Monthly Archives: October 2015

The Colombian remittances market

Colombia is the 4th largest economy in Latin America. It also has somewhere between four million and six million of its citizens living abroad. In 2014 those citizens sent four billion dollars in remittances back to the country. It is an important enough chunk of Colombia’s balance sheet for the national bank to keep tabs on it.

Remittances to the country have been growing steadily in the past 15 years, with only a temporary slowdown in the dog years of the global downturn (2009-2012).

The largest source of remittances is, unsurprisingly, the United States (US$ 1 billion). Spain is a distant second (US$ 400 million) and the UK is fourth (US$ 73 million). So put together, the European corridor is significant. A quarter of all remittances are paid directly into a bank account, up from 21% in 2011.

Colombians abroad send remittances in a similar way to other nationals. Money is handed over to a network of agents in shops and specialist outlets associated with one of the remittance companies that operate in the market (like MoneyGram or Western Union). Once the money is “captured”, the remittance company issues a payment order to their agents in Colombia, who contact the beneficiary of the transfer and hands over the money in Colombian pesos.

In the case of Colombia the clearing of funds is done mainly by money exchange houses (casas de cambio). It appears that most of the trade is concentrated in a very small number of operators, although recent evidence for this is difficult to come by. A 2004 study by Colombia’s central bank found that 81% of the market was handled by only 14 exchange house. The rest was made up by banks, some stock exchange traders and commercial finance companies.
But that study was already pointing out that competition was hotting up and fees were coming down as a result. This 2010 study seems to suggest a similar trend.

At the moment, users pay fees in two different ways – in upfront commissions and in the so-called “differential exchange rate”, that is, the difference between the exchange rate in the market as a whole and the (lower) one that the remittance operators give to their users.

Who cares?

Remittances have a significant effect on those who receive them. The 2010 study found that households who receive remittances tend to spend more on education than those who do not. And they enjoy a standard of living that is higher than those in similar socioeconomic brackets who do not receive them. Remittances, in other words, change lives, for the better.

Arguably, the more competitive the market, the better for its users and the more money that ends up in the pockets of those who will use them to pay for school fees and better places to live.

But entry into this market for a new player is currently very expensive.The costs of compliance (e.g. anti money laundering), logistics (getting the money to the end beneficiary) and the sheer amount of liquidity needed upfront to keep paying out while money is settled across multiple countries, make it prohibitively expensive to compete in the market.

But cryptocurrencies could massively reduce the settlement times and transform the compliance and even the logistics scenario. Is this a market ripe for disruption?

Why isn’t it happening, then?

In my previous entry I described the brave new world of remittances without banks, or Western Union or eye-watering commissions.
I described the world of bitcoin remittances and how it is available right now, today, to every migrant worker in the world.
And I described how all the executives in the remittances food chain are quaking in their boots at the spectre of the D-word: disintermediation. It happened to the newspaper industry and the yellow pages industry with the arrival of the internet. Their business model, as intermediaries between reader and advertiser, just melted away before their very eyes. Whole empires crumbled in record time. When was the last time you opened a yellow pages book? If you are under 20, you probably have never even seen one.
Except the remittances execs are not quaking in their boots.

There are a few reasons why their model is not crumbling just yet.

1. Lack of access and knowledge

Your average Colombian migrant worker in London (and most migrant workers everywhere) is typically of low socioeconomic background with limited access to, or knowledge of, technology. His mother back in Colombia even more so.
Their main concern is not with abstruse crypto-currencies, bitcoin wallets and exchanges. It is with working long hours for little pay and then getting part of that paycheck over to their relatives in their country of origin.
That is why they pay intermediaries to do the magic for them.
Until such a time as the process of bitcoin remittances becomes more seamless, the barrier to entry will remain too high for most.
In fact, the word bitcoin needs to be taken out of bitcoin remittances altogether.
Even if the Colombian migrant and his recipient in Bogotá could manage to climb the access hurdle, there is another one that makes most people think again.

2. Lack of trust

Right now, doing a bitcoin transaction is not for the faint hearted. It is a bit like ecommerce in the early days of the internet. To buy bitcoin for pounds, for example, I had to deposit my pounds in the bank account of a total stranger and then wait several hair-raising minutes for the bitcoin to appear in my wallet.
And while you are waiting you might remember all those things you’ve read about bitcoin being the currency of choice for transactions involving drugs, guns and assassinations on the dark web.
Then your thoughts are interrupted by your bitcoin actually arriving, yes!
But now you remember the spectacular collapse of the Mt Gox exchange and the stories you read about the crazy volatility of bitcoin. And you start to wonder what you have done and how quickly you can sell that bitcoin you just got before it goes up in smoke.
Basically the whole thing is a bit too “far west” still, too hairy for those of a nervous disposition.
But even if you get over this hurdle there may be another one lurking around the corner.

3. Lack of liquidity

You got over the technology hump and you got over the trust hump. You have your bitcoin and your mum is eagerly awaiting her pesos in Bogotá.
But can you actually sell your bitcoins for Colombian pesos?
Well, for small amounts you probably can. But at the time of writing there appears to be only one exchange for people who trade in Colombian pesos. And according to this, the total volume of bitcoin traded for pesos in a day is about 10btc.
Compare that with the number of places you can trade with dollars or pounds and the volumes traded and you start to see the problem. This market is just not very liquid. Anyone doing anything other than sending a bit of money to their relatives (like a remittances business) would start running up against this problem pretty soon. They may not be able to offload their bitcoin, or it may be uncompetitive if they do.

And yet….

I can’t help thinking that all the above problems are temporary, rather than fundamental. Over time, they will be solved. So it will happen. The remittances business model, as we know it, will cease to exist. It will be a museum piece, like a Yellow Pages book.
And I think this is important because, in a way, the profits of this industry are built on the backs of people who are often badly paid and vulnerable: the maids of the rich in gulf states; the office cleaners in London; the fruit pickers in California. So anything that puts more money in their pockets and those of their relatives back home has to be a good thing.