Source: iStock/Joel Carillet
The text below is an excerpt from The Compendium of Cryptocurrency Remittances by George Harrap, CEO of Bitspark, a bankless money transfer solution utilising blockchain technology.
It is impossible in the remittance world to ignore Western Union (WU). The solid brand name is more than 150 years old, operates in every country of the world, is in 20,000 remittance corridors with over 550,000+ physical locations.
In each country that WU is located in, it has local bank accounts, settlement facilities and an established compliance system. Not to mention, they are the largest online remittance service provider – bigger than every other company combined.
Every company in the industry often compares themselves to WU, be it in pricing or distribution. Yet even while all these potential competitors rise and fall, WU continues to grow and outpace them all through sheer size and networks.
WU has been a small but important voice in the growth of cryptocurrencies for cross-border payments. Most prominent perhaps was a trial with Ripple for XRP.
However given the recent comments by Western Union CEO, it doesn’t seem like that is going anywhere. The reason Ripple is not useful to WU is that WU’s system is better. Some of this can be seen in the earlier sections about Xcurrent and Xrapid but essentially Ripple brings nothing to the table.
Consider the below:
1. Xcurrent is a database for settlement between banks. It enables instant exchange of payment data between banks connected in their network for settlement later outside of Ripple via SWIFT. WU has already pioneered this and it is tailored to the intricacies of 180 countries. WU can already net settle between itself and its own bank accounts in every country in the world as WU is on both ends in a closed loop. Banking partners in every jurisdiction help WU manage these payments in a predictable and complaint manner suitable to them – this infrastructure takes a long time to build.
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2. Xrapid uses XRP for settlement, however, it has no local fiat liquidity in any currency. It is not useful for WU to buy XRP in one location and sell it in another because it is often not possible to buy XRP in a certain location and selling XRP for local fiat for more than 1 to 2 currencies in sizes of <USD 5,000. Xrapid cannot support WU as WU needs to settle hundreds of millions of dollars, today.
3. Bitcoin: A cryptocurrency like bitcoin may be viable in some very specific corridors but ultimately WU does not have the problem of capital requirements for pre-funding and arbitrage benefits would be difficult to scale.
4. Let’s say WU did buy bitcoin or XRP. Who is selling XRP in Ghana? Or Azerbaijan? Or Cambodia? If WU needed to sell it, then they would either be selling for USD or selling to themselves. There is no point trading with yourself as you are essentially mimicking a net settlement database but with an added burden of managing a volatile token that is illiquid.
5. WU would also need to be a cryptocurrency exchange on a massive scale. This is something they are not interested in doing. A cryptocurrency exchange is a way to ensure a trade with someone other than yourself and offload your current liability for payment to someone else. This is a tall order, even if WU ‘partnered’ with a bitcoin exchange, none of them cater to any more than 1 or 2 fiat currencies. WU needs 180+ currencies.
The previous points apply to crypto, but let’s consider some other fintech alternatives. A company like Transferwise gets a lot of press with its endless comparisons to WU and sky-high valuation from venture capitals, but when you look a bit deeper some realities hit.
• Transferwise is valued at USD 1.6 billion and pulled in USD 150 million in revenue with USD 8 million in profit.
• WU is bigger than Transferwise, World Remit and every other online remittance company combined with just WUs online payment system.
• WU has access to cash delivery, fintechs online do not. 90% of the remittance world works on cash.
• Often Transferwise and others do not settle in the local currency and, therefore, is not relevant to remittance countries where the payout is in local currency.
• Every top remittance country generally has a banking penetration of <25%. Therefore, a new app or ‘deposit by bank’ website is of zero relevance to someone in a remittance recipient country like Myanmar where people do not have a bank account.
• Fintechs like Transferwise need to settle via traditional FX providers or banks and will be subject to the same wholesale rates and limitations as everyone else.
• The last point is interesting, Transferwise has built a model on using pools of money for settlement and also using local FX companies like currency cloud.
The model is as per below:
Pool of money A: USD
Person A has USD and wants EUR
Pool of money B: EUR
Person B has EUR and wants USD
Instead of doing a cross-border bank transfer for USD to EUR for each transaction, the pool of money in USD can be used to withdraw domestically cheaper to person B. Likewise person A can receive their USD from the pool of EUR domestically, also cheaper. The money in either pool did not need to move in this case, the two payments NET.
This is fine for the big currency pairs of USD, EUR, JPY, AUD etc. However, low value remittances are not between these currencies and there is fundamentally always more money going to the destination than is coming out so it is impossible to NET.
In a market where you need to be able to settle to exotic currencies, the pooling does not work. At the end of the day you need to have local cash distribution to enter these markets and also local banking partners. Something that the fintechs in Europe and US do not have.
WU has local cash distribution points and local banking partners in every country of the world and the numbers speak for themselves.
If companies that are trying to tackle the money transfer industry do not focus on cash, then they will never be able to add considerable value to the remittance industry.
Western Union does NET settlement internally like these fintech companies but does not make it a marketing venture.
Ultimately Western Union has its own FX division which is engaging constantly with the global markets by managing cash floats around the world and trading with counterparties in other currencies enabling them to exchange value.
Opportunities for Western Union
• Crypto to cash as a revenue opportunity
• Cash balancing between MTOs 24/7 via crypto.
• Linkage via crypto to online e-commerce and other financial services.
• Arbitrage gains in specific corridors.
We often make note for MTOs to consider bitcoin and cryptocurrency as an additional revenue opportunity then consider it for settlement later.
In the short term, the cash to cryptocurrency market is expanding rapidly, with bitcoin ATM usage growing exponentially. Cash to crypto exchange margins are 7-10% globally and for MTOs who already manage cash, this is an exciting addition to their product suite.
Often MTOs may sell mobile top ups, travel packages or food to gain additional margins/customers and cryptocurrency can be considered as another product at another margin, which is growing rapidly. MTOs existing ability to manage cash floats is an added bonus.
Another important feature is cash balancing. For large remittance networks with hundreds of locations, there is often the problem of cash balancing between physical locations.
All physical remittance and exchange shops needs to have cash on hand to pay out incoming transactions, and often they run dry.
In some cases it can mean that the business is not able to operate for the better part of a day or until they can retrieve more cash from the bank.
This is particularly troublesome when it might be the end of a day, at bank closing times or when the bank is closed on a weekend and supply of cash is not easily obtained.
Cryptocurrency sales are means to balancing cash between locations – maintaining the equilibrium between optimal locations for people to deposit cash and exchange for digital currencies and cash heavy locations where it is good to sell digital currencies for cash.
This self balancing via cryptocurrency requires no overheads, generates solid 7-10% margins and alleviates time and opportunity cost of balancing cash between bank accounts or agents in the field.
The growing use of e-commerce globally has created large brands like Alibaba and Amazon, however currently the only means of payment in these online providers is by bank accounts, mobile payments or credit cards.
This excludes the booming emerging market economies of the world and the 1.7 billion consumers who have no formal banking relationships.
Physical cash agents can become the payment portals in the rest of the world’s 150 countries where credit card and banking penetration is low, with locations like WU agents becoming centre points for people buying products from Amazon, Alibaba or elsewhere.
There are a few interesting cryptocurrency companies in this space to look at.
While cryptocurrency arbitrage is a major selling point for cryptocurrency remittance companies, for WU it would not be their core offering but rather something that might be utilised at times when there is a dearth or excess liquidity in specific currencies.
This would likely be managed by the WU trading divisions on a corridor by corridor basis.
Read more: International Money Transfer: Western Union vs World Remit vs Bitcoin