Waiting for Diem

Facebook’s proposed Diem dollar is uniquely poised to disrupt the cross-border payments market in Africa and the rest of the developing word if it gets regulatory approval. The disruption of that market is long overdue. For many years African expats have endured frustration from extortionate fees and poor exchange rates offered by established Money Transfer Organisations (MTOs) like Western Union, Money Gram and World Remit. In Diem (formerly Libra) and Novi, Facebook seemingly has the perfect product market fit. For large populations in sub-Sahara Africa the social media giant is the gateway to and synonymous with the internet. Furthermore, the ubiquity of WhatsApp across the Continent would facilitate the Diem dollar on-ramp and adoption by the masses. Diem’s success is largely dependent on whether it will be licensed by the Swiss Financial Market Supervisory Authority (FINMA) which means Africa may have to endure a longer costly wait for a solution. In the meantime, this article challenges and proposes that a disrupter should emerge from the innovative Decentralised Finance (DeFi) sector. DeFi has the potential to provide a cheaper mobile-phone based frictionless solution with transparent pricing and minimal internet usage.

The article is based on personal experience gained from sending money to the Southern African Development Community (SADC) region. Nevertheless, the challenges are representative of the situation across sub-Sahara Africa as confirmed by the World Bank in the latest Q3 Remittance Prices Worldwide (RPW) report.

Potential Blockchain Based Solutions

Some of the blockchain technology-based businesses that could disrupt the retail remittance market are Wirex and Coinbase. Wirex and Coinbase are among a handful of companies in this sector alongside Aave and Gemini to have been awarded monetary licenses by the Financial Conduct Authority (FCA). Both Wirex and Coinbase offer fiat/crypto visa debit cards linked to mobile phone apps. Such organisations can potentially leverage the Distributed Ledger Technologies (DLT) for fast and cheaper cross-border payments to Africa as illustrated below.

The table below is based on an example of sending US$30 from London to Harare, Zimbabwe. The exchange rates and quotations used were as of 1st November.

Note: the figures and rates are indicative for illustration purposes only and are not based on actual transactions. The Exchange Rate Margin is derived from dividing 30 by the Amount sent and comparing the result to the Market Reference rate. The Market Reference rate used was £1:US$1.2822 per Revolut. Total cost % = Fee/Amount sent*100 + Exchange Rate Margin %. Assumes money sent via Western Union and World Remit is received as US$ cash from an agent and that there are no destination fees payable by the recipient.

Coinbase and Wirex scenarios

The example above assumes a scenario where beneficiaries in Harare have Coinbase and/or Wirex visa debit cards which is currently not possible as both companies do not have official presence in Africa. Coinbase has a feature whereby money can be sent using the recipients e-mail address. Funds sent would be immediately accessible via Coinbase Card and there would be no requirement for the recipient in Harare to engage in any further online activity. This is key because most countries in Africa have low internet penetration. The feature is turned on when the beneficiary elects and enables the off-chain instant send option during initial account set up. Similarly, with Wirex money can be sent using the recipients telephone number or e-mail address. However, in this case the beneficiary would need to do a simple swap procedure within the app which converts Dai to their currency of choice and then manually transfer the money to the Wirex Visa debit card. These in-app transactions are simple and would require minimal internet usage.

Other Solutions

Ripple’s ongoing efforts to disrupt SWIFT are commendable and well documented however XRP projects seem focused on the transfer of funds by big corporations. Despite Ripple paying millions in XRP market development fees to MoneyGram it is not clear whether benefits would have trickled through to the retail remittance market. For instance, South Africa where MoneyGram operates remains the costliest G20 country to send remittance from. Interestingly the Ripple/MoneyGram initiative only became public knowledge after the inception of Libra.

Potential DeFi Solutions

The examples above using Coinbase and Wirex shows how blockchain technologies can be leveraged to reduce friction and bureaucracy resulting in cheaper in payment systems. The fact that those 2 companies have not entered the African market could be because there are high barriers to entry for centralised organisations. Enter Defi. There is a plethora of DeFi projections that raised millions in ICO with the sole goal of serving the world’s unbanked. Disappointingly years later most of the projects seem to be in perpetual iteration mode and never come to fruition. Indeed, very few of the world’s unbanked today enjoy economic gains brought about by this technology revolution let alone know that it exists. To paraphrase Lauryn Hill if DeFi is supposed to inspire, how come we ain’t gettin’ no higher?

