BitPesa Ltd., a Kenyan start-up, will take on remittance providers like Western Union Co. (WU) by using the Bitcoin virtual currency to cut transaction costs for Kenyans working abroad who send home $1.2 billion a year.
The online service plans to start on a trial basis by March, after obtaining regulatory approval, and gain 1 percent market share within a year by handling 6,500 transactions a month, Chief Executive Officer Elizabeth Rossiello said yesterday in an interview in the capital, Nairobi.
Bitcoin gained credibility this month after law enforcement and securities agencies said in U.S. Senate hearings that it could be a legitimate means of exchange. The price of Bitcoin today traded at a record $1,188.67 apiece on the Mt. Gox online exchange, fueled by speculators snapping up the virtual currency as it gains wider acceptance.
“There are no other market entrants trying to solve the problem of the very high cost of remittances in Africa,” Rossiello said.
Western Union and MoneyGram International Inc. deduct $10 to $17 to wire $200 to Kenya from the U.S., including charges to exchange funds, in a process that can take an hour to five days, according to the World Bank’s Send Money Africa price database. BitPesa will charge 3 percent on overseas transfers and says the money arrives the same day. At that rate, it would cost $6 to send $200 via BitPesa.
Kenya is sub-Saharan Africa’s third-biggest recipient of remittances, after Nigeria and Senegal, with more than 3 million people of Kenyan origin living abroad. North America is the main source of remittances to Kenya, accounting for about half, followed by Europe at almost a third.
Overseas transfers to the East African country are growing almost five times faster than the sub-Saharan African average of 6.2 percent this year. The region is the world’s most expensive for remittances because of factors such as limited competition and regulatory barriers, the World Bank said.
BitPesa is in talks to partner with two Kenyan commercial banks, and it’s also considering working with at least one telecommunications company and one money-transfer agent, Rossiello said, declining to identify the companies. Pesa means money in the Swahili language.
Safaricom Ltd., 40 percent owned by Vodafone Group Plc (VOD), runs Kenya’s most widely used M-Pesa mobile-phone money-transfer service, which competes with Airtel Kenya Ltd.’s Airtel Money, Essar Telecoms Kenya Ltd.’s YuCash and Orange Money by Telkom Kenya Ltd., a unit of France’s Orange.
Bitcoin is used as an alternative to cash to pay for everything from candy to smartphones on the Internet. There are more than 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across exchanges.
The rally in Bitcoin had gathered steam last month after regulators shut down the Silk Road Hidden Website, where people could obtain guns, drugs and other illicit goods using Bitcoins. That generated optimism the digital money would become more widely used for legal purposes.
“The minute you confirm the transaction, the price is locked in,” Rossiello said. “We absorb all the exchange risk, and like anyone else with foreign exchange exposure we will hedge our risk.”
BitPesa will need to develop its reputation in Kenya to become competitive, said Sarah Wanga, a research analyst at Nairobi-based investment company ICEA Lion Group.
Commercial banks handle about half of the remittance transactions to Kenya, led by Equity Bank Ltd., the second-biggest lender by market value, and Barclays Bank Kenya Ltd.; each controlling 14 percent of the market. Western Union accounts for 31 percent of business and MoneyGram 6 percent, according to a 2010 study commissioned by the World Bank.
“There is an element of reliability with banks, people have security putting their money there because it’s what they are familiar with,” Wanga said. “But if this new system markets itself right, makes itself a household name, and it’s cheaper, I think it could become a threat.”
Under the model developed by BitPesa, the sender will use an Internet-based service to make payments and the funds will be traded into Bitcoins. BitPesa will then convert the virtual money back into a conventional currency at a competitive exchange rate for withdrawal by recipients through either their mobile phones or a bank account, said Rossiello.