Remittances have become the lifeblood of many people in sub-Saharan Africa, but the cost of remittances through banks and remittance operators remains high.
According to the World Bank's latest report in 2019, sending an equivalent of $200 to the region requires an average of 9.3% of the remittance, which is quite high globally. However, when funds are sent through financial technology companies based on cryptocurrencies, the cost will drop by 90%.
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The highest cost of cash transfer by bank
Last year, Africans working abroad remitted as much as $46 billion in international remittances to their families. This money is usually used to pay for education, to buy food and clothing, to start a business, to build a home, and to pay for daily living. For many families in Africa's often unstable economies, overseas remittances are an important tool for their survival. However, a large part of their funds were earned by financial companies in the form of transfer fees.
According to the World Bank, banks have the highest service fees, accounting for 10.2%, followed by remittance operators (7.7%) and post offices (5.5%). This is currently too high compared to the sustainable development goal of cutting financial transfer costs to 3% of the total transaction value by 2030.
Now, some people are beginning to hope that the currency will be remitted by bitcoin, which is expected to reduce the handling fee and improve the efficiency and speed of transfer.
In 2013, when American political science graduate Elizabeth Rossiello founded Bitpesa, the company initially focused on facilitating cash transfers supported by Bitcoin between British and Kenyan citizens. However, Bitpesa currently operates in eight African countries: the Democratic Republic of the Congo, Ghana, Kenya, Morocco, Nigeria, Senegal, Tanzania and Uganda.
Stephany Zoo, head of marketing at Bitpesa, based in Nairobi, said in an interview with news.Bitcoin.com that the company helps Africans send money or collect money from around the world at a fraction of what traditional agents charge. She said that Bitpesa also provides services to global money transfer companies using API services for payments to mobile money operators and the banking network in their African countries. Zoo said:
“When dealing with remittance payments, we incorporated traditional and personal insurance (such as UNPROFOR) and the use of cryptocurrencies. We only charge between 1% and 3%, so we have to pay more than the fees mentioned in the World Bank report. Much lower. Many of our customers are transfer operators, they are actually providing money transfer services, we provide basic technology or software support for their work behind the scenes, and they are also their foreign exchange providers."
Informal cash transfer
In September, Bitpesa signed an agreement with Japan's SBI remittance company to allow people across Africa to pay for cars, beauty products and electronics. When Africans buy goods overseas, they deposit their legal currency into Bitpesa's bank account and then transfer the money to SBI's account via Bitpesa's Bitcoin blockchain, which then makes the final payment in Japan.
The entire process can be completed in a few hours and costs approximately half of the usual transfer costs. Bitpesa claims that traditional banks take several days to process similar transactions. The legal currency is also applicable to the remittance service for cryptocurrency deposits and transfers, except that the funds are directly transferred to the payee's account at the time of the levy. Bitpesa said on its website, "This saves all intermediate links and saves on transfer costs, which can be done in just a few clicks."
The World Bank data does not reflect the true value of funds remitted from Africa or other African countries to Africa. Often, remittances flow across borders through informal channels of friends, family or bus drivers. This is because sometimes the work to be done to send cash through MTO is not worth the risk. Doing so means showing a passport, work permit or visa to indicate your identity, and many migrant workers do not have these documents.
Similarly, some cryptocurrency-based remittances have not received attention, and people have not noticed that they are serving this purpose. For example, Coinpesa in Uganda is primarily a cryptocurrency exchange, and its CEO, Suleiman Murunga, said that Coinpesa “does not directly engage in remittance operations”, which does not mean that they do not deal with transactions initiated as remittances. Murunga pointed out that remittances based on cryptocurrencies are difficult to track on exchanges, but he also stressed that this feature can help reduce the cost of transfer to around 2%, thus eliminating the cost of conversion from cryptocurrency to fiat currency.
Transfer of internal crypto token support
In Nigeria, Sure Remit typically receives a 0-2% fee for non-cash remittance services. The company claims to have a network of hundreds of merchants around the world and use internal tokens based on the Ethereum blockchain for transfers. The token can be redeemed for a variety of services, such as buying and sending vouchers, sending credits, paying bills, and buying groceries. Nigerian payees do not need to collect cash, they can exchange vouchers for any services or goods they need, as long as they receive the vouchers.
Elsewhere in southern Africa, Wala uses its own digital currency to help users in many countries send money for free, purchase talk time and data, pay bills and tuition. Wala is built on the bank's existing infrastructure, which "helps banks better serve their customers." The South African company believes that "once people start using digital products, the cost of financial services will be greatly reduced."
According to World Bank data, with the sub-Saharan African remittance market expected to grow by 4.2% and 5.6% in 2019 and 2020, respectively, Bitpesa's Stephany-Zoo is optimistic that cryptocurrency-based remittances will occupy market share. He said:
“I believe that in order to increase market share, cryptocurrency companies must work with companies that have a hybrid infrastructure that is more digital, because it is more effective, faster, and easier to account for than traditional remittance methods.”