Bitcoin vs Western Union: How Low Fees Are Disrupting the Remittance Industry

    Clement Chan April 10, 2015 - Posted by Clement Chan on Analysis

    Sending money internationally, or remittance, costs money. According to The World Bank, this costs an average of 7.99% of the amount sent.

    In 2014, these cross-border transactions are expected to reach $582 billion, and up to $608 billion in 2015. It goes without saying that reducing the transaction costs by a few percentage points can save migrants billions of dollars collectively.

    Migrant workers and immigrants typically send money back to their families in their home country, but using traditional payment methods like Western Union or wire transfers is often expensive. These companies make money by charging:

    • A percentage on the exchange rate, which is often invisible
    • High transfer fees to send or receive money

    Image from Imgur

    Even so, transparency is also a problem. According to ACORN Canada, out of 229 remittance users surveyed in Ontario, "27% of users had no idea whether exchange fees were included in the prices advertised by remittance providers." [1]

    With the emergence of Bitcoin remittance providers in the past few years, they have started to disrupt the very industry that takes advantage of low-income individuals by charging high fees. But how does Bitcoin remittance work?

    How Bitcoin Remittance Works

    Image from Zach Copley

    Let’s work with an example, with a sender who wants to transfer money from the US to India.

    Step 1: Sender purchases Bitcoin with USD via one of the many exchanges available such as Coinbase (or LocalBitcoins).
    Step 2: Sender sends Bitcoin to a Bitcoin remittance company.
    Step 3: Bitcoin remittance company sends rupees to the receiver.

    The entire back-end process for Bitcoin remittance is simpler than traditional remittances, where these 'legacy' companies involve clearing houses and banks.

    But since Bitcoin’s value is known to fluctuate wildly, wouldn’t this affect the transmitted value?

    While the Bitcoin’s value is indeed volatile, a sender will likely not be affected by this if the conversion from USD to BTC and BTC to INR (as in the example) happens in the same hour. [2]

    To see whether a Bitcoin remittance provider is truly cheaper than traditional methods, let’s compare the costs of a few services.

    Rebit.ph

    Rebit.ph allows migrant workers and immigrants—their target market—to send money to the Philippines from countries such as Australia, Germany, Hong Kong, Malaysia, Singapore, the UK, and the US.

    According to Luis Buenaventura, the co-founder and Head of Product at Rebit.ph, only about 10% of all Filipino adults have bank accounts.

    Because of this, Rebit.ph pays out about 75% of migrant workers’ remittances through pawnshops, a feature not commonly found in other remittance services.

    Comparison as of Apr 5, 2015:

    Bitpesa:

    Based in Kenya, Bitpesa is a Bitcoin-based remittance service that allows international money transfers to East Africa: namely countries like Kenya, Ghana, Tanzania, and Uganda. The company takes advantage of the popularity of mobile wallets in the countries, enabling them to convert Bitcoin to the supported local currency at low costs.

    Comparison as of Apr 5, 2015 for transferring to Kenya:

    Comparison as of Apr 5, 2015 for transferring to Tanzania:

    While Bitpesa charges 3% on the BTC to KES / TZS exchange rate, Western Union still falls short by charging an even higher fee on the exchange rate, along with an additional transfer fee. You can read more about their fee structure and dissatisfaction of clients on this WU online payment review.

    CoinPip:

    This Singapore-based Bitcoin remittance company enables international money transfers to Singapore, Indonesia, and Hong Kong. They charge a 2% fee on the initial transfer amount, while the exchange rate used is the prevailing market rate without any fee imposed.

    Comparison as of Apr 5, 2015 for transferring to Singapore:

    Comparison as of Apr 5, 2015 for transferring to Indonesia:

    Comparison as of Apr 5, 2015 for transferring to Hong Kong:

    Even though CoinPip takes a 2% cut on the initial transfer, the final converted amount for the recipient is still higher than Western Union. The latter appears to charge a much higher percentage on the exchange rate.

    Conclusion

    Sending money using a Bitcoin-based platform is comparatively cheaper, as transmission fees in Bitcoin transactions are often very low.

    We can see from the comparisons above that these Bitcoin remittance providers consistently charge lower fees than the regular mainstay, Western Union, while still managing to transfer the required currency in minutes up to a few hours. Western Union, on the other hand, can take several days depending on your payment method.

    With 'legacy' remittance companies like Western Union, MoneyGram, and other traditional banks continuing to charge high fees while hiding other fees via poorer exchange rates, it’s hard to visualize a future where they’re still relevant. Startups that disrupt this predatory profiteering from migrant workers and immigrant workers are here now for social and economic justice—and with the recent trend, they're likely to stay.

    The challenge here, therefore, is educating consumers on how using Bitcoin-based remittances can save them both money and time. And that's another story.


    Clement Chan
    About Clement Chan — Clement is currently working towards his CFP certification in New York. Read his insights on personal finance and travel on his blog. Follow the author on Twitter @saigoheiki

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