remittance industry

Does Western Union need to watch out for bitcoin?

February 10, 2014: 11:40 AM ET

Bitcoin evangelists and startups like ZipZap envision international workers sending money home for nearly free. But the remittance industry isn't ready to die yet.

By David Z. Morris



FORTUNE -- On Feb. 6, San Francisco-based Bitcoin services startup ZipZap announced the launch of cash-for-bitcoin services at 28,000 retail locations in the U.K., including omnipresent convenience stores such as Spar and Tesco Express. To buy bitcoin, buyers connect a ZipZap account to their bitcoin wallet, then print or load to their smartphone a scannable barcode that they take to a ZipZap affiliate location. A clerk scans their barcode, then accepts their cash payment. Bitcoins arrive in their wallets within minutes through one of ZipZap's partner bitcoin exchanges. Fees for the service are currently £3.95 (about $6.50), with a maximum £300.00 ($500) worth of bitcoin purchased.

The service provides a complement to recent adoption by major online retailers like (OSTK) and -- it is now, at least in the U.K., as easy for the non-tech savvy to buy bitcoin as it is to spend it. ZipZap's ultimate goal, though, is not just to help curious first-worlders buy bitcoin, but to provide both cash-in and cash-out capabilities globally. "We're in the process of making our brand trustable, at least for the cash-in process, and then we will launch the cash-out process," says Joaquin Moreno, ZipZap's regional manager for Latin America. "Once [buyers] get the bitcoin, they can use them online, or they can send it to their family around the world," says ZipZap CEO Alan Safahi. By providing on- and off-ramps to the global, nearly-free Bitcoin network, ZipZap would create a remittance system to rival those of Western Union and Moneygram.

Bitcoin advocates regularly call out the remittance industry as a near-monopoly profiting from migrant workers and the underbanked. Safahi is clearly a man on a mission in this regard: "You help the poor get out of poverty by reducing their remittance cost," he says, citing global remittance volume of more than a half trillion dollars a year, and fees that average 9% and peak at 25% or more.

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But some question the accuracy of those often-cited fee rates, and the potential of bitcoin systems to change the remittance landscape. "I know every single location where you can pay in Africa, and that's nonsense. The cost of sending money to Africa is about 6%," says Manuel Orozco, senior fellow specializing in remittances at the Inter-American Dialogue. Western Union's fees are higher -- a quick online search shows that sending $500 from Florida for pickup in cash in Kenya costs $39, plus a more than 3% exchange rate spread taken by Western Union (WU), for a rate of about 11%.

Orozco and others cite compliance with Anti Money Laundering (AML) and Know Your Customer (KYC) regulations as a large irreducible cost of remittance service. In fact, "regulatory compliance is spiking," says Josh Strauss, Portfolio Manager of the Appleseed Fund, which is long on Western Union. "Compliance will squeeze [Western Union's] 2014 profits by something like 8%," but will also keep competitors out, he says. Strauss says that once bitcoin-based competitors have to meet the same compliance standards, which now only affect bitcoin at the point where it is exchanged for cash, they will have little if any price advantage. There are other risks and costs to bitcoin as a remittance vehicle, including that of holding highly volatile bitcoin even briefly in the process of a transfer, and at least the perceived risk of fraud and lax security in a developing system. Ultimately, Orozco is skeptical of claims about major disruption. "There is an assumption that money transfers today are very expensive, and that a model like bitcoin will lower the cost. I think that assumption is inaccurate."

Western Union CIO David Thompson focuses on established players' compliance and security advantages. "A compliant system ... requires a lot of control. It requires a network that is enabled for compliance." While bitcoin uses a peer-to-peer cryptographic model to ensure the security of transactions over the internet, Western Union fully owns and controls a global network of dedicated wires. It also has dedicated retail outlets, while ZipZap projects are operating through partnerships with existing retail financial servicers. According to Joaquin Moreno, this will allow ZipZap to offer its service in more locations for a lower cost than companies with dedicated infrastructure.

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Thompson did state that "when we get to the point where customers are asking for this service [bitcoin remittance], we would look at it as enabling yet another currency." He says the Western Union network is capable of "movement of any currency type ... We can move [bitcoin] across our wires to the receiving entity." He did not specify whether this might function through some sort of token or derivatives system, since bitcoin proper can only be transferred over the Bitcoin network. Thompson was unable to comment on possible trends in Western Union's pricing in advance of Tuesday's earnings call.

Alan Sahafi accuses established remittance players of complacency and inefficiency, ignoring cost savings of available online identification and compliance methods. "I went to a Western Union place a year or so ago. I had to write the entire application by hand, and it took me 10 minutes, and it took the lady behind the counter another 10 minutes to type it up. Why wasn't I doing that on my computer before I went there?" Further, he asks, "why [don't] Western Union or Moneygram offer you a discount after your first transaction?", after which basic compliance is fulfilled. ZipZap is already using those methods -- all of its transactions meet relevant U.K. regulations. "Don't let people fool you that this thing costs a lot of money," says Safahi. "It's just smoke and mirrors." The International Monetary Fund agrees, saying in a report that "lack of transparency" is a major reason for high remittance costs worldwide.

ZipZap expects to offer cash-out fees similar to those for cash-in, meaning that the Florida-to-Kenya transaction would cost about 3% to Western Union's 11%.  "It's not going to happen overnight," Safahi warns, but that scenario would transform economies dependent on remittances -- and present a huge challenge to existing providers. As for how ZipZap itself will make money on these transactions and still pay agents, Safahi speculates that his and similar services may ultimately operate on a "freemium" model similar to some online games, "where you provide free service to anyone anywhere who wants to buy and sell bitcoin, and you sell additional services that people are willing to pay for." Ultimately, he says with passion, "ZipZap will find other ways to make money than gouging people."

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In fact, though, Safahi's greatest long-term dream seems to be one that would put him out of business -- a world where cashing out of bitcoin isn't even necessary. For instance, he says, "85% of remittance is basically bill payment. There are services coming online that will let people pay bills with bitcoin," which could be done from any locale to any other very cheaply. The same may eventually go for goods: "When you have more and more merchants accepting [bitcoin], you wouldn't have to be converting it back to local currencies," says Anthony Di Iorio of KryptoKit, a bitcoin wallet service. Once cash is removed from the equation, global remittances, from one bitcoin wallet to another, could be executed in minutes and cost tiny fractions of a percent.

Appleseed's Strauss predicts a darker future, in which governments regulate bitcoin's functionality out of existence. "The Chinese came out with what I would expect governments to do going forward," banning banks from allowing cash-for-bitcoin transactions. "Bitcoin allows for avoidance of all AML laws ... There's no way governments are going to allow it."

A true government crackdown on bitcoin would be disastrous for Safahi, not just as a businessman, but as a global citizen. "There are 6 billion people who can benefit from bitcoin immediately," he says. "We need to be focused on making sure bitcoin thrives, and helping it grow and be successful and bring people out of poverty."

Follow David Z. Morris on Twitter: @davidzmorris.

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