The US-Mexico Remittance Market and Bitcoin ATMs (BTMs)
Abstract: The number of remittances sent from the US to Mexico in 2017 reached an all-time high of $28.771 billion, but there are still many issues that need to be tackled to make it a truly frictionless transaction process. Currently, undocumented immigrants lack easy access to banking services. International banking fees can be as high as 7.16% and average 4.06%. Political change may even stall fiat transfers from the US. But, in light of all these problems, could Bitcoin and BTMs come to the rescue?
“Remittances” are funds or other assets that migrants send to their home nations. Worldwide, an estimated US$574 billion was sent by migrants to their relatives back home in 2016, according to the World Bank.
In the United States, the majority of remittances in 2016 were sent to Mexico: approximately US$28.1 billion (followed closely by China, at US$15.4 billion remittances sent). Mexican migrants, including those from the United States, contribute a great amount to the economy of Mexico and, in 2015, remittances coming into Mexico overtook oil revenues. In 2016, US migrants in Mexico sent back approximately USD1.75 billion. Thus, the cash flow from the US to Mexico surpasses the flow from Mexico to the US by nearly 16:1.
But how is all of this money being transferred? Today, the majority of remittances are sent from the US using small money transfer operators or MTOs. These MTOs have a market share of nearly two thirds (67%-68%), followed by others such as Western Union (15%), Orlandi Valuta (10%) and MoneyGram (7%-8%). However, the overall picture is more complex.
One obstacle to using many of these services is formal documentation. Although half or more of all Mexican immigrants to the United States are properly documented, many find their access to formal remittance channels blocked by their lack of accepted identification documents.4
Another obstacle is cost. Over the years, a major feature of the US-Mexico remittance corridor has been the declining cost of transferring money; however, there are certain characteristics that need to be considered when examining this decline. For example, the cost varies greatly depending on the speed of the transactions and even the city from which the transaction is made.4
The necessity for higher speed, lower costs, and deregulation of the remittance corridor appears to create a perfect storm for cryptocurrencies to step in and save the day. But is this really the case?
First, we must examine the nature of cryptocurrencies.
A cryptocurrency is a form of electronic cash. Take, for instance, the archetypal cryptocurrency, Bitcoin. It is a decentralised digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer Bitcoin network, without the need for intermediaries.
Bitcoin automated telling machines (BTMs) facilitate the selling and buying of Bitcoin. Bitcoin ATMs are not literal automatic teller machines (traditional ATMs are connected directly to users’ bank accounts). Instead, Bitcoin ‘ATMs’ are linked up to the Internet and a Bitcoin exchange. In addition, users will need a wallet on their mobile device to receive or deposit Bitcoin to/from the BTM.
Accordingly, Bitcoin ATMs are kiosks — they either provide a printed-out ‘paper wallet’ receipt of the transaction or transfer the purchased Bitcoin to a public key address. Using a QR code of that address, the user is able to scan it with their mobile device and interact with the BTM. Thus instead of punching in one’s pin to access their checking or savings accounts, the Bitcoin ATM is used to interact with a given Bitcoin exchange. It is important to note that specific user verification standards vary from machine to machine and exchange to exchange.
Returning to our central theme of remittances, how does Bitcoin stack up for money transfers, and can it compete in the money transfer market?
A useful comparison is the emerging market for online fiat transfers. Though many people still use banks for international transfers, online services are gaining popularity because of their simplicity. The steps to using any such service tend to follow two similar steps:
- Tell the money transfer platform how much one wants to transfer and who to send the money to.
- Send the money to the money transfer platform.
The money transfer service then takes care of all the details. The recipient receives the funds rapidly, often on the same day. By contrast, the basic process for transferring money through Bitcoin is as follows:
- Deposit fiat onto a BTM to purchase Bitcoin.
- Then follow two different paths: one where the end receiver will use Bitcoin as is, or else the recipient sells the Bitcoin for fiat on a BTM.
As you can see, this process involves a few more steps compared to using a traditional money transfer platform. What’s more, one has to complete them alone — nobody takes care of the entire process. This may be a strike against Bitcoin since transferring money via this method is certainly more complicated than using a traditional money transfer service. But what about the costs?
Well, it’s complicated.
On the surface, transferring with Bitcoin reduces intermediary banking fees; however, BTMs charge their own fees — averaging around 8%. Knowing that international banking fees may be around 4% on average, it may still be cheaper to use traditional banks (although this depends upon the specific BTM and service used). And what about speed?
When someone initiates a Bitcoin transaction, it is confirmed on the blockchain in around ten minutes. Some Bitcoin platforms require multiple confirmations before they will clear a transaction, but one can often complete a Bitcoin transfer in under an hour. Generally, this is faster than existing options.
An average international wire transfer takes several days. While in-person transfers can be completed in mere minutes with services like Western Union and MoneyGram, these require an additional fee and/or percentage of the transaction. For many services this is a flat $20 fee plus a small percentage of the overall transfer on top of that. In practice, this is simply not feasible for smaller transactions.
Thus, transferring money through Bitcoin is, in general, the faster method for most amounts.
And what about regulations?
Here, there is a clear advantage to the Bitcoin blockchain with its built-in privacy and lack of KYC procedures. In order to transfer Bitcoin, the majority of BTMs require fewer government-issued documents and paperwork than the traditional alternatives. The following table sums up the various advantages and disadvantages:
Although there seems to be numerous benefits compared to traditional money transfer services, the privacy offered by Bitcoin is an unmatched advantage for undocumented immigrants that wish to send money from the United States to Mexico — or anywhere else for that matter.
However, access to a BTM varies across the US-Mexico remittance corridor. While one can easily find a BTM in nearly every big city in the US, and the network is still growing, it is much harder in Mexico itself. At the time of writing, there are a total of 2,364 active BTMs, some even servicing customers on a 24/7 basis, within the US. However, there are only ten BTMs in Mexico.
It is worth noting that although BTMs promise increased affordability and privacy when it comes to remittances, the need for technical knowledge and servicing infrastructure may not be enough, at least for now. This will remain the case until the Mexican BTM network expands significantly.
Then, however, the price of Bitcoin may have stabilised and adoption of the cryptocurrency itself may be more widespread. In theory, at least, this may mean that there is no longer a need to convert Bitcoin into fiat in the first place — leading to a future where the role of BTMs is superseded completely by mobile and web wallets. Still, this future is likely a long way off and in the short to mid-term, further investment in the BTM market — and the burgeoning US-Mexico remittance corridor — can only be a good thing.
