Which international money transfer innovation will prevail?

The international money transfer industry is about to be re-disrupted but the jury as to which innovation will disrupt it is still out there. Not long ago (in the early 2000’s) Xoom disrupted the industry by creating a platform to send money online, removing the large costs of operation derived from having a network of physical locations to collect the money to be sent. In the past year we have seen two new types of startups emerge in the international money transfer industry that aim to disrupt this industry once again.

One of the models is peer to peer. This model is designed to avoid incurring one of the largest costs of money transfer which is sending money across international borders.  The way it works is that once a customer sets an order to send money abroad the company finds someone that wishes to send money the other way around. By doing this they can transfer the money without it actually moving across the border because they just do a local transfer (e.g. someone sending from the US to Europe and another one sending from Europe to the US get paired up so that the money sent doesn’t leave Europe nor the US). Another key advantage to this model is that since the company doesn’t hold foreign currency they don’t need to manage its risk and therefore are able to offer a better foreign exchange rate.

Of course, getting this model off the ground will not be easy since one big challenge with this model is building a large enough network so that every time a user wants to send money the company can find a counterparty to complete the transaction.  Some of the most important players using this model are TransferWise and CurrencyFair.

The second model that has been launched is the one that uses bitcoin as the tool to send remittances abroad. An example in this sector is Bitpesa which sends money to Kenya using Bitcoin and allows users to withdraw the money through mobile banking platforms already pretty popular in Kenya or the recipient’s bank account. The way it works is that customers buy bitcoin through one of the available bitcoin vendors, they send Bitcoin to Bitpesa and then Bitpesa delivers it in Kenyan Shillings. Since bitcoin is a virtual currency that can travel internationally without any additional charges there are large savings to be created in the remittance market. However bitcoin has not yet taken off and there are two key things holding back its adoption: first the regulation that will continue being imposed on it and second the large volatility that it still has which makes exchanging fiat money for bitcoin a highly risky activity by itself.

Because of this it would seem that the peer to peer model should be adopted much more quickly causing it to be the clear winner, right? Well in this case I think that the two innovations will coexist but eventually bitcoin will end up being the main technology to send remittances.

The reason is that while peer to peer is a great idea and the technology is already out there working there is one huge flaw in it which is that for it to work there needs to be a balance in the amount of money transferred between countries and unfortunately the majority of remittances are sent between countries that are not balanced. Take for example the US to Mexico market. Mexico is one of the largest recipients of remittances (about 25 billion USD are sent every year from the US to Mexico); however Mexican immigrants can’t use a peer to peer service because there are very few people sending money from Mexico to the US. This is the case for other key markets such as India and the Philippines.

For this reason I think that the peer to peer services will be interesting players for some markets but will not end up being the dominant technology and they will only survive until bitcoin takes off (by reducing its volatility and getting through regulatory hurdles). Once bitcoin takes off and uses its scale to provide even larger savings than the ones offered by peer to peer models maybe we’ll see bitcoin emerge as the winner. For now nothing is set in stone.


  1. Jerod Pierce

    Good article Luis. I agree with many of your points regarding the difficulties of scaling the "peer-to-peer" money transfer system described above, I struggle to accept that bitcoin will eventually become the dominant player in remittances or more general cross-border money transfers.

    First, I question why bitcoin should not be considered a peer-to-peer system and/or subject to the same network effect hurdles. Bitcoin will also require a large number of participants in order to make its system valuable and is in essence a transfer between two individuals. Thus, equalizing bitcoins and peer-to-peers challenges of customer adoption and scale. Second, bitcoin has more hurdles versus other peer-to-peer options in place to its adoption with the main one being that the currency itself has no intrinsic value making it risky to own even if it is only for a short period of time. Third, the cost of using services such as PayPal continue to decrease (currently it only costs about $0.09 to transfer $200 to Mexico) making them even more attractive without any of the risks of bitcoin.

    Therefore, services like PayPal should end up being the dominant players because while they face all of the same challenges of bitcoin in terms of adoption, they are more reliable and becoming extremely cheap.

  2. Thanks Luis for writing about blogging about this interesting topic. I am still skeptical of how much real disruption we will see in this business. The reason I still harbor this doubt is I do not see a reason why incumbents cannot adopt the strategy of peer-to-peer. In other words, this strategy is not exclusive to that business model. Jerod mentioned Paypal, and it can withhold transaction to wait for a match. And I suspect paypal might do exactly the same to reduce its cost. Second, I think this strategy with some modification is scalable. You mentioned the imbalance. However, one can imagine charging different processing fee for different direction. If more money is flowing out of US to Mexico, then one can simply increase the processing fee out of US. When one form of payment becomes less attractive compared to alternative forms for a particular flow, the flow will decrease. Note that the one never has to charge a higher processing fee than the existing fee for crossing borders—at that rate, the company can sustain any imbalance and clear the balance by going the traditional route of taking money across border. Furthermore, money flow has to be in balance in aggregate. Maybe for corporate customers, the imbalance is in the other direction. Then the payment company which can mobilize enough small users can pool their flow , can pair with a corporate user to match the imbalance. This will create further cost reduction. Finally, while there is network effect, it might not be a winner-take-all outcome. We have multi-homed–most of us have more than one bank account, and have a paypal account. So it is not obvious that eventually the market will tip.