NB Financial Innovation
6 Reasons Online Remittances Are Primed to Explode: International money transfers are moving online – and that’s good news for the BoP
The World Bank estimates that global remittances to developing countries will exceed $436 billion in 2014 – more than three times the total spent on foreign aid ($134.8 billion).
Among the top recipient countries, money from remittances made up between 17 and 52 percent of their GDP in 2012. And household surveys in several developing countries with high BoP populations suggest that international remittance income helped lower poverty significantly, by nearly 11 percent in Uganda, 6 percent in Bangladesh, and 5 percent in Ghana, to cite a few examples.
Unfortunately, high fees have claimed a substantial part of the money remitted to the developing world. But recent developments in the industry could change that.
Over the last 20 years we have witnessed a number of prominent industries – from music and air travel to personal banking – make the (sometimes difficult) transition online. Soon, international money remittance is likely to join them, bringing a wider variety of lower-cost services, and putting pressure on legacy companies to reduce their fees. To understand what’s driving this evolution, let’s look at a prime sender of remittances: the United States.
A Growing Demand
The World Bank estimates that global remittances will exceed $436 billion in 2014. The United States alone accounts for upwards of $100 billion in annual remittances sent, making it the world’s largest sender of remittances by a substantial margin. This is mainly due to its large migrant population, which the World Bank calculated at nearly 43 million people in 2010.
When receiving money from abroad, migrants’ families must often battle extended commutes via public transport, long lines and arduous paperwork – not to mention the anxiety and safety concerns of traveling within urban centers with large sums of cash.
Convenience in the international money transfer process therefore becomes an attractive proposition.
Increased Access to Financial Services
There has never been more awareness around the financial inclusion and engagement of the underbanked community. With that attention, more non-profits, start-ups, and traditional and non-traditional financial service providers are sprouting up to serve this long-neglected demographic.
Take American Express and Walmart’s Bluebird. The service essentially serves as a checking account, allowing consumers to direct deposit into their account or load funds at any Walmart store, and to use those funds via debit card or online to pay bills.
Credit unions are playing a part too. Often forgotten in the shadows of the big banks with trillions in assets, credit unions are targeting a lower-income customer demographic, including the unbanked, which has been estimated near $169 billion. And companies like Zest Finance and LendUp are developing new technology that could spur further adoption of financial services by underbanked Americans, like newly engineered strategies for determining creditworthiness. Even T-Mobile is crossing over into financial services. As this engagement progresses it will lay the groundwork of familiarity and comfort in completing financial transactions in different ways, with remittances being a prime example.
Greater Ease of Technology Adoption
Hop on any metropolitan public bus during commuting hours and you are bound to see the majority of people, many from low-income migrant backgrounds, scrolling away on their phones.
The trend toward greater mobile access has had a major impact on Hispanics, which comprise by far the largest segment of U.S. migrants. According to Pew Research, 61 percent of U.S. Hispanics own smartphones, compared to 59 percent for African Americans, and 53 percent for whites. For many years whites used the Internet, and owned computers and mobile devices in higher numbers than Hispanics. That gap has shrunk immensely in recent years, with Hispanics holding a significant 16 percent lead in going online from a mobile device. This is in part because of the ever-decreasing cost of smartphones and data service plans.
To take it one step further, more and more Hispanics are shopping online. Experian found during a period sampling from late 2013 that Hispanics visited top 500 online retailer websites 21 percent more than the general online population. In addition, targeted online commerce portals exist that cater specifically to the U.S. Hispanic community. So Hispanics not only use mobile devices to access the Internet, they use both to make purchases. Over time a shift toward sending money online would be a logical progression.
An Expanding Middle and Upper Class
Highly-skilled middle to upper class migrants can be found in many industries, including technology, sciences, engineering and medicine. Many come to the U.S. to complete their education and stay afterwards, or come specifically to pursue employment in sectors where there are opportunity shortages in their home countries.
Much of this segment is entrepreneurial, tech savvy, and very assimilated into the traditional financial system. With these conditions in place, online money transfer stands as an attractive option that is merely an extension of the existing e-commerce marketplace with which most are familiar and comfortable.
Maturing of Immigrant Communities
Newcomers to the U.S. often come with children. Assimilation in a new country can be difficult, especially for older people. But children grow up American. They have American friends and interests, and are in many cases highly-educated. They provide a fluency and understanding of America that allows them to bridge the gap for their parents when it comes to cultural practices and norms.
According to the Migration Policy Institute, the overall number of U.S. children with at least one immigrant parent has continued to rise from 8.2 million in 1990, to 13.1 million in 2000, to 17.4 million in 2012. That 17.4 million accounted for 25 percent of all children in the U.S. So an increasing amount of children of immigrants have grown up during the rise of technology and the Internet. Whether it’s online bill payments, reading mobile news, or using Skype, they can help their parents use the Internet to do things more efficiently – including sending money home. The combination of understanding technology and American culture, and an active connection to family in their country of origin make online money remittance a natural progression for the younger generation.
A Changing Landscape
The industry has traditionally been dominated by big players like Western Union and Moneygram, which utilized networks of money transfer agents in brick-and-mortar stores to make and receive payments. The expense of creating a competing agent network, as well as nationwide U.S. licensing and a competitive marketing budget have been major barriers to market entry for competitors. While a few companies currently operate online, choices for consumers remain limited as many providers are still working on the transition. But the increasing viability of online transfers has helped to level the playing field, allowing smaller brands and upstarts like web-only Xoom to compete online immediately with legacy companies.
Remittance outflows are also expected to grow, with the speed dependent on improvements in the cash-out process for recipients (among other factors). Online services still often require recipients to pick up their cash at a store or bank, though many also offer options like home delivery, mobile wallets and deposit in a local bank account.
Going entirely digital would greatly streamline the process, especially for the unbanked. Unfortunately, the mobile money ecosystem in many countries remains undeveloped, in spite of notable success stories. But as web-based remittance services become more common and mobile money ecosystems mature, online remittances may help move the developing world toward greater financial inclusion. This evolution will be a story to monitor.
Logan Lemberger leads business development for WireCash, which bills itself as the first online money remittance marketplace. He also writes about the money transfer industry for The Enlightened Remitter by night. He can be found on Twitter @loganlem.
- Financial Inclusion