Alan Safahi founded ZipZap in San Francisco in 2011 as one of the earliest mobile wallets for people lacking bank accounts or credit cards. Now he has a new venture, based in Toronto, ZED Network, designed to connect money transfer operators (MTOs) via blockchain, with a ZED coin as the means of access.
The goal is to aggregate enough remittance volumes with know-your-customer protocols to generate business relationships with banks, insurers and payments processors.
This is not Safahi’s first foray into blockchain. In 2014, ZipZap raised $1.1 million from investors including Brock Pierce, 500 Startups and Blumberg Capital to connect cross-border payments via cash-to-bitcoin services. Consumers could add bitcoin to their ZipZap wallet via 800,000 local merchants, or by wire transfer.
But the Bitcoin and Ethereum networks have proven unwieldy for commerce: exchanges struggle with payment processing, while retailers insisted on retaining cash payouts, leading to expensive chargebacks. So Safahi, with some advice from founders of Ripple, considered creating the company’s own currency to support ZipZap’s broader tech platform.
“We’re like Ripple but for smaller MTOs, not for banks,” Safahi told DigFin. These small players account for 75% of remittances worldwide but have never been able to scale. “But they have good customer relationships,” he said.
The company is moving tokens via Stellar, a network built to move money across borders by connecting banks, payments systems, consumers and merchants. Stellar also issues a currency token, the lumen. But Safahi says ZED Network brings a KYC capability on top of ZipZap’s tech that will make its own coin useful.
“Stellar is a great platform, purpose-built for remittances,” Safahi said. “We’ve talked to them about referring their MTO customers to us for a more comprehensive solution.”
He hopes to announce a formal arrangement soon. The ZED initial coin offering is slated to launch this month for Canadian residents.
Token pros and cons
If it takes off, ZED Network would end up competing with other fintechs such as OK Link that also seek to connect small remittance companies worldwide via blockchain. These companies enable small businesses with a remittance operation, from retailers to mom-and-pop kiosks, to scale outside of a particular currency corridor where they have a lot of business (Hong Kong to Philippines, or Japan to Brazil, for example). OK Link executives didn’t respond to requests for comment.
Safahi argues that remittances, by moving to a token business model, can be made even faster, cheaper and more reliable than centralized fintech versions of remittance aggregation.
The MTOs he has spoken with were concerned about eliminating banks from the process, and regulatory crackdowns on crypto-currency businesses. “So we came in with a full KYC offer,” he said. “Banks and regulators should welcome us because we create a database that captures fraud and corruption” because the network will see transactions from multiple MTOs. (He declined to say how many had agreed to try the service but expects to have 40 or more by year end.)
ZED will charge MTOs a transfer fee of up to 1%. It wants to aggregate its volume to also transact with banks and insurance companies. Later it hopes to move into invoicing, getting corporate clients to pay it as a means of paying suppliers, agents or salaries.
Launching ZED hasn’t been easy, especially when it comes to getting a bank account or insurance for the business. “The risk of MTO plus crypto is a tough combination,” Safahi said.
He is betting the network’s ability to bring volumes to banks and payments processors will entice them to do business, given they would never spend money chasing business from individual MTOs. This is one reason why he established the company in Ontario, which has a securities regulator supportive of blockchain companies and a pro-migrant bias. But he’s still working on securing partnerships to provide MTOs with banking and accounting services.