Sending Money Home: Technology or Bureaucracy?
Remittances are helping poor people globally, but regulators loom
AUGUST 26, 2014 by IAIN MURRAY
Some of the world’s poorest people depend on the money they receive from relatives working in developed countries. In fact, this money dwarfs the world’s official foreign aid budget, and the gap is increasing.
In 2011, total private flows of aid totaled $680 billion—almost five times the $138 billion official figure. As I noted in 2005, “the future of aid to developing countries is private.”
This increase in private aid is great news for all concerned. Except, perhaps, for bureaucrats, who are loath to let good deeds go unpunished. World Bank and United Nations bean counters are denouncing remittance transfer fees as exploitative. The U.S. Consumer Financial Protection Bureau (CFPB) has issued a rule to crack down on supposed fraud and exploitation affecting the existing remittance-transfer infrastructure. Its most important provision is the right to cancel a money transfer within 30 minutes of its being initiated. Proposals to cap the fee charged by remittance firms have also been agreed to internationally.
Critics claim that high transfer fees are the result of a so-called market failure. Yet, markets in remittances are frequently overregulated. Many African governments have exclusive deals with money transfer companies, which operate as national monopolies, free from competitive discipline. And there are other regulatory pitfalls that drive up prices. A Western Union spokesman told The Guardian:
Our pricing varies between countries depending on a number of factors, such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility and other market efficiencies. These factors can impact the fees and foreign exchange rates offered by corridor and service type.
All this suggests the remittance market needs less regulation. Proper competition, lower taxes, less restrictive “consumer protection” measures (which quickly become outdated), and less red tape in general would all likely increase the flow of funds between individuals.
Such a solution would be inconceivable for global bureaucrats. Indeed, their house organ, The New York Times, last week recommended that the industry should be not only nationalized, but internationalized, with the World Bank taking on the role of remittance service provider, a role the Times actually described as “critical”:
The World Bank could pool deposits from banks and nonbank money transfer agents and parcel them to recipient banks, using its formidable certification protocols to verify that the money is coming from and going to legitimate parties. Such pooling could also reduce exchange fees, a big cost to migrants. Equally important, the World Bank could use its relationships with regulators around the world to enhance the remittance system’s integrity.
Technology is already solving many of the problems faced by the money transfer industry, making the industry obsolete in the process. For example, in the central Asian republic Kyrgyzstan, which relies heavily on remittances—accounting for 31 percent of its GDP, mostly from within the former Soviet Union—an Italian entrepreneur named Emanuele Costa is able to promote bitcoin as an alternative to the expensive, heavily regulated money transfer firms.
Costa can do this because Kyrgyzstan is notably less oppressive and more free-market-oriented than its neighbors, and it has much less regulation than is typical in the area. He regularly hosts meetups to explain the currency to potential recipients and has installed a bitcoin ATM at a pizzeria (which, as Eurasianet notes, has been “bombarded with calls” since it publicized its existence).
In Kenya, meanwhile, a bitcoin startup called BitPesa offers money transfers “twice as fast and 75% cheaper” than traditional competitors. Kenya is an especially interesting place for this innovation to happen, as it was the scene of a “cell phone revolution” that allowed its telecommunications market to work around a serious case of government failure. As a result, most Kenyans now use a form of mobile wallet on their cell phones.
The potential for bitcoin to revolutionize the global remittance industry is hard to overstate. It largely cuts out the middleman, reducing the fees and charges some view as exploitative. Converting to local currency would be the most significant charge for most users. Bitcoin facilitates the establishment of trust through its “blockchain” public ledger, potentially reducing fraudulent transfers to near zero (although there is always the chance of someone stealing a wallet key). Taxes, at the moment, are minimal.
For these reasons, bitcoin represents the best hope to ensure that all of the $680 billion in remittances goes to the people who need it. That might be why in America, bitcoin is most popular among Hispanics, who send more money abroad than any other group.
Yet, roadblocks remain. If Kyrgyzstan joins Moscow’s customs union as expected, bitcoin’s days may be numbered there, as Russian officials have taken a dim view of anonymous payment vehicles. Meanwhile, in the UK, where many Kenyan remittance senders live and work, banks are wary of taking bitcoin businesses on as clients. As BitPesa’s founder told The Guardian:
Most UK banks won’t let Bitcoin businesses open bank accounts. These businesses want to be licensed, but UK banks shy away, just like Barclays cut Somalia off the map.
British banks are highly regulated and probably fearful of what regulators might do to them if they did business with companies that present “reputational risk”—as defined by regulators, of course.
In the United States, the CFPB rule mentioned above could threaten to make bitcoin illegal for remittance purposes. The average time for a Bitcoin transaction to go through is around eight minutes, and reversing a transaction is impossible unless an escrow service is used. It is possible that the rule may not apply to a decentralized network like bitcoin, but in its short existence, the CFPB has not become known for reading its powers narrowly.
Regulators could wind up killing off the solution to problems created by, well, regulators. If they are serious about reducing costs and decreasing the potential for fraud in remittances, they will stand aside and let bitcoin develop in this role. If the choice is between a distributed, autonomous cryptocurrency network approved by the people who need the remittances most, or a combination of policies approved by The New York Times, the World Bank, and international regulators, Public Choice economics suggests that the technological option faces a long struggle ahead.