How to Cross a Border
Fintech Will Make Remittance Cheaper, Easier, and More Convenient.
When I was 21, some months out of college, I moved to Guatemala as a Peace Corps Volunteer. For two years, my home was the tiny town of Casillas, a 90-minute drive from the El Salvador border. This was 1991 and my job was to teach sustainable agricultural to subsistence farmers in the surrounding villages. Their problems were well-documented and grave — soil erosion, dependence on costly synthetic fertilizers, deforestation caused by demand for cook-fire fuel. My Spanish was awful and the closest I’d ever come to farming was my family’s vegetable patch in Connecticut, but I was confident I could help those poor Guatemalan families live better. I arrived at my site equipped with three months of training in agroforestry, a biology degree from Yale, and a skinny mare named Pepa.
Whenever I read about a fintech venture aspiring to lower the cost of remittance for immigrants sending money back home, I’m reminded of my first days as a Volunteer steering Pepa along dirt roads that connected the farmers’ mud brick shacks. The Western Union problem is also well-documented — high fees, inconvenience. Everyone knows unbanked immigrants pay through the nose to send money to their families back home. Enter bitcoin to save the day — globally accessible by anyone with a networked device and a lot cheaper (though catching up fast thanks to BTC scaling issues). It’s just a matter of riding out into the world with a lean start-up, a smart app, and some catchy marketing, right?
When I finally got all my mangled palabras more or less arranged in the correct order — when those village kids finally understood what I was trying to say — they laughed even harder.
Risk Aversion Meets Hubris
From the first day I felt welcome in those remote villages, but not for the reason I’d hoped. I was free entertainment for people who lacked electricity and running water. Cackling children would gather around, trying to understand why I was there. I explained my intentions as clearly as I could in my basic Spanish: that I was…. hoping to plant some trees… in the fields where their fathers planted corn and beans… so they’d all have more money. When I finally got all my mangled palabras more or less arranged in the correct order — when those village kids finally understood what I was trying to say — they laughed even harder.
Many more episodes of The Crazy White Guy in Guatemala Show were performed before I finally managed to persuade one of those farmers to try some agroforestry techniques. The men were exhausted and risk averse. Subsistence farming means you grow most of what your family eats. There’s very little surplus, if any, and so a very slim margin for error. Those farmers knew better than some visiting do-gooder gringo that they were trapped in a vicious cycle: buying synthetic fertilizers and pesticides to increase their crop yield enough to pay for next year’s chemical inputs. They also knew that without planting new trees their wives’ kitchen fires would be more difficult to light each year. But they lived rainy season to rainy season, barely getting by, with little time to plan, learn, or try something new.
Bitcoin remittance apps have faced a similar uphill struggle to persuade immigrants to try their solution. The problem with bitcoin for value transfer is also well-documented. Its inherent volatility means that you never know how much money you’re sending and how much will be received on the other end. Delays related to bitcoin scaling issues have only exacerbated this volatility risk. The remittance use-case for bitcoin is an even tougher nut to crack because most of the people who are on the sending and receiving ends are, like my farmer friends from Guatemala, incredibly hard-working and risk-averse. They use Western Union, Moneygram, BBVA’s BTS, or any of the hundreds of other money transfer services because, as expensive and inconvenient as they are, they work. 10% (the average cost margin of money transfers worldwide) is high, but just as with those synthetic fertilizers and pesticides, people living precarious, back-breaking lives will pay a premium for certainty.
The First Mile, Last Mile, and All the Miles in Between.
The fintech graveyard is littered with bitcoin-based remittance ventures. Freemit, Buttercoin, 37coins, Kipochi, Bitpesa, Beam have all shut down or pivoted away from bitcoin-forward remittance solutions. This was likely no surprise to successful remittance start-ups like Xoom (acquired by Paypal in 2015). Xoom spent millions on hispanic-focused media in the US to win immigrant clients with its app-forward solution that made it easy for clients to transfer money from their bank account or cards to Xoom’s digital ledger. Beyond the high CAC, low ARPU, and uncertain LTV faced by any remittance start-up, bitcoin-forward ventures faced the additional challenge of convincing immigrants to acquire bitcoin. Or if bitcoin was used behind the scenes for value transfer, these start-ups were left with the risk and cost of bitcoin volatility — the mismatch of obligations denominated in fiat backed by a crypto asset whose value fluctuates relative to the promised fiat.
