Start-ups ABRA and Circle Internet Financial are using the blockchain to speed up and reduce the cost of cross-border remittances. Robin Arnfield reports.
The blockchain provides an alternative, real-time infrastructure to Swift for banks and remittance services. Currently, the only way to transfer fiat currency via the blockchain is to convert it into a cryptocurrency such as Bitcoin or Ripple and then back to fiat currency. Major banks including BBVA, SEB and UBS are piloting the blockchain and Ripple for inter-bank transfers.
“I’m not aware of a way to transfer funds via hard currency inter-bank on a blockchain,” Ben Knieff, a payments industry consultant at New York-based Outside Look, tells RBI. “But, theoretically, it should be possible to avoid converting funds to cryptocurrency by using smart contracts, such as can be implemented with Ethereum.”
Ethereum is an open-source blockchain-based platform for smart contracts.
“Blockchain-based inter-bank transfers would have huge value, as clearing-houses – the current method for transferring hard currency – are slow and expensive,” says Knieff. “This is why SWIFT has a blockchain proof of concept, as blockchains could make SWIFT obsolete and become the next-generation equivalent of ISO 20022.”
But Knieff says he can’t imagine inter-bank transfers converting to cryptocurrency, as there’s too much risk and too much volume involved. “Bitcoin, the largest cryptocurrency by volume, couldn’t handle the billions of dollars of inter-bank transfers that occur daily,” he says. “I can, however, imagine smart contracts for such transfers that would net-settle end of day.”
“Abra and Circle have a real value proposition in reducing the cost of cross-border remittances by offering dramatically lower fee structures,” says Knieff. “By using cryptocurrencies such as Bitcoin, the transaction cost approaches – but doesn’t reach – zero. This is attractive compared to traditional cross-border remittances charging fees that can exceed 10% of the transaction value. Lower fees mean more money being sent home in a situation where every dollar counts.”
Knieff says there are risks due to the volatility of exchange rates between the cryptocurrency and both the remitter and receiver’s home hard currency. “Some of this risk can be mitigated by guaranteeing a certain destination value,” he says. “This can work when a firm has enough volume to even out the risk, and can process transactions quickly enough to mitigate much of the risk.”
“One of the advantages of traditional cross-border remittances is that both ends of the transaction can be in cash,” Knieff says. “You can go to a Western Union or MoneyGram branch with $500 cash, send a remittance, and the recipient can walk out at the other end with cash in their home currency minus fees,” he says.
“Since many remitters and receivers operate primarily in cash, being under-banked, it may be challenging for them to move to more electronic transactions. I think that blockchain-based P2P firms recognize these challenges and that they will work hard to evolve the customer experience.”
There is also a trust factor, Knieff says. “Some users may find it difficult to trust their hard-earned funds to new services with unknown brands despite the lower costs,” he says. “While security is very strong with blockchain-based payments, as they are cryptographically secure and immutable, there have been cases where cryptocurrency wallets have been hacked and tokens stolen.”
Abra, which has raised around $20m in investment, wants to become the WhatsApp of money. The US start-up offers a single app in 200 countries enabling consumers to send money from any cellphone number to any other cellphone number anywhere worldwide. “Abra has built the first global, peer-to-peer, digital cash, money transfer app,” it says.
In 2008, Bill Barhydt, Abra’s founder, set up a mobile P2P transfer firm called M-Via, renamed Boom Financial, which was later sold to Caribbean telco Digicel.
“What Bill learnt from Boom went into Abra,” says Eric Rosenthal, Abra’s Vice President, Business Development. “His vision was to set up a mobile money company that let you send money from any smartphone to any other smartphone worldwide.
But, because, like other mobile remittance providers, Boom was predicated on having custody of funds, it wasn’t able to deliver on Bill’s vision of a smartphone app letting you send money by knowing the recipient’s phone number. Because Boom was custodial and was based on prepaid cards, it needed e-money licences in every country where it operated in order to fulfill that vision.”
