African startups are embracing bitcoin to enable cross-border payments and remittances, currently dominated by Western companies.
"Bitcoin offers an immediate remedy for cross border payments, remittances, online payments and business-to-business payments because it takes less than an hour to send and receive money, with an added advantage of final settlement," said Michael Kimani, Chairman of the African Digital Currency Association.
The African Digital Currency Association is a nonprofit industry group drawing membership from digital currency startups. Current members include TagPesa, BitPesa, ChamaPesa, Whive and BitX Kenya.
BitPesa, a digital currency exchange last month announced that it had raised $1.7 million from Pantera Capital Management. The funding will allow BitPesa to move deeper into the Kenyan and Ghanaian markets, targeting small companies at the beginning. BitPesa has already held a forum with small traders in Nairobi, explaining more about the technology and how to use it.
BitPesa works as a currency exchange. It accepts digital currency but pays out in Kenyan shillings. For instance, the transmitter sends the exchange bitcoin, and the recipient receives the equivalent in shillings. The recipient decides if he wants to collect the money at BitPesa offices, or have it sent via mobile money transfer.
Bitcoin technology is challenging to understand even for techies but startups are hoping the extent of mobile money usage in the region will lead to usage of digital currency. For any startup that wants to gain traction, mobile money integration is critical.
"Mpesa, Airtel, Orange and other mobile money wallets are a direct access to bitcoin financial services," Kimani said. "Unlike other countries where bank accounts are mandatory, in East Africa, your mobile wallet is your bank account; our members can now connect East Africans to a global market straight from their phones."
Mobile money integration has been accomplished by global remittance bodies like Western Union and Money Gram. These companies have signed agreements with companies like Safaricom for M-Pesa payments.
"We have seen the agreements boost our offering as they enable customers to receive money from a number of
countries," said Betty Mwangi-Thuo, chief officer, new products division at Safaricom, which pioneered mobile money services with its M-Pesa offering. "This, coupled with the continued momentum we are seeing with merchants who are turning to M-Pesa to pay for services, has mostly driven the growth in use of M-Pesa over the last year."
The relationship between international remittance companies and telcos has developed over time. But telecom companies may view bitcoin startups as competition. The bitcoin startups are on the ground locally, with physical offices, and can engage with businesses and interested individuals one on one.
For instance, BitPesa held a forum earlier this month where they brought together small businesses and NGOs to demystify bitcoin and how it works. They are recruiting them as users of the service. if the business or NGO provides services or goods internationally, they can choose BitPesa for payment. The buyer pays in bitcoin and the business or NGO receives money in shillings.
One of the challenges the startups will have to deal with is the fact that in markets like Kenya, physical property trumps virtual property. People prefer land, cars or any tangible property. So the digital nature as well as the volatility of bitcoin may pose marketing challenges.
"Yes, land and property are hot in East Africa," Kimani acknowledged. "There has been additional interest from young people in trading bitcoins, or as a new asset class, however, it is still early on this front."
Regulatory issues dogged M-Pesa during its early years, when banks demanded that telcos should meet banking requirements set by the Central Bank of Kenya because they were handling deposits and withdrawals. Telcos managed to win that war but it is not clear if any regulatory hurdles will be imposed on bitcoin startups.
Under Kenyan regulations, banks are required to have certain deposits with the Central Bank of Kenya, which depend on the class of service, for example, microfinance or full-fledged bank offerings. A bank is also required to have disaster recovery and data centers and keep client data like residence, contacts etc. This was the original fight between banks and Safaricom but the regulator decided since the telcos don't keep the money or take deposits, they are exempted from banking regulations.
Meanwhile, bitcoin companies are banking on low transaction fees, speed of transaction and the large payments market in Africa to grow their businesses. Remittance companies like Western Union and Money Gram have high exchange rates, which discourage cross-border payments. Bitcoin is hoping to change that with its 3 percent charge on the transaction.