The fintech graveyard is littered with bitcoin-based remittance ventures.
During my two years in Guatemala, I managed to form groups in five villages, with each group establishing a tree nursery and each member an agroforestry plan to improve their eroded fields. There were about forty families in all who I convinced to work with me. Together we planted living fences to provide for fuel wood and established terraces with those nitrogen-fixing trees to stop soil erosion. I leveraged my novelty entertainment value into friendship, which created the trust and goodwill necessary for those men and women to try something new. It required countless visits, an open mind, and a willingness to understand the people and their lives, not just their agricultural challenges.
Remittance start-ups face both the first-mile problem of convincing senders in the developing world to try their solution and the last-mile problem of off-boarding local currency in the developing world (usually via storefront partners) to remittance recipients. And then there is the challenge of moving the fiat assets from the developed world banks to bank networks throughout the developed world. Correspondent banks have traditionally filled this role and represent another layer of cost and counter-party risk for both remittance start-ups and the banks that hold their money.
Building a Better Remittance Mouse-Trap with Digital Money.
Fintech ventures that want to win the hearts and minds and hard-earned cash of immigrants need to give senders a compelling reason to switch from their reliable remittance solutions. Cheaper or sleeker isn’t enough. One fintech start-up I work with, AirTM, will be offering U.S.-based immigrants a digital USD remittance product later this year. Instead of onboarding USD that gets converted to a voucher redeemable for local currency, immigrants will be empowered to send the same money they work so hard to earn — USD — that can be withdrawn from the cloud as local currency via AirTM’s P2P network of cashiers.
Fintech ventures tackling remittance also need to think of how to innovate the last-mile in the developing world. Mpesa is a great example of how to create a cheap and antifragile agent network. There are dominant off-boarding channels in every country — like Grupo Elektra in Mexico — that charge remittance companies a high toll to pay-out in local currency from their thousands of store-fronts. Start-ups need to avoid those off-boarding costs if they want a shot at taking market share away from the established remittance titans. Bitso — Mexico’s leading bitcoin exchange — has a tight integration to the Mexican banking system that makes it easy to go from BTC to MXN in any bank account.
Likewise, AirTM is piloting a storefront solution — Cash Point — in Argentina and Venezuela. With AirTM’s Cash Point, any storefront can onboard local currency to AirTM’s USD ledger or off-board local money from it, thereby bypassing both inefficient correspondent banks and costly established local off-boarding channels.
Another fintech start-up I recently invested in is solving the huge problem enterprises (including large remittance companies like Western Union and Moneygram) have moving money from the developed world to the developing world and vice-versa. By matching large cross-border money flows, this start-up (still in stealth mode) makes correspondent banks unnecessary and drastically reduces enterprise costs.
Crossing any border — the ones that separate cultures, countries, or people, or the one that separates start-up failures from the fabled land of the unicorns — requires patience, dedication, and care (in the sense of both passion and circumspection).
To Cross a Border, Know the Terrain.
What all these start-ups have in common is a deep understanding of a specific use-case and a focused solution that addresses the problems and pain points of consumers and businesses. The hand-wavy, Field of Dreams approach (build it and clients will come) doesn’t work. Fintech entrepreneurs need to have their feet on the ground and know their clients well. The dogmatic bitcoin-not-banks approach is also a recipe for failure. Successful remittance ventures use bitcoin, if at all, behind the scenes, and without exposing their end-users or their fragile balance sheets to the cost and risk of bitcoin volatility.
By the end of my two years in Guatemala, my Spanish was mas o menos intelligible, Pepa was impregnated by a roving stallion, and my work with the groups I formed resulted in the planting of over a thousand trees and the implementation of sustainable agriculture practices by dozens of farming households.
Crossing any border — the ones that separate cultures, countries, or people, or the one that separates start-up failures from the fabled land of the unicorns — requires patience, dedication, and care (in the sense of both passion and circumspection). The journey is always more arduous and much longer than expected. The key to surviving a long trek full of pitfalls and disappointments is to find the reward of accomplishment with every step forward.