Digital Currencies and Financial Inclusion: Revisited

When CGAP published its Brief on Bitcoin versus Electronic Money in January of this year, we concluded: “The current realities of Bitcoin mean it is still a long way off from reaching the unbanked.” It seemed that digital currencies such as Bitcoin were primarily the domain of consumers in developed countries who were tech-savvy and enjoyed playing around with the latest hot item. Yet demonstrating just how quickly things move in this space, just a few months later a start-up called BitPesa launched a service using Bitcoin to provide cheap and fast remittance services to Kenya. CGAP decided to provide support to BitPesa for market research of potential customers, so that CGAP could understand what potential digital currencies have for financial inclusion as well as to understand the practical and regulatory barriers facing a start-up wanting to link Bitcoin with the formal banking and mobile money infrastructure in an emerging market.

BitPesa, based in Nairobi, is initially focusing on providing remittance services for the UK to Kenya corridor and charges a variable rate of 3% on transfers. Here is how it works.

• Senders in the UK own or buy Bitcoin. BitPesa helps facilitate this process through information on its website.
• The digital currency is used as a means of exchange. Once a sender in the UK makes a transfer through BitPesa, the Bitcoins are immediately converted into Kenyan shillings so that people on the receiving end in Kenya don’t have to use Bitcoin or even know that the senders have used it. Funds are only held in Bitcoin for a matter of minutes or seconds, which limits risks associated with fluctuating currency values.
• Kenyan shillings land directly into mobile wallets and bank accounts in Kenya, which recipients can use directly or convert to cash.

CGAP was interested in BitPesa as a test case for the link between digital currencies and financial inclusion for two main reasons. First, not only are international remittances very significant (Kenyans working abroad sent home $1.3 billion in 2013) but they are a huge pain point in Africa. Tackling this expensive and inefficient system makes a lot of sense. The World Bank calculates that the average fee for a £300 transfer from the UK to Kenya is 9% - and that’s excluding additional margin made off the exchange rate. BitPesa’s 3% fee is a significant reduction. Aside from cost, international bank transfers and even PayPal can take days or even a week to clear. There doesn’t seem to be a lot of motivation from banks to increase efficiency in this space and extremely efficient peer-to-peer protocols like Bitcoin might provide some impetus for improvement.

Second, Kenya is an ideal country in which to test this out as the majority of the population regularly uses accounts of some sort – bank accounts or, more commonly, M-PESA accounts which increasingly are linked to bank accounts such as CBA’s M-Shwari account. Most remittance services do not send money to accounts; instead recipients must cash out the entire amount immediately at one of the remittance service’s locations in that country. This is a great opportunity to push remittances into accounts where recipients can store value to use as needed or send it on to pay school fees or buy goods.

So, just six months after its soft launch, what can we learn from BitPesa about the potential of digital currencies for enhanced financial inclusion?

So far, the strongest use case for BitPesa is Kenyan entrepreneurs who need to receive payments from abroad.
Nicknamed the ‘Silicon Savannah,’ Nairobi has plenty of tech start-ups, many of whom receive money from abroad. Before BitPesa, someone from the company would literally go to the ATM several times a day and withdraw the maximum amount in order to receive payments from customers abroad – and then go into the bank branch to deposit into their shilling denominated account. BitPesa provides an alternative to this inconvenient method of accessing money. The video below shows some great examples of how start-ups are using BitPesa.

Getting to individual remittance recipients, including the unbanked, will be more of a challenge.
Businesses need to receive bulk payments and so are highly motivated to figure out the cheapest and most efficient way to do this. Entrepreneurs by nature are tech-savvy. However, it’s going to take longer for the average Kenyan living in the diaspora to learn about BitPesa and be comfortable trying out a new and unknown technology for sending money abroad. BitPesa is conducting focus groups and outreach in Kenyan neighborhoods in the UK and is confident that this customer segment will grow, but it won’t happen overnight.

Even if BitPesa succeeds in reaching mass market international remittance recipients, the inclusion effect will be limited to enhanced use cases for the funds received.
Channeling remittance funds into a wallet with multiple functionalities is significantly better than the way most recipients access and use funds today. However, for an even bigger effect, consumers would need to be able to use digital currencies within Kenya to send funds or buy goods more cheaply and efficiently. Right now, the service still requires Kenyans to “cash out” from their BitPesa accounts into local currency. Therefore the most likely route to lasting inclusion would be expanding the availability and use of merchant payments through mobile money such as Kopo Kopo or Lipa na M-PESA.

It will be fascinating to watch the digital currency story unfold. There are many compelling reasons why digital currencies could significantly impact financial inclusion. Practically, despite the promising early beginning of BitPesa, there are many challenges to overcome before digital currencies reach the unbanked at scale in a significant way. In our next blog post, we’ll unpack some of the most controversial elements of digital currencies and lay out which common arguments against them have merit and which we think can be disproved.