Cutting the Cost of Remittances
For migrant workers, many of whom have travelled abroad to support families back at home, the remittance costs of transmitting money to their loved ones remains absurdly high.
This issue was brought into focus at the 2009 G8 summit in Aquila, where a lofty “5x5” goal was agreed to lower global average remittance costs by five percentage points within five years. According to the World Bank report on Migration and Development published last week technology is one of the key drivers of price decline we have seen so far.
Nowhere will potential progress be felt more than in Sub-Saharan Africa. With remittance costs standing at 11.45%, an African migrant in Europe or the US pays, on average, $23 to send $200 of savings to their family in Africa. In some cases banks charge up to $50 per transaction to transfer money home.
The Overseas Development Institute (ODI) last year estimated that this excessive remittance “super tax”, as they described it, amounted to an annual loss of $586 million for workers from the African diaspora alone.
Three trends that could disrupt the remittances status quo are emerging:
1. Partnering on remittances on international corridors
Phone-based financial services such as M-Pesa or EcoCash have gained rapid, widespread adoption in African countries, particularly amongst poorer populations excluded from the traditional financial system. These innovative mobile financial services are offered as complementary products by phone companies and card issuers, operating on very small margins to keep costs as low as possible for bottom-of-the-pyramid customers.
Through vast networks of cash-out agents that reach into remote villages, mobile money services have turned the remittances market on its head. Mobile services are now crossing borders entirely and encroaching upon the traditional, long-established domain of the banks and money transfer operators.
Last month M-Pesa and MTN Money announced a cooperation to launch international corridors between seven countries: Kenya, Tanzania, DRC, Mozambique, Uganda, Rwanda and Zambia. Customers in these countries will enjoy better accessibility of service via tens of thousands widespread mobile money branches and lower cost than traditional channels and banks. Until M-Pesa enabled the Tanzania – Kenya corridor few weeks earlier at the price of domestic remittance, pretty much the only remittance channel solution to send money from Tanzania was through 2,000 banks and MTO branches, located mostly in urban areas. Now this change is spreading across the whole region.
Photo Credit: Olusegun Aderemi, 2012 CGAP Photo Contest
2. An abundance of cheaper online money transfer services
It isn’t just mobile services that are shaking up the market. A series of online MTOs have emerged over the last five years, using targeted digital marketing and lower fees to build a loyal customer base of remittance senders amongst diaspora communities.
Bolstered by substantial VC funds, new online-only players such as WorldRemit, Azimo and, to an extent, TransferWise, have attracted customers through strong social media campaigns and a relaxed, friendly brand identity. Some haven’t been afraid to stir up mistrust in banks and traditional MTOs to attract business, as the notorious ‘You’ve Been $cammed’ campaign by TransferWise demonstrated (Tagline: “Your bank is secretly overcharging you on international money transfers”).
3. Solving the interoperability challenges
Despite its challenges, the remittance industry is a highly fragmented marketplace where two retail-based players, MoneyGram and Western Union, are likely to be the only companies with double-digit market share. The remainder is a long list of small MTO’s, banks and other operators with new, emerging models.
Strategic partnerships are often the only way to enable the smaller operators to scale-up - both in size and geographical reach - and achieve the market reach required. Startups want to focus on marketing and customer service without needing to develop and fund platforms in a variety of countries.
This has created a major opportunity for ‘interoperability hubs’ offered by a growing number of third-party companies to ease the hassle of connecting disparate technologies, settlement practices, currencies and regulations. Companies like HomeSend and MFS Africa are already operating across several receiving corridors including Kenya, Nigeria and South Africa.
Opening new mobile money corridors across East African borders illustrates how the international remittances industry is on the cusp of a new era of interoperability. As the number of partnerships grow, it is inevitable that there will be greater efficiencies and more corridors, driving down the prices of remittances to Africa and bringing us closer to achieving the G8’s elusive “5x5” goal. Once again, African innovation can lead the way for mobile-based financial services.
The road to cheaper remittances will not be without challenges. All of the players above, including MNOs, online only players and retail based players, are subject to changing regulation, increasing compliance requirements, and face response from bank lobbies. Partnerships between MNOs are often burdened by legacy of competitive behaviour rather than collaborative spirit. Finally, cooperation between those disruptive players will have an impact only on corridors where their service, mobile money in particular, managed to reach scale, a major challenge to the scalability of the trend.