Crypto’s killer app is payments

A recent World Bank report on the cost of remittances found that the average cost of transferring a relatively modest $200 was 6.3%. Cryptos have slashed that to fractions of a percent in many cases.

Remittances, where people living and working abroad send money back home to friends and family, form a huge part of most African economies.

In Gambia, remittances accounted for 28% of GDP in 2022. In South Sudan it was 24.8%. In Lesotho and Somalia, they account for about 21% of GDP.

If ever there was a market begging for disruption, this is it.

A recent report by crypto exchange Coinbase demonstrates how cryptocurrencies like bitcoin and ethereum can slash the cost of sending money internationally by about 96.7% versus traditional methods. Sending bitcoin to another wallet costs an average of $1.50 (R27) per transaction, and ethereum costs an average of $0.75 (R13.50) per transaction.

Stablecoins such as USD Coin (USDC) are widely accepted in many parts of Africa as they are seen as a relatively good proxy for the US dollar, with costs of transfer typically less than 1%.

Remittances as a percentage of GDP

Source: Statista

The World Bank report from September 2022 shows remittance costs are trending lower – but not by much. In 2009, the average cost of sending $200 was 9.67%. The target is to get that down to 3% by 2030. The World Bank estimates the annual value of remittances at $605 billion in 2021, though other estimates put the figure closer to $781 billion.

Should the World Bank’s 3% cost target be reached by 2023, this will put more than $20 billion into the pockets of the remitters.

World Bank data shows that remittances to low and middle-income countries more than doubled during the past 15 years to reach $550 billion. Over half of it goes to people in rural areas, and about 75% is used to cover basics such as food and medical or school expenses, while the remaining is invested in assets or saved.

An IMF study measuring remittance costs over a 10-year period to 2020 places South Africa at the upper end of the cost spectrum, with average costs of around 8%.

Coinbase reckons Americans spend over $12 billion a year in fees just to send money to friends and family abroad.

“These remittances are a vital lifeline for underbanked communities, enabling those who need it most to buy essential household goods, invest in healthcare and fund education,” it says.

“Yet the process for international transfers is shockingly slow and expensive. Crypto international money transfers are significantly faster and over 96% cheaper, substantially relieving the burden placed on communities who wish to provide support for their families and friends abroad.”

The cost of sending these remittances varies from 5.5% (post office) to 6.2% (money transfer operators), all the way to 10.8% (banks).

The banks are the most expensive when it comes to remittances.

It’s not just the costs that cause consumers pain. Traditional remittance channels can take anywhere from one to 10 days, while crypto transfers are usually settled in 10 minutes. Another advantage in using cryptos for payments is that you can send the funds any time of day or night (not just banking hours) – and across national borders without any central bank permission.

Merchants increasingly on board

Remittances is one area where cryptos are muscling in. Another is the growing acceptance of cryptos by merchants.

Omer Iqbal, CEO of fintech company FiveWest, says cryptos are steadily encroaching on a space dominated by banks as merchants worldwide start to accept crypto payments.

“Although crypto assets are not legal tender, they are nevertheless increasingly accepted as a means of payment,” says Iqbal.

“In this instance, crypto assets function as a type of barter instrument with the price being determined in accordance with the willing-buyer-willing-seller principle.”

FiveWest’s Blockshop payments platform hedges unfavourable currency price movements in potentially volatile cryptos such as bitcoin or US dollar-backed stablecoins such as USDC.

Iqbal says this makes merchants more comfortable accepting cryptos, since they do not have to suffer wild swings in exchange rates before receiving the rand equivalent into their bank accounts. Ensuring that all users are subject to Know Your Customer and Anti-Money Laundering regulations is vital in gaining wider acceptance for this means of payment, he adds. The big advantage is the ability to slash the costs of traditional payments.

Forex controls

Almo Lubowski of CryptoConvert, which recently helped Pick n Pay introduce bitcoin as a means of payments across its store network, says the SA regulatory landscape with regard to foreign remittances of crypto assets is less than favourable due to strict foreign exchange control regulations.

He says the regulations prohibit transactions where capital or the right to capital is directly or indirectly exported from South Africa without permission from National Treasury.

“This includes transactions where an individual purchases crypto assets in South Africa and uses them to externalise capital,” says Lubowski.

“Remittances of crypto assets from SA abroad are therefore not legally permitted as part of an individual’s single discretionary allowance or foreign capital allowance,” he adds.

This is because of the nature of the assets and the fact that transactions involving crypto assets are currently not reportable on the FinSurv Reporting System. Contravening these regulations is a criminal offence.”

What appears to worry regulators is crypto’s ability to bypass controls, and that appears to have goaded them into rolling out regulations.

What’s clear, however, is that banks are going to get a run for their money as the world awakens to the fact that a cheaper payments alternative has arrived.

Listen to this Moneyweb Crypto pod with Ciaran Ryan:

You can also listen to this podcast on iono.fm here.