As demand for international person-to-person payments grows, can today’s infrastructure meet the needs of customers for speed, transparency and value for money? Earthport invited the views of its clients on the topic of remittances.
Millions of people live and work outside the countries they were born in. With this global workforce comes the need to transfer money internationally. For many, sending money home is simply a fact of life. For those with a vested interest in the size of this market, the figures are staggering – over 230 million international migrants; global remittance flows expected to reach over $700 billion by 2016.1
Michael Kent, CEO and founder of online money transfer platform Azimo says their customers represent a very broad mix of people: “However, the one strand that connects them is they’re away from friends and family; they have consciously migrated abroad to make a better life for themselves and their families back home. They may be a Filipino nurse, a Nigerian taxi driver, a skilled engineer or a graduate from India – a huge stratum of society from unskilled labour to highly skilled. If you speak to the world’s 200 million migrants there’ll be 200 million unique personal stories.”
With 230 million people making regular remittances there is a clear and huge demand for services that meet their needs.
Those needs, not surprisingly, concern speed, ease of use, reliability and cost.
E-wallet service provider Yandex.Money serves over eighteen million customers sending money from Russia around the world. Oleg Nikitin, business development manager, says: “There is high demand in Russia for services for payments that are of lower value not usually covered by banks.”
The average global cost for sending remittances is a wallet-hitting eight per cent of the principal amount being transferred. Through banks, customers pay around 50 per cent more than this and are the most expensive of all types of remittance service provider.
Kent adds: “Banks think about this in the wrong way. They only make a relatively small amount, in their eyes, on each remittance transaction so they’re not interested. What they are more interested in is all the other services they can sell, and, by comparison migrants wanting to make remittances aren’t buying mortgages and big purchases. How they should be looking at it is, that each transaction may be of a small value but the total customer value should be looked at over many years.”
In search of low fees, upfront foreign exchange rates, speed and surety about when money will arrive, unbanked customers and those who use banks for other financial services are choosing alternatives. They include money transfer companies, PayPal and cards.
Banks, with a well-established correspondent banking infrastructure are well-placed to transfer generally larger sums than remittances involve. It is a model that is entrenched, expensive and difficult to evolve and adapt.
A technology revolution?
It could be argued that payments is overdue a technology revolution. When it comes to sending physical packages internationally, customers expect nothing less than to pay an upfront cost to cover the whole delivery, to know how much that fee is going to be at the start of the transaction, to be able to track the package’s course online and to know it has arrived. This level of transparency and predictability, achieved in part through technology, is not universally the case for sending money abroad. Meeting customer needs for transparency and predictability – and making a profit along the way – is only part of the picture in payments. Regulation demands, on behalf of customers, a safe and compliant service. One that counters terrorist financing and safeguards against money laundering.
For all remittance service providers, staying compliant when dealing with the myriad of different, sometimes opposing in-country rules and regulations is a big challenge.
Hank Uberoi, Earthport’s CEO says: “The Payments Services Directive now requires all payments services providers (PSPs) to register with their relevant regulatory authority. This gives the regulator full sight of all of them and thus is positive for making the financial system safer. On the other hand, in some situations, banks, mindful of anti-money laundering and sanctions requirements, are making moves to withdraw from providing bank accounts to some PSPs providing remittance services to areas deemed high risk. And this is a problem for those regions dependent on incoming funds from other countries.”
Efficiencies not exclusions
According to one MP speaking at a Westminster Hall debate on the subject, the UK’s International Development Secretary cited the issue of money transfer accounts and the remittance sector as, “one of the most important things I have dealt with in my political career.” Over four million people in Somalia – 41% of the population – reliant on remittances as their primary source of income stood to be affected if accounts with remittance providers serving their country had been closed down, as was possible at the time.
The economy of some developing countries depends on remittances. In at least 14, remittances exceed the foreign exchange reserves.1 Quite simply, people in these regions depend on income received from those working elsewhere abroad.
Iain Allison, vice president of business development at online international money transfer service Xoom, says their customers use them: “To help family and friends in their home countries improve their livelihoods with basic, and sometimes dire, needs for food, shelter, healthcare and other critical, non-discretionary expenses.”
Recognising this, in 2009 the IFC/World Bank Group set a five-year objective to reduce the global average cost of transferring remittances from ten per cent to five per cent, freeing up $12 to $15 billion for immigrants’ home countries. At a current global average of over eight per cent, clearly there is still work to do.
The path forward
The market for remittances is set to continue on a strong growth trajectory. The providers that step up to meet customer expectations of speed and service levels, working with regulators to meet stringent demands for compliance, stand to gain.
Arguably today’s challenges are still to be met with tomorrow’s yet to come. Customer expectations are already changing. They want to make payments using new technologies; instant transfers with instant acknowledgement. Recipients also have high expectations now as well. We have to meet these needs. Technology disruption can come at any time and we cannot say the industry will continue in the same way it has. It may have to change due to regulation and technology changes – these are the two main factors that will influence the industry.
Kent adds: “I see potential new market entrants as technology companies, telcos and the likes of Amazon and Facebook. These sorts of companies are now looking at financial services because they place value on the customer relationship and know a huge amount about them. Unless banks radically rethink the way they approach this market they won’t address it. It’s an exciting time because new market entrants will surely help drive down costs for the customer.”
Such a rethink reveals a strong case for industry collaboration; for banks to work with other providers within a model that overlays a more flexible payments network on the existing infrastructure. Uberoi asks: “Is there benefit to adapting and extending the domestic ‘common scheme’ model internationally? Absolutely. The banking industry has a significant opportunity to improve international payments products and services through collaboration. Earthport is an example of a proven model that utilises the characteristics of domestic schemes and aggregates them as a single commercial scheme.”
(1) The World Bank: ‘Migration and Remittance Flows: Recent Trends and Outlook, 2013-2016’ October 2013
(2) From the World Bank: ‘Remittance Prices Worldwide’ March 2014: ‘The average total cost of sending money through commercial banks was 12.53 percent in 1Q 2014, well above the global average and the most expensive of all Remittance Service Provider (RSP) types.’