Imagine for a moment that you have a close relative stranded in Mexico in dire need of some cash. You could send a wire transfer through a service like Western Union, but to send $20, it would cost $3 in fees and take three days to make it to the bank—and time is of the essence here.
Or you could make the same transaction using Bitcoin, the decentralized digital currency. Not only would the money be there in a matter of minutes, but it would cut out most of those unnecessary fees.
That’s one of the reasons why there’s hope that Bitcoin could revolutionize payment systems, especially in developing countries, serving as a default currency for goods and transfers. But for Bitcoin to become as pervasive as other mobile money services, countries will first need to overcome major obstacles, including the lack of smartphones, banking, and data accessibility.
Solving the remittance problem
One of the major promises of Bitcoin is improving remittances in emerging economies. Remittances, or payments sent to others via banks and services like Western Union, are expected to reach $454 billion to developing countries in 2015, according to the World Bank. And those sums received from Western countries play an important role in the welfare of people across the world.
But the remittance system is flawed. For people to send money to friends or family, they must pay a percentage to Western Union or another provider and wait days before they can collect their payment.
“The fact that $30 billion is sent between U.S. and Mexico each year, and 10 to 20 percent of that money is extracted from Western Union and the actual money transmitters,” Byrne Reese, vice president of product at Bitreserve, said in an interview with the Kernel. “That feels horrible because it takes so much money from people who need it most.”
One of the major promises of Bitcoin is improving remittances in emerging economies.
Using Bitcoin to send money would effectively cut out the intermediary and ensure almost all of the designated amount winds up in the recipient’s account. Peer-to-peer Bitcoin transactions would cut the fee significantly, along with waiting time, giving people more money in their pockets faster.
Peer-to-peer micropayments like those we have through Square Cash or Venmo could be made possible by using Bitcoin by allowing people to send small amounts of money to friends without suffering the huge fees PayPal and others require.
It sounds good in theory, but in practice it doesn’t work.
Banking for the bank-less
Bitcoin is touted as the bank-free way of managing money, but unless someone is mining the currency themselves, Bitcoin requires some centralized banking system to purchase coins, not to mention access to smartphones and data.
“When you initially want to buy a Bitcoin, you’re going to need money to do that. Bitcoin isn’t the way to completely circumvent the banking system,” Jose Pagliery, cybersecurity reporter at CNN and author of Bitcoin and the Future of Money. “They still need some banking in these countries order to get Bitcoin in the first place.”
About half the world’s adults are unbanked, according to a report from the World Bank. And of those who don’t have an account with a financial institution, 20 percent say distance is a key factor in why they continue to go unbanked.
“Bitcoin isn’t the way to completely circumvent the banking system.” —CNN cybersecurity reporter Jose Pagliery
Despite challenges of obtaining Bitcoin in certain areas, people still are acquiring the currency, and emerging economies are trying to tackle and regulate it. Bitcoin transactions are illegal in Bolivia, Bangladesh, and Ecuador, and the currency is restricted in a handful of countries, including China and India.
“The reason Bitcoin has more potential to take off [in developing countries] is because they are facing a far greater shortage of banks, a far greater shortage of access to currency, and it’s extremely expensive to get money there,” Pagliery said.
But banking is just one hurdle for Bitcoin; another problem is data connectivity.
Some countries already use mobile payments. People in Kenya and Tanzania have been using money transfer and microfinancing services like M-Pesa on their phones to pay for things long before you started using Apple Pay at the grocery store. But unlike M-Pesa and comparable services that can rely on classic mobile phones, maintaining a Bitcoin wallet requires a smartphone. Smartphones are still relatively rare in the developing world. PewResearch measured smartphone use in 24 countries, and just 11 countries had more than 20 percent smartphone penetration.
How it might work
Until challenges with banking infrastructure and mobile ubiquity are met, Bitcoin won’t take off in the developing world. But the cryptocurrency can still have a huge impact on people in impoverished communities.
Beam is one company providing a bridge for people with Bitcoin in Europe who want to send money to friends and family in Ghana who don’t have access to the cryptocurrency. Through Beam, people can use Bitcoin to send remittances cheaper and faster than services like Western Union and MoneyGram.
Banking is just one hurdle for Bitcoin—another problem is data connectivity.
Because there is no established Bitcoin infrastructure in Ghana, the company must first convert Bitcoin to dollars and then to Ghanaian cedis, which are paid out immediately to the recipient via a mobile payment through a telco company like MTN that can either be exchanged for cash at a bank or redeemed at a merchant that accepts mobile money. The MTN mobile money credits can also be used to pay for electricity, school fees, or to top off a fuel card.
“If you have mobile money, you can convert it to cash,” Nikunj Handa, cofounder and CEO of Beam, said in an interview with the Kernel. “In Ghana, you can walk up to any bank or branch or ATM and can convert your mobile money credits to cash instantly.”
The transaction fee to send money through Beam is just 3 percent—significantly lower than other money transfer companies that can take as much as 12 to 15 percent of the payment in fees.
Beam accepts money from most countries except the U.S. Regulations and money-transmitter licensing requirements, which are mandatory in each individual state, prevent Beam from accepting the cryptocurrency for remittances.
Eventually, Beam hopes people will use its remittance system to send and receive micropayments. Instead of a fixed amount like other mobile money services, Beam’s low fee percentage enables people to transit very small sums, which allows users to send money at the cheapest price.
Smartphones are still relatively rare in the developing world.
Like other Bitcoin startups, Beam must first convince people why its cryptocurrency payments service is a safer and cheaper alternative. And it will also have to explain that its very existence counters what many people have come to understand about Bitcoin—that it’s a way for people to make payments without going through a central system.
Beam itself, like other Bitcoin remittance startups, is a centralized system like Mt. Gox, which acted as a middle-man and stored people’s data before it came crashing down. Beam sees potential for speed and efficiency of mobile payments with Bitcoin, but not everyone does yet.
“The downside is that we have to educate the market to some extent about Bitcoin—what we really depend on is the Bitcoin infrastructure to grow in certain countries,” Falk Benke, Beam cofounder and CTO said. “In the U.S., it’s really easy to buy Bitcoin at a great rate with your credit card. Western Europe is not there yet, so it’s a little more of a hassle to get Bitcoin there.”
The team that grew out of a Ghanaian startup accelerator is facing the same challenges other Bitcoin startups around the globe are struggling with: How can Bitcoin become a viable payment system in parts of the world that have limited access to banks and smartphones?
“At this point, Bitcoin acts like a really good bridge between different, extremely fragmented mobile money markets in Africa,” Handa said. “We hope that merchant adoption rises and completely removes the mobile money aspect from the picture.”
Illustration by J. Longo