Last week I
reported on two Bitcoin startups in Africa that are working to cash in on the remittance business: Kenya-based
BitPesa and Ghana-based
Kitiwa. These startups are working to leverage Bitcoin’s low transaction fees to reduce the cost of sending money across international borders.
In this week’s column, I give a detailed review of BitPesa, based on four test transactions. My tests reveal that BitPesa is indeed a convenient, comparatively low-cost way of remitting money to Kenya.
I found that the total fees for using BitPesa are slightly higher than the advertised 3%. However, BitPesa is still more economical than other options like Western Union. Moreover, BitPesa enables micro remittances, which are not currently practical through established money transfer services.
What is BitPesa?
BitPesa is a remittance service based in Kenya that allows users to exchange Bitcoin for Kenyan Shillings that are sent directly to a recipient’s mobile money account.
Mobile money is a growing phenomena in Africa and around the world. People deposit money into an account associated with their cellphone number, then use their phones to buy things in shops, to send money to other mobile money accounts, or to cash out into paper currency.
Kenya’s Safaricom owns the M-Pesa service, which is at the vanguard of the mobile money movement. Almost every adult in Kenya owns an M-Pesa account, and a third of the country’s GDP passes through the system. Users are assessed fees when transferring money between accounts and when exchanging mobile money for cash. These fees make mobile money a lucrative business, and Safaricom is now East Africa’s most profitable company.
BitPesa, which works seamlessly with M-Pesa and competing mobile money platforms, allows people outside of Kenya to upload BitCoin and specify a Kenyan phone number to electronically receive Shillings in return. As stated, BitPesa advertises a 3% fee for this service.
Not Available in All Markets
I initially attempted to test BitPesa from my home in New York City. However, the system blocked me from creating an account, likely due to the United States' stringent money transfer laws.
Currently I am traveling in England, where I successfully opened a BitPesa account and completed four test transactions.
Account Registration
The registration process for BitPesa is trivial, requiring only a name, email address, mailing address and date of birth. Users must also check a box that permits BitPesa to confirm their identity information.
Transactions
After registering, users are asked to input the quantity of Pound Sterling (£) that they would like to remit to Kenya. This sum is immediately translated into the quantity of Kenyan Shillings (KSH) that will be received and the amount of Bitcoin (BTC) that is required to process the transaction.
The user then specifies a person to receive the money by inputing their name, email address and mobile money phone number.
A Bitcoin address is subsequently generated and a 10 minute countdown timer is initiated. The user must deposit the indicated amount of Bitcoin to the specified address in order to complete the transaction.
In all of my test transactions, the recipients’ mobile money accounts were credited after one confirmation on the BitCoin network, which took between 2 and 15 minutes.
Identification Required for Subsequent Transactions
After the first transaction, BitPesa will not work until the user uploads a government-issued identity document.
Fees and Exchange Rates
I completed four test transactions in the amounts of £1, £2, £5 and £6. The table below details each of these transactions:
| Amount sent |
Amount received |
Bitcoin used |
| £1 |
KSH 145 |
.00283 |
| £2 |
KSH 289 |
.00566 |
| £5 |
KSH 723 |
.01416 |
| £6 |
KSH 868 |
.01699 |
At the time of testing, the market exchange rate for Bitcoin was 1 BTC = £353.73. The following table shows that this is roughly the same exchange rate that BitPesa used in calculating the Bitcoin required for each transaction:
|
Amount sent (£)
|
Bitcoin used (BTC)
|
BitPesa's exchange rate (£/BTC)
|
Market exchange rate at time of transaction (£/BTC)
|
Difference
|
| 1 |
0.00283 |
353.36 |
353.73 |
-0.37 |
| 2 |
0.00565 |
353.98 |
353.73 |
0.25 |
| 5 |
0.01412 |
354.11 |
353.73 |
0.38 |
| 6 |
0.01695 |
353.98 |
353.73 |
0.25 |
At the time of testing, the market exchange rate for Kenyan Shillings was £1 = KSH 149.23. The table below illustrates that BitPesa’s fees were indeed approximately 3%:
|
Amount sent (£)
|
Amount received (KSH)
|
BitPesa's exchange rate (KSH/£)
|
Market exchange rate (KSH/£)
|
BitPesa's fee*
|
| 1 |
144 |
144.00 |
149.14 |
3.45% |
| 2 |
289 |
144.50 |
149.14 |
3.11% |
| 5 |
723 |
144.60 |
149.14 |
3.04% |
| 6 |
868 |
144.67 |
149.14 |
3.00% |
| |
|
|
*(Market Rate – BitPesa's Rate)/Market Rate, expressed as percentage
|
It should be noted that the above calculations do not include the costs of purchasing BitCoin. I buy Bitcoin in the United States, on a low cost exchange, for a 1% fee plus $0.15. This increases the total transaction cost to about 4% from BitPesa’s advertised 3%.
Not everyone desiring to send money to Kenya will be able to access low-cost exchanges. Immigrants who are undocumented or do not have bank accounts will likely have to purchase their Bitcoin with cash, at up to 10% above the market rate.
Additionally, the above calculations do not include Bitcoin miners’ fees paid to transfer Bitcoin from a user’s wallet to BitPesa’s site. For each of the above test transactions, I paid a negligible .0001 BTC ($0.06) using my Mycelium smartphone wallet.
Finally, receivers in Kenya must pay additional fees to Safaricom to withdraw cash from the M-Pesa network or to send money to another M-Pesa user. In the above £5 (KSH 723) transaction, the receiver would pay KSH 33 (4.5%) to send to another M-Pesa account or KSH 27 (3.7%) to withdraw cash.
Not all M-Pesa transactions accrue fees, however. Buying airtime on the Safaricom network is free, as are transactions within Kenya’s mushrooming network of M-Pesa merchants. For instance, the recipient of my test transactions uses M-Pesa to buy gasoline and does not pay transaction fees to do so.
Comparison with Existing Methods of Money Transfer
Western Union is one of the world’s most well-established money transfer companies. In the United Kingdom, Western Union allows people to send money online, from their bank account to a Kenyan mobile money account like M-Pesa. The chart below uses Western Union’s fee calculator to determine the effective exchange rate for various remittance amounts:
|
Amount sent (£)
|
Western Union transfer fee (£)
|
Total used (£)
|
Amount received (KSH)
|
Effective exchange rate (KSH/£)*
|
| 2 |
2 |
4 |
295.24 |
73.81 |
| 5 |
2 |
7 |
738.27 |
105.47 |
| 10 |
2 |
12 |
1476.2 |
123.02 |
| 50 |
4.9 |
54.9 |
7380.98 |
134.44 |
| 100 |
4.9 |
104.9 |
14761.96 |
140.72 |
| 500 |
19.9 |
519.9 |
73809.82 |
141.97 |
| |
|
|
|
*higher is better |
Compare this to BitPesa’s effective exchange rates in the table below:
|
Amount sent (£)
|
1% Bitcoin purchase fee (£)
|
Total used (£)
|
Amount received (KSH)
|
Effective exchange rate (KSH/£)
|
| 2 |
0.02 |
2.02 |
289 |
143.07 |
| 5 |
0.05 |
5.05 |
723 |
143.17 |
| 10 |
0.10 |
10.10 |
1447 |
143.27 |
| 50 |
0.50 |
50.50 |
7235 |
143.27 |
| 100 |
1.00 |
101.00 |
14470 |
143.27 |
| 500 |
5.00 |
505.00 |
72349 |
143.27 |
This comparison reveals that BitPesa yields a better exchange rate in all cases. Importantly, savings are particularly pronounced for small transactions. These “micro-remittances” in the range of £2 - £10 ($4 - $20) are impractical via established money transfer companies like Western Union.
Conclusions
BitPesa—one of Africa’s first Bitcoin startups—could make waves in the international remittance market. In addition to offering competitive exchange rates across the board, BitPesa also enables micro remittances. This may be the company’s strongest selling point for Kenyans living abroad, who often encounter situations where they wish to quickly send home small sums. BitPesa thus destabilizes the prevailing business model for money transfer services where smaller remittances accrue far higher fees than larger remittances, as illustrated in the Western Union table above.
BitPesa is also appealing in its convenience. Using the service is almost effortless once a person is comfortable with buying BitCoin and transferring it between wallets. BitPesa thus allows users to send money from their laptops or smartphones, eliminating the frustration of standing in long queues at brick-and-mortar money transfer outlets.
There are drawbacks to using BitPesa, however. For instance, the service is not available in the United States, which will undoubtedly frustrate a number of potential users there.
The extreme volatility of Bitcoin is a second potential drawback. Users who purchase Bitcoin and do not immediately send it might find that the value of their Bitcoin decreases (or increases) drastically in a matter of days or hours. Receivers are not directly affected by this volatility, however, because BitPesa converts Bitcoin into Shillings as soon as it enters the platform. In fact, receivers do not need to know anything at all about Bitcoin, or even that it was used in the transaction.
In sum, BitPesa appears poised to disrupt the international remittance market by offering competitive fees, by enabling micro remittances, and by offering users a convenient way of sending money. It is an up-and-coming company to watch in Africa's fledgling Bitcoin ecosystem.
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