Yet this is one sector that has the potential to usher new, more efficient, and cheaper payment rails to sub-Sahara Africa. Some countries in the region like Somaliland and Zimbabwe though ravaged by inflation inadvertently have had digitised currencies for many years now. Most transactions in Zimbabwe are by Ecocash mobile payments which accounts for more than 90% of all retail transactions. Similarly, the success of other mobile payment systems across the continent like M-Pesa in Kenya has been well reported. The high mobile phone penetration in Africa and the rest of the developing world presents a persuasive case for DeFi and other potential disrupters to come up with solutions that take advantage of this infrastructure. A DeFi solution could create a virtuous cycle because aspiring blockchain developers from the continent could be galvanised when they witness first-hand how the technology has a positive impact on bread-and-butter issues. Besides if DeFi is to reach maturity then diversity, equality, and inclusion (DEI) should be the foundation layer on top of which decentralisation is built. That would be a huge relief as sadly too many tech companies are associated with questionable social justice credentials and perceived black people problem. Timnit Gebru would concur.

A DeFi solution could also dispel the prevailing impression that the space is merely a playground for whales, incubator for Ponzi schemes, scams or otherwise a hang-out for Chad and Friends.

Open Challenge

Given the stalemate between Diem and the regulators, the unwillingness or inability of other centralised organisations to disrupt this market the conditions are ripe for DeFi to seize the moment.

This is an open challenge to the DeFi Community particularly those projects so inclined to come with a solution by next IDFR. The mission is to create an intuitive, frictionless mobile based cross border payment system which charges less than 7% in total transaction costs. The system should be implemented and functional with at least 100 monthly active users sending remittances to any country in SADC from the G10 region by 16th June 2021. An example would be a solution with competitive charges even when sending small amounts like Coinbase and Wirex as shown on the table above.

According to the World Bank if the cost of sending remittances could be reduced by 5% of the amount sent recipients in developing countries would receive over $16 billion dollars more each year than they do now. Incidentally disrupting this industry could also achieve one of the UN’s sustainable development goals (SDGs) namely to reduce to less than 3 per cent the transaction costs of migrant remittances by 2030.

Given the scale and magnitude of this project an effective solution may require collaboration across different money over internet protocols. Alternatively, to expedite the licensing process perhaps Diem could consider burying the hatchet and using the regulated Gemini Dollar on Novi wallets. Gemini as alluded to above, is one of the latest companies in this industry to be granted the coveted Electronic Money Institution license by the FCA.

Prospect of Profit

Is this a profitable venture?

Alan Trapulionis in his inspirational article UKRANIAN DEVELOPER BUILT A $19.3 BILLION APP — BECAUSE SILICON VALLEY WAS TOO IGNORANT TO DO IT, observes how the biggest opportunities often lie in markets which do not sound attractive.

Alan gives an example of how nobody in Silicon Valley wanted to build Android Apps for the Indian market until Jan Koum created WhatsApp and sold it for billions of dollars without ever spending a penny on marketing.

This may well be the case here too.

The economies in sub-Sahara Africa may seem fragmented and the region is not considered a high-volume remittance corridor. However sub-Sahara Africa has the highest average remittance costs in the world. Also, the fact that companies like WorldRemit have grown to unicorn status suggest it should be possible to disrupt this industry while still generating alpha.

Conclusion

It is possible that incumbent MTOs like Western Union, WorldRemit, MoneyGram and others would reform and provide a cheaper service in the imminency of a more competitive landscape. Or it could be Diem and DeFi that provides the solution. What is certain is that millions of unbanked people in the developing world would welcome the hand up regardless of where it comes from.

If the status core prevails it is conceivable that China’s pioneering digital renminbi would move in to fill the gap and in the process dominate this market. If the Dragon enters the fray even Facebook would seem noble in comparison.