I’ll start with a confession. 10 years ago if someone had asked me what remittances were, I would have shrugged my shoulders and moved on. I had no inkling what they were and at the time, didn’t care.

Today, things are different for myself and a lot of us in the payments industry. Today, we care about remittances a lot.

Remittances have always been touted as the low-hanging fruit.

The sheer size of the market and near easy access to it, makes the whole case so attractive. Its like the sweet smell of popcorn. It just draws you in.

Because of the size of the industry and the fact that almost all the countries of the world are involved in remittances in one form or another, the entry points are relatively simple if you know your way around.

It seems you cannot read a bitcoin article today, without the mention of the word remittance. From US to India to New Zealand and everything in between, fintech startups have been clamoring, pushing and shoving to get on the money-transfer bandwagon.

It wouldn’t be out of place to suggest that many fintech startups are revisiting their bitcoin based revenue models. The transaction growth hasn’t been as promising as one had hoped for.

From the graph below (Number of Bitcoin Transactions Per Day) the growth looks promising; the truth is, there is still a long way to go.

In comparison, if one were to look at remittances from the Middle East to South Asia and Philippines, there are more than 100,000+ transactions per day. Remittances coming into India are hovering at the 500,000+ mark per day. Worldwide figures are very difficult to gauge, but the following table can give you some indicative sense of how big the market is (and it will only get bigger with the addition to small-value transfers, i.e. remittances sub US$50)

In the remittance market, there is a double-edged sword at play. Firstly, for many money transfer operators, access to banking is becoming increasingly difficult. Many banks have unilaterally shut down bank accounts of Money Services Businesses (Read up on Operation Choke Point).

Without a bank account, the business plan goes kaput!

Secondly, is the issue of licensing. Financial regulators in the developed countries have a very clear line about what needs to be regulated and what doesn’t. Money transfer operators, or companies that mimic cross-border value transfer in any form, are deemed money transmitters and hence are required to be licensed.

Herein lies the opportunity and problem in one. Because of the banking problem, many MTOs have closed down, some have merged while most have simply gone out of business. With the licensing requirements becoming more stringent, the remainder have exited the business or are working as ISOs in some form or another. The collapsing of money transfer operators is what is seen by many startups as an ideal opportunity to insert themselves into the industry.

Perhaps the strongest argument in favor of remittances is that bitcoin was designed to do value-transfer over the Internet. What better way to demonstrate this, by applying the use case bitcoins to remittances.

How Big is the Remittance Market?

The official (documented) remittance market is estimated to be US$ 640 Billion (for 2015). The unofficial (undocumented) remittance market is about 80% of the official figure (i.e. US$ 512 Billion), suffice to say, the total remittance market (documented + undocumented) is well over US$ 1 Trillion.

Roxana Torre publishes a really informative infographic for all things remittances. She uses the World Bank 2012 bilateral remittance data (download), and puts out an interactive infographic depicting Sending & Receiving remittance figures for each country.

The infographic can be accessed here (please allow time for the dataset to be loaded).

With the advent of small-value transfer (or small value remittances), the market is expected to increase in size drastically. Some estimates say it will be adding on US$ 30 Billion over the next 10 years, whilst other calculate the number to be US$ 1.2 Trillion. By any measure, it is safe to assume, micro-transfers will constitute a major portion of transfer, perhaps as much as US$ 300 Billion per year.

Fintech startups are eyeing the money-transfer space and trying to see how they can disrupt it.

Traditional fintech startups like Transferwise, Azimo, et. al. are tackling the market with lower fees, better UI/UX, social media outreach campaigns, etc. Whilst new players in the Bitcoin Remittance space are advocating instant value transfer using Bitcoins, lower fees, direct account credit, etc.

The very definition of disruption differs depending who you ask. For some, it is merely the introduction of bitcoins, or riding on the Ripple protocol, for others, it is a more transparent way of pushing your money across, better pay-in/pay-out options, and then there are flavors like instant settlement, better rates, lowest price, mobile payments, etc.

Bitcoin as a Payment Method in the US

In the US, you have quite a wide variety of payment options. If I wanted to purchase something online, credit/debit cards work perfectly fine. Many merchants accept PayPal (the de facto wallet in the US — albeit some would disagree).

