In a continent where about 55% of the combined GDP and 80% of the combined workforce belong to the informal sector and where less than 25% of the population owns a bank account, cash is an important factor. When money goes from a paper based form (cash) to a digital form (such as a mobile wallet), its properties completely change, making the potential to change the lives of millions a reality in turn.
Digital money can be traced when payments are made, providing transparency and trust in transactions. It can be managed by more than one party at a time (such as a mobile operator and a user), it can’t be easily stolen when it’s stored or transferred, and it can “travel” any distance in seconds. Suppose you want to transfer money urgently to a loved one. Would you give it to the first bus driver passing by to take it to them? You may be surprised to know that about half a trillion US dollars is estimated to be transferred annually through informal channels of that sort, known as hawala transfers.
Consider the fact that 19 African countries have more mobile money accounts than bank accounts, or that globally, in 37 countries there are ten times more mobile money agent locations than there are bank branches. As you read this, telecommunications infrastructure is getting better and faster, and it is estimated that in five or six years 75% of the African population will own a smartphone. Thus, by offering mobile money services, mobile operators are addressing such enormous pain points that the opportunity to provide a profitable service of social value is equally big. As it happens, by doing so they are encroaching into what would normally be the banking domain.
Since cash as we know it is a millennia-old tool much closer to the papyrus than to the computer, mobile money is ensuring ever increasing levels of security, ease of use and transparency to users. These advantages are entirely the result of formal setups, and they can translate into a wider range of improvements. For example, digital money’s traceability has the potential to increase tax revenue volumes; it can also allow even the poorest of the world to have credit and insurance scores through their payments data, making a total of two billion unbanked people (the majority of whom are African) eligible to acquire formal financial products and services for the first time.
So, where does Bitcoin fit in the picture?
Bitcoin transfers don’t require the intervention of external authorities, in contrast to money issued by central banks. As a digital currency based on an open-source protocol, there is no central financial system, no permissions required. In contrast, a bank wire transfer between two people takes place across a wide set of technologies, technical rules and legal frameworks, with many official institutions involved. It’s a very complex matter. Bitcoin, even though it runs on a highly complex protocol, is simple in the sense that a transfer between two people does not require much more than an internet connection, two wallets and some Bitcoin. The system that supports the transaction capability and its features is hosted in the cloud, in a decentralised, public way.
The myth of Bitcoin as a remittance disruptor
Over the years, the remittance market has seen a great deal of hype regarding the alleged advantages of Bitcoin peer-to-peer international transfers. Startups around the globe have been born to disrupt the remittance space and its incumbents (most notably Western Union, the remittance superpower). A few years in, however, the majority of aspirants have pivoted out of retail remittances or shut down their operations, including some well-known African remittance pioneers.
The business model just isn’t sustainable, and the World Bank provides some sobering data to prove it: In the last decade, the remittance industry players have lost close to a third in their margins overall. Online remittances are around 4% and they keep getting lower due to competition. In some cases, the fixed rate is as low as zero, leaving only the FX markup as revenue for remittance providers.
Additionally, sending remittance in Bitcoin requires users to buy Bitcoin before sending, and selling Bitcoin before cashing out. This doubles the FX markup cost and virtually forces the receiver to cash out (since Bitcoin is not accepted nearly as ubiquitously as local currencies are). Bitcoin remittances will not live up to expectations even in Africa, where average rates are undeniably higher than in the rest of the world due to low-volume and high-cost intra-African remittances.
Merchant payments, a driver of development
Bitcoin’s potential lies not in peer-to-peer (P2P), but in peer-to-business (P2B) payments, where it not only serves e-commerce purposes, but critically, it increases the amount of circulating digital currency.
The latest industry insights show that African mobile operators are moving beyond the peer to peer transfers that are helping Africans move money around safely and securely. The focus is shifting towards the e-commerce and merchant payment segments. There’s a strategic logic behind the shift: If there isn’t a large number of merchants accepting mobile payments, money in Africa cannot maintain its digital state for very long, quickly returning to its cash state, out of the operators’ direct reach (and where little to no progress takes place).
A success story perpetually in the making
Despite the miracle narrative and the endless references to the case of Kenyan mobile money leader M-Pesa, the truth is that the sector is in permanent need of evolving to live up to its true potential across the continent. The market’s complexity leads mobile operators to fail often on their customer centric approach (when they have one in place). Consider, for example, that most mobile wallet users need to cash-out to be able to make a purchase, which is not only inconvenient but often expensive. It also keeps digital liquidity at very low numbers, which works entirely against the mobile operators’ bottom line. Mobile money’s digital state is too fleeting.
For the industry to reach a truly thriving stage it is absolutely necessary that “merchants accepting mobile money” becomes an industry metric. The sector is currently focused (and rightly so) on the fast pace changes in inter-operability, infrastructure, smartphone penetration and user adoption. Growth forecasts on these well-known four areas are more promising each year, and yet, according to the World Bank, out of a total 223 million there are 139 million mobile money accounts in Africa that haven’t been used at least once in the past three months (a commonly accepted definition of inactive account).
Bitcoin’s role in Africa
In order to reach the point in which merchants not accepting mobile payments perceive themselves as being at a disadvantage, Bitcoin comes in handy. Unlike using Bitcoin for traditional remittances, where a cash-out is almost guaranteed, having merchants accept Bitcoin does work in favour of the payments industry by increasing digital liquidity. It should be self-evident that wide adoption of mobile money (both in the developed and developing world), requires heavy merchant involvement, as people need them to make use of their digital money, be it Bitcoin or any fiat currency. For East Africa residents, for example, it is not hard to acquire Bitcoin. The challenge remains where to spend them.
Fortunately, established global companies are considering accepting Bitcoin payments in Africa. This might provide a significant contribution to the mobile money ecosystem by increasing both digital liquidity and global exposure for the African Bitcoin market. Especially because Bitcoin is mostly used across Europe, followed closely by US, where the African diaspora is highly concentrated. This opens up the door to Bitcoin merchant payments as de facto remittances in kind, providing low cost international transfers which provide control over spending, as opposed to sending cash over traditional remittance channels.
Since Bitcoin transfers do not require external control to be received, if African merchants accept Bitcoin, Africans in the diaspora can use it to pay directly from their country of immigration in exchange for goods and services back home. Additionally, people in African countries with monetary issues are looking to alleviate inflationary pressures by using Bitcoin as a viable tool to safely exchange value in their transactions.
It is worth clarifying that the Bitcoin user profile is a tech savvy, educated person, in Africa and everywhere else. Therefore, contrary to what some believe, Bitcoin is not a poverty alleviation tool. Rather, Bitcoin is a formal commerce tool. We are now laying out the building blocks of an app based digital money ecosystem in Africa, and we are going to need Bitcoin to play a role in the critical domain of merchant payments.
Javier de Coca is the marketing director of FloCash, an African cross-border e-commerce network.