Remittance startup uses bitcoin as a bridge between bank accounts

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A startup called bridge21 thinks it can use bitcoin to beat banks and money transmitters at the international transfer game—at least for remittances to Mexico.

It works like this: The startup allows any user with a U.S. bank account to send money to a Mexican bank account. Dollars are withdrawn from the user's account and used to buy bitcoin, which bridge21 refers to simply as "digital cash." The company then sends the bitcoin to Mexico, where it is sold for pesos, which are deposited into the recipient's bank account.

The process takes only minutes, following a single confirmation on the bitcoin network.

"Our rates are based on the price of digital cash in the sending and receiving countries, not the bank exchange rates used by everyone else,” Will Madden, bridge21's founder and CEO, said in a news release. “This means we can often send money at rates no other money transfer company or bank can offer."

Bridge21 is often able to send money to Mexico for 2% or even 5% less than the midmarket rate, he added.

The company has chosen a fraught time to launch its service. As immigration has become a hot-button issue in recent years, remittances have come under fire. President Trump has said he wants to confiscate a portion of Mexicans' remittances to pay for his border wall. Meanwhile, bitcoin is going through one of its periodic constitutional crises, with a technical debate over how to scale the network threatening to split the currency into two competing systems.

But the problem bridge21 seeks to solve is real. Remittances are costly, and the poorest or more desperate people are often charged the highest fees. Migrants from sub-Saharan Africa, for instance, pay more to send money home than any other group—an average of 9.81%, much higher than the global average of 7.45% and more than one and a half times what it costs to send money to South Asia.

Global remittances totaled more than $601 billion in 2015, according to World Bank estimates. In order to send money home to their families, migrants pay billions in fees. As a result, cross-border payments, and particularly remittances, are often mentioned as an area of finance that fintech in general, and bitcoin specifically, could disrupt.

Bitcoin, of course, can be sent anywhere in the world without the need for a third party such as bridge21; the trouble is spending the digital currency once it arrives.

That is where bridge21 sees an opportunity. The startup launched in beta in January, claiming to provide money transfers in mere minutes from the U.S. to any Mexican bank account for a 2% fee, which was levied in addition to the midmarket rate for exchanging dollars for pesos.

"It's an instantaneous international bank wire using bitcoin," Madden said at the time.

The startup's new service for Mexican remittances, announced this week, offers better than midmarket rates.

Banks themselves are experimenting with ways to achieve faster, better payments. At least one, the Japanese megabank Mitsubishi UFJ Financial Group, is considering bitcoin.

MUFG has partnered with Coinbase, a leading digital currency company, to explore the use of bitcoin as a means of moving money across borders. MUFG's chief executive, Nobuyuki Hirano, has said that by using digital currency to connect two fiat currencies or two separate banking systems, it might be possible to send money more cheaply and easily than traditional methods allow.

Bridge21, for its part, is not stopping with Mexico. It is planning to expand later this year to several additional payments corridors.

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Digital currencies Bitcoin Remittances Fintech Disruptors