In addition to this, there is Venmo, Apple Pay, Dwolla; soon there will be Samsung Pay; Google Wallet is already revitalizing itself, and Android Pay is not far off. Add to this mix, Snapchat’s payment option, Facebook Messenger Pay, and the good ol’ ACH, almost all avenues of payments are covered. Oh let’s not forget Starbucks and their mobile payment, which I am sure will extend out to other merchants. The need for Bitcoin as an additional payment method within the US really doesn’t make much sense today. At least not yet.

Most of the startup movement in the US (and around the world) is centered on creating use cases for bitcoin, that predominantly extend out to buying/selling, trading, wallets and merchant processing of bitcoins.

With the numbers still low (albeit they are slowly climbing) startup founders have hit a jolt of reality. New models for revenue centers around bitcoin pretty much dull out and profitability is difficult without some additional use cases for bitcoin. This has been true for bitcoin exchanges (not all exchanges are thriving), wallet providers, bitcoin merchant processors (only a handful of merchant processors rule the same) and especially for the bitcoin ATM (or BTM) industry. Most of the BTM OEMs have (or are in the process) of transition from a hardware company to a software company that now includes remittances.

Bitcoin and the Love for Remittances

One of the most powerful aspects of Bitcoin technology is the ability to do value-transfer across the internet near real-time and one in which transactions cannot be reversed. Just like Uber disrupted the taxi experience, Airbnb the hotel/motel industry, Bitcoin has the power to disrupt the money-transfer space.

It is no secret, that an additional use case is Remittances which are now deemed crucial for many bitcoin companies just to stay afloat.

Suddenly, everyone is rolling out the world map, marking countries they want to do business with. Africa happens to be on top of the list (it might be worthwhile to mention here, Africa is a continent).

From Kenya to Nigeria, from Ghana to Somalia, bitcoin based remittances are picking up in Africa (though they still pale in comparison to the size of the traditional MTOs who are channeling money into Africa).

Other markets like Philippines, Vietnam, Hong Kong, and Indonesia are also picking up.

Having talked to various providers, the total Bitcoin remittance market as of March 2015 hovers around the US$ 10–12 Million / year mark. Minuscule, but its a start.

Quarterly projected growth for the rebittance industry vary widely, from 8% (on the low side) to about 23% (on the high side).

Bitcoin Remittance Pricing Breakdown

There is a huge debate if Bitcoin will actually be able to bring down remittance prices for select corridors. Each bitcoin remittance startup has its own model, but the basics remain the same:

Sender has to buy bitcoins using fiat (this is a fee component both for buying the bitcoin as well as the payment instrument used to fund the buy). The coins are then sent across to the recipient’s MTO, where coins are converted to fiat, and the FX component would also come into play.

The areas of costs are as follows:

Funding account to buy bitcoins or book a fiat transfer

Transaction charge for booking a fiat transfer

Transactions fees for buying bitcoins

Transactions fees for selling bitcoins

FX fees during conversion

Pre-funding costs

Then there are other optional charges like aggregated selling of bitcoins on foreign bitcoin exchanges, and this money then needs to be channeled back into the recipient country.

Legal and compliance costs are not even taken into account. If a company makes 3% on average on every transaction for every US$ 100,000 processed, they would earn US$ 3,000. With typical burn rates in the vicinity of US$ 25,000 to US$ 80,000 per month, one would have to process a whole lot more remittance volume just to break even, a harsh reality that doesn’t go unnoticed by investors.

Bitcoin Legality

There is a huge debate (for some) that bitcoin is grey and not illegal when it comes to remittance transfers. Others hold the view point that unless it is licensed on both ends (sending/receiving), the transfer will strictly speaking be illegal.

The bitcoin legality debate is still ongoing and one that would probably become clearer in the months to come. Despite being an advocate for Bitcoin remittances, I do hold an opposing viewpoint that there isn’t a 100% legal bitcoin remittance corridor available in the world yet (as of March 2015). 100% legal implies that regulators on both sides of the remittance corridor approve the rembittance as legal, in writing.

Conclusion

The Bitcoin remittance market is no doubt huge, but then again so is the mirage that everyone will enter and eventually secure 1/10th of 1 percent of the market share and make it.

Have no doubts about it, the disruption, the changing weather and behavior, the incumbent players will not relinquish control over the market easily.

Think about the following scenario:

Bitcoin Remittance price from US to Kenya is 2.5%

Traditional Remittance price from US to Kenya is 6%

Now what if the traditional remittance price from US to Kenya goes down to 1.5%? Just to kill the bitcoin remittance market? How does that affect your model? Think it is far fetched?

Only time will tell.