A recent report from Citi’s Equities Research team challenges the widely held view that Bitcoin delivers simpler and cheaper international remittances.  While the analysis highlights some key Bitcoin remittance limitations, it should not be assumed that these apply to all blockchain or Distributed Ledger Technology (DLT) based solutions – or markets.  

Fintech targets remittance

International remittance is a prime target for fintech innovators and rightly so.  The sheer complexity of the correspondent banking value chain, inflated fees, uncompetitive FX rates and fat margins cry out for a good disruptive kick.  And a long line of start-ups has formed to try and give it. Some, but by no means all, of these are based on blockchain technologies.

New players including BitPesa and Abra have built services on the Bitcoin network and Bitcoin exchanges and wallets such as Coinbase provide a mechanism for informed users to make international transfers.  Cross-border settlement is the lead use case for DLT bank infrastructure contender Ripple.  Santander, an investor in Ripple through Santander InnoVentures, became the first of a number of established banks to launch a trial remittance service based on the paltform in May this year.

The case for both Bitcoin and DLT platforms rests the inherent simplicity of peer to peer networks vs. the complex correspondent banking process that underpins legacy international money transfer services.  Removing the fee charging intermediaries associated with correspondent banking should reduce the inherent costs and speed the transaction.   There are also opportunities to introduce competitive FX rates – for example, the Ripple protocol makes specific provision for this.

The Bitcoin remittance cost penalty

As part of its analysis, the Citi team compared the costs of Bitcoin based transfers against traditional Money Transfer Operators (MTOs) such as Western Union & Money Gram and on-line account to account services including Xoom, Azimo and Transferwise. The surprising finding is that for nearly all the remittance corridors tested, Bitcoin is not the cheapest option.  In most cases it is more expensive than Transferwise and, for some transactions, it is significantly more costly than the alternatives.

While acknowledging the efficiency of the Bitcoin network, the report argues that its relative advantage dissipates when “last mile” costs to convert to fiat currency are considered and that MTO business models and agent networks actually bring clear advantages in terms of total costs, speed and accessibility to target consumers.

The Real Potential of the Blockchain

So is faith in blockchain as better alternative for international remittance totally misplaced?  We don’t think so.

In spite of its drawbacks, Bitcoin may still be an effective alternative to inefficient legacy infrastructure and services in underdeveloped markets such as Africa. The alternative DLT based platforms, of which Ripple is currently the furthest advanced, should be more effective and sustainable than Bitcoin long term. This is why a number of leading banks are exploring the technology.  The Ripple model should address a number of the factors that mitigate against Bitcoin.  Its trust based consensus protocol does not suffer the energy overhead of proof of work, and partner banks and market makers will bring higher levels of liquidity.

But don't expect a quick transition

Of course Ripple is far from proven at scale and even its supporters argue that its roll out needs to be staged. Globally there are thousands of banks processing cross-border payments via correspondent rails and moving them all to a DLT based network is going to be a slow, complex process with inherent risks.  Taking account of this, the most practical scenario is for a small number of banks to form distributed ledger networks and then scale up steadily.  This is probably a viable model because as Ripple partner Eathport argues, even if only one party is Ripple enabled, transactions can be completed using traditional rails but with improved efficiency. 

The customer proposition still matters

In recent years, retail banks have tended to take a back seat in offering competitive commercial remittance services, opening the door to the MTOs and challengers. Distributed ledger infrastructure may present opportunities for those banks to launch compelling new cross boarder payment products.  Whether they succeed against the MTOs and online challengers will depend not just on cost, but also on how compelling and accessible they can make their proposition to those consumer segments and businesses for whom international payments matter most.