It was the frustration of trying to roll out a custodial-based solution involving prepaid cards for remittances that led Barhydt to start Abra.
“Abra isn’t custodial, nor are we the legal counterparty of the transactions on our system, all of which are done via cellphone numbers,” says Rosenthal. “To deliver a non-custodial platform using a fully interoperable mobile app, you have to rethink the business model. You have to remove yourself from the funds flow and use new technology – we decided to use the blockchain for this.”
Rosenthal contrasts Abra’s approach with Circle, which, being custodial, needs to be licensed in each market where it operates, he says. “Similarly, PayPal needs to be licensed wherever it has subsidiaries,” he notes. “This requirement restricts a company’s rollout.”
Digital equivalent of gold
“We applied the concept of a shared economy platform like Uber or Alibaba to replicate in digital form what happened 100 years ago,” says Rosenthal. “Back then, someone would buy gold with cash and send the gold to someone who would sell it for cash.
“The entity selling the gold to the sender had the compliance responsibility, as did the entity buying the gold from the recipient, while the courier was solely responsible for the physical movement of value. With the Bitcoin and blockchain being used for value transfer, we enable that same kind of transaction in digital, non-custodial form, with the blockchain replacing couriers and Bitcoin replacing gold.”
Abra orchestrates the connectivity between digital currency sellers and buyers, using the blockchain to transfer value from one phone to another. It then facilitates the off-boarding or withdrawal of that value by enabling conversion from bitcoin to fiat.
“We’re building a global liquidity Network that lets people have on-ramps and off-ramps to get in and out of our network,” says Rosenthal.
“Our digital hedge locks in the value of the Bitcoin and pegs it to the user’s fiat currency value,” says Rosenthal. “
“Unlike other Bitcoin wallets which are predicated on the user knowing and wanting bitcoin, we don’t require users to learn how to use Bitcoin. If you want to go mass market, you can’t expect people to learn a new currency.”
Abra lets users send any amount of money in any currency they choose, including domestic P2P transfers, and also exchange Bitcoins for fiat currencies. “We’re usually competitive from an FX perspective,” Rosenthal says. “But, in very competitive corridors, we might be on par with other services.”
Abra said in July 2017 that American Express, one of its investors, allows cardmembers to use Amex cards to directly fund their Abra wallets . “Although you can (indirectly) buy digital currency with debit or credit cards, apart from Amex, no other major card network has directly supported the ability to do that for a Bitcoin-enabled app,” says Rosenthal.
“How you fund an Abra wallet depends on your country of residence. In individual countries we support different funding mechanisms. In the US, it’s Amex and ACH, in Europe it might be SEPA, or in some countries it could be debit cards.”
Abra operates a ‘teller’ network (https://www.abra.com/become-a-teller/) of people who are able to transact on behalf of Abra. “If you need euros for a trip to Europe, and I have euros, I can act as a teller for you,” Rosenthal says.
“You give me dollars and I give you euros. You’re actually doing a digital currency exchange with me, but it looks like you’re topping up your digital wallet. We also have institutional networks which operate as our master tellers and manage liquidity across a larger retail footprint.”
In addition to exchanging fiat currencies, including cash transactions, Abra human tellers can purchase Bitcoins from third-party bitcoin wallets via one of Abra’s Bitcoin Exchange partners.
Banks and payment processors offering Abra funding mechanisms in different countries join the Abra Network, with Abra taking care of their integration with the Network. They don’t get involved in Bitcoin transactions, Rosenthal says.
Abra already lets people use its app for digital payments. “But we won’t see significant investment into that line of business until our liquidity network is bigger,” says Rosenthal. “We’re interested in enabling different types of payments regardless of the use cases.”
Abra users don’t need bank accounts, as, if they want to deposit or withdraw cash from their Abra wallet, they can use one of the cash-accepting money service businesses in Abra’s Liquidity Network.
All Abra transactions are trackable and transparent, Rosenthal stresses.
