Global Payments Part One: Remittances
With all the technological innovation impacting people across sectors, lifestyles and regions, it’s a wonder that the finance sector seems to capture less of our collective imaginations. The potential of, say, blockchain on the FinTech sector to create a new, freer global money market is exponential, for despite its current struggles, its core technology still possesses the potential to impact monetary markets. Moreover, booming e-commerce is questioning the slow pace of cross-border payments. Yet there has been a long-standing issue that affects many of the world’s poor. With all the new questions, the old question of improving remittance payments can get overlooked.
FinTech innovation has the power to change millions of lives, especially within the developing world, where migrants and expats are struggling to send money home to their families abroad. The need to provide direct, fast, and non exorbitant ways to send remittances home is both a humanitarian and economic issue, making it an impact investment as well; one which benefits society while generating revenues at the same time.
Why are Global Remittances so Expensive?
The majority of remittances are executed through banks and well-known money transfer operators (MTOs) like Western Union, MoneyGram, and Ria. With banks and brick-and-mortar transfer services, remitting $200 can cost the sender a whopping $50 in fees.
Although the costs of sending money internationally have declined by more than 25 percent in the past decade, many migrants are still spending considerable sums of their own paychecks just to send home what little they are able. To make matters more difficult, immigrant workers typically earn less than their native counterparts, making every dollar even more important.
While there is no definitive answer as to why global remittances are so expensive, there are several suggestions. The most obvious answer is that businesses recognize the opportunity, and are simply exploiting individuals who are willing to pay the prices set by the market. Another explanation is offered by Bill Barhydt, founder and CEO of Abra, a mobile payment service.
Barhydt notes that with conventional remittance companies like Western Union and MoneyGram, too many parties and personnel are involved in the transaction, driving up costs. These remittances often include multiple banks, post offices, and a number of servicing agents, all of which require payment.
If this were simply the case, the potential for FinTech to disrupt this issue is obvious. Replacing personnel and old procedures in slow moving behemoth companies with sleek technological solutions can potentially dive costs down. But moving money internationally isn’t so simple, according to the old guard in the field.
David Thompson, Chief Technology Officer at Western Union, the leader in remittances, suggests a different reason. Thompson attributes the high cost of remittances to increasingly stringent regulations, including anti-money laundering laws enacted after the September 11, 2001 attacks. In an interview with Fast Company, Thompson justified remittance pricing, stating: “Western Union is in a highly regulated industry globally, requiring licenses in every jurisdiction you operate in… Technology doesn’t solve all those business and regulatory issues.”
Thompson’s statement is exactly the challenge FinTech is up against. Is it really true, regulations are just too impossible? Or can innovative thinking break those barriers and move beyond the traditional cross-border monopolies?
Regardless of the cause, it is clear that remittance costs can be lowered, as evidenced by a consistent reduction in the global averages, and the impressive traction of mobile operators. Cross-border payments, as will be discussed in part two of this series, is being reconsidered as well.
A lot of the consistent reduction in prices is thanks to mobile apps. Today, mobile remittance operators are changing the market for everyone involved, with average fees of 2.87 percent, compared to banks (11.18 percent) and money transfer operators (6.57 percent). Had all payments in 2015 been transacted through mobile operators, immigrants would have saved a staggering $26.6B in fees versus the overall industry average.
What's the Significance?
There are many industries where cost-saving startups could be used to fund humanitarian aid projects or other philanthropic causes; however, global remittances present a unique opportunity to invest billions of dollars into underdeveloped countries receiving these remittances, with assurances that it would be getting to the individual. In fact, the savings on remittances are so great that if all remittance payments processed last year were done through mobile operators, the amount saved would far exceed the total annual foreign aid given to all of Southeast Asia.
Conclusion
While banks and MTOs may have made some progress toward lowering remittance costs, mobile operators are reshaping the standard in global remittances. As an industry driven by developing countries, the remittance market, and the developing world as a whole, stand to gain tremendously from the implementation of FinTech breakthroughs, which can reduce fees, personnel, time and most importantly fees for global remittances.
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