NB Financial Health
Digital Remittances: Now that they’re here, where are they headed?
Moving people, moving money
For thousands of years, humans have been traveling the globe, and with these travels has come a need to move money and to do so safely and, if possible, quickly and cheaply. This need is as relevant now as it was at the time of the Roman Empire or in 9th century China. Today, many people who move abroad are economic migrants, seeking work and the means to support family members back home. These migrants also need a safe, convenient and affordable way to send money earned in a destination country to their home country (what we’ve come to call “remittances”).
For many years, carrying, mailing, or entrusting cash to a third party was the only way to send money over long distances. Paper-based instruments for transferring funds without physically moving cash (always a risky proposition) have existed for centuries but were mainly linked to trade. The invention of the telegraph radically changed communications and made the bank wire transfer possible. But, again, these are instruments designed for large value payments, beyond the scope of an average remittance transfer. In fact, as I’ve done research for the Digital Frontiers Institute’s new course, Remittances in the Digital Age, I’ve been surprised to learn that remittance products and services as we know them now have existed in their current form for only a few decades. That’s despite the fact that remittances have become a commonplace aspect of economic migration and a hot topic on the global development agenda.
Money transfer for economic migrants
Although informal international money transfer systems and services emerged with earlier waves of migration, it was not until the mid-1980s that developments in communication technologies would facilitate the growth of specialized international remittance providers that could serve the particular needs of economic migrants. In the 1990s we saw these money transfer businesses bloom, with companies like Western Union and MoneyGram developing a new business model for remittances based on a system of international agent networks. After centuries of international migration, commercial products and services specialized to meet the demand of migrant workers were officially on the market.
The past 30 years in the remittance industry have been marked by the growth of agent networks and the rise of new players. However, all this has happened with practically no change to the basic way the service is provided, i.e., the remittance customer gives cash to an agent who processes a transfer that ends with cash being delivered to a designated recipient in another country. In most cases, it happens within minutes, thanks to the liquidity pool that money transfer companies maintain in multiple countries and that they rebalance daily through bank wire transfers. In fact, the basic structure of this transaction differs little from most informal international money transfer systems, like hawala.
The first online-only remittance providers appeared on the scene more than 15 years ago with the widespread use of the internet. Now a digital channel for remittances could potentially eliminate the need for costly agent networks and physical agent locations by arriving directly to a customer’s computer, laptop or (now) mobile device of choice. Yet today, the digital channel remains small when compared with the volume of remittances sent via “traditional” cash-in agents. (According to Western Union’s recently published 2017 Q4 results, for example, digital revenue represents only 10 percent of its total consumer-to-consumer segment). In most sending countries, financial access doesn’t seem to present a major barrier to using online services (which must originate from bank accounts or credit or debit cards). So even though, on average, online services are less expensive than cash-to-cash services, most remittance customers seem happy with their money transfer agent. The digital remittance revolution hasn’t quite happened yet.
Innovation for better and cheaper remittances
So, what’s next for remittances? A growing international consensus says that the cost of sending remittances must be reduced, putting money back in the pockets of economic migrants and their families (as per Sustainable Development Goal 10), yet cheaper online services have struggled to compete with brick and mortar agents. Global average costs were at 7.13 percent according to the most recent data from the World Bank’s remittance price report, after hitting a historic low (7.09