NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Every year, workers around the world send nearly half a trillion dollars to their families back home in developing countries. These international remittances are economic lifelines for millions. But due to a lack of innovation and competition, the remittance market has long been known primarily for its high fees. Over the last few years, startup activity and the accompanying media buzz have jumpstarted some promising alternatives; however, we are still waiting for a true disruption to benefit the lives of the poor.

Evolving, but slowly

Until recently, sending a remittance required bringing cash to an authorized agent or bank, filling out multiple forms by hand, then waiting three or more days and trusting that your money would reach its destination. However, in the last five years remittances have come into the digital age – at least partially. While traditional cash-to-cash remittances still dominate, new (and often cheaper) online services let you easily choose your country, amount, and delivery channel via their websites, routing funds not just to a bank but also directly to a mobile phone, or in some cases offering delivery directly to a home.

Investors have piled funding into these and other modernizations. For example, TransferWise, which matches supply and demand between currency exchanges to offer lower rates, raised $58 million in an investment round led by Andreessen Horowitz last year, valuing the firm at $1 billion. And WorldRemit, which lets people send money straight from their smartphones, has raised a total of over $192 million since its founding in 2010, for a valuation upwards of $500 million. Our scan of the landscape earlier this year identified 13 remittance services using Bitcoin. Today, the market does not lack for innovation or investor interest.

These trends seem promising, but when you look at the size of the overall market, both consumer uptake and broader sector disruption remains frustratingly slow. By one count, only 5 percent of remittances flowed through digital channels in 2014. Fees are dropping, but they remain at a global average of 7.7 percent – still well above the 5 percent goal that the G20 had hoped to achieve by 2014. And for those eager to see digital remittances as a path to broader financial inclusion, there remain 2 billion people without an account of some kind – whether via bank or mobile – to manage their money.

What the remittance market needs

So what would it take to see a real shift? What is missing? We see three notable gaps, ready for greater investment and action from the private, public and social sectors:

1. Better understanding of the customer.

Donors and governments are funding innovations and models but not hard data. They should be funding more public research. Individual companies have entire teams dedicated to understanding their markets, but public research is limited, with few comparisons between regions or countries. This leaves new and smaller entrants making many of the same mistakes: underestimating the necessity of customer trust, treating every corridor the same, and assuming no difference in customer segments on the receiving side. Examples of questions we would like to see answered – with data! – include:

• How much do customers really care about lower costs? Consumer trust largely dictates which company and platform they will use. Knowing that, what “value add” benefits might actually work to lure customers to try a new platform: speed, convenience, security, transparency? Or stated more pointedly: Is it worth spending so much effort to lower costs on a digital platform if customers are willing to pay more, and prefer to do so to access a service they know and trust?

• Do senders care how remittances are used? Would knowing how recipients spend their funds be an option that senders would pay for, and an incentive for downstream use of a mobile money platform that could provide such information transparency?

2. Better donor and government analysis of how digital channels benefit consumers … if they do.

Many sources [for example, The Guardian, GSMA and CGAP] describe how much cheaper remittances via digital channels can be – but there is little hard and comparable data showing long-term digital pricing benefits. In fact, other sources proclaim that innovations such as Bitcoin can offer only moderately lower prices given the necessary expense of regulatory compliance and the challenges of last-mile distribution. These challenges apply broadly, beyond Bitcoin, to mobile money as well. And some of our initial research for CGAP in 2012 and 2013 suggested that cost savings were being recouped as added margin, rather than passed on to the consumer. We would love to see some hard data on how new digital providers affect pricing over time. ­

We’d also like to know if digital is bringing new entrants to formal remittance channels, cutting into market share for existing players, or both. And while we’re creating an analysis wish list, let’s also assess the downstream benefits of sending remittances into a mobile money wallet. Where, if at all, are remittances translating to use of mobile savings accounts, or increasing access to loans, insurance and other products also offered via mobile money? Such analysis could influence the direction of a number of financial inclusion initiatives.

3. Better regulatory balance between managing risk and expanding access to needed financial services.

This is a big ask, and already on the agenda for many, including the G20 through the Global Partnership for Financial Inclusion (GPFI) – see their Principles for Innovative Financial Inclusion as one example. However, as the MasterCard-funded Inclusion Hub recently noted, there are vast disparities in how countries prioritize financial inclusion and what regulatory approach they take. Couple this disparity with increasingly risk-averse banks that are, in some cases, halting remittance flows to countries such as Somalia altogether as part of a general “de-risking” policy, and the case for greater advocacy and more regulatory frameworks for use of digital channels becomes clear.

Donors are spending tens of millions of dollars developing and supporting remittance services, but we still lack some basic facts about the hundreds of billions of dollars that flow between countries each year. Remittances could capitalize on the fast-moving mobile money and fintech sectors, opening up new opportunities for information, revenues and impact. However, this energy could also be misdirected if we don’t learn more during these early stages of innovation and growth. Governments and donors should prioritize investments in data sharing and research. This, paired with a continued push for balanced regulations, could speed up and magnify the disruptive power of remittance innovations.

Photo: A money exchanger counts Somali shilling notes on the streets of Mogadishu. Credit: AMISOM Public Information

Andria Thomas is an Associate Partner in Dalberg’s Washington, D.C. office.