Backed by investors such as Goldman Sachs and Baidu, which have collectively invested over $140m in the company, Circle Internet Financial leverages Bitcoin as a settlement mechanism to process cross-border remittances.
Customers download Circle’s social payments app, and can fund their Circle Pay wallets by using UK, US or European debit cards and bank accounts. The company is also building open protocols that will use Bitcoin and Ethereum blockchains in order to move money around in the future.
In May 2017, Retail Banker International named Circle as the best non-bank competitor in the 2017 Global Retail Banking Awards at its annual Retail Banking Conference in London.
Circle says its customers in the US, UK and Europe can send and receive money instantly cross-border with no fees and no FX mark-up. Since September 2017, customers can request and send funds in a single group conversation, and create a destination to host payments for an event or cause.
Circle makes its money by trading cryptocurrencies on digital currency exchanges and over the counter. In August 2017, Circle directly traded over $2bn in crypto assets.
Circle started life as a Bitcoin exchange, but no longer allows customers to buy and sell Bitcoin directly from Circle, referring them instead to its partner Coinbase, a US-based Bitcoin exchange.
Circle has an EEA (European Economic Area) E-Money Institution licence from the UK’s Financial Conduct Authority and is registered as a money services business with the US Department of Treasury’s FinCEN. It operates in the US, the UK, and in 29 European countries including Spain, Ireland, Italy and France.
The company said in September 2017 that it will soon be available in every country in the European Economic Area (https://blog.circle.com/2017/09/19/france-italy-groups-crypto-trading/).
Circle says UK customers can receive payments into their UK bank accounts nearly instantly via the Faster Payments scheme. Users can also transfer funds on the same day into most European bank accounts via SEPA withdrawals.
In September 2017, Circle said that growth of customers in Europe has exceeded 800% year-over-year and that payment volume has grown by over 700% in Europe alone in the past year. According to a news release, Circle is on track to process over $1bn in total transaction volume on an annual basis, and is seeking new investors.
WorldRemit was founded by Somaliland refugee Ismail Ahmed to make remittances mobile-first and to lower costs compared to traditional remittance channels. A spokesperson tells EPI that WorldRemit currently has partnerships across six continents.
Transfer funding mechanisms include Android Pay, Apple Pay, debit cards, and bank account transfers, and the firm is looking at adding SAMSUNG Pay.
“We don’t use the blockchain,” says Brion Nazzaro, WorldRemit’s Compliance Director. “In our business model, using the blockchain would require quite a few players to say they are willing to do it that way for the blockchain to become feasible for us.
“If you have a closed-loop system, the blockchain is an efficient way to manage the transactions. But, if you make the blockchain more open, you need to get multiple participants to integrate with the blockchain.”
Nazzaro says there is value in the blockchain if everyone in the value chain implements it and there are no integration issues. “Also, using the blockchain on the back-end, you wouldn’t need to expose the individual end user to the blockchain, and you would settle in the same way that you already do so,” he says.
Nazzaro says that another reason why WorldRemit wouldn’t use the blockchain is that it already has an adequate remittance system. “The blockchain acts as a core transaction journal system and we already have a core system that works fine for recording transactions and can lock in their value,” he says.
WorldRemit’s business model involves the firm holding accounts with multiple banks around the world and processing bulk transfers to these accounts on behalf of clients sending funds to specific countries.
Another reason why WorldRemit doesn’t use the blockchain is that blockchain investment by FIs in developing countries is a long way off, Nazzaro says.
“We have money transmission licences in all the countries where we send money from,” says Nazzaro. “In Europe, we have a PSD (Payment Services Directive) licence. As we aren’t a stored-value provider, we don’t have e-money issuer licences.”
WorldRemit’s business model doesn’t require recipients to have bank accounts. “We enable people who have basic cellphones but no bank account to receive funds on their handset instantly,” Nazzaro says. “These mobile money transfers are trackable and provide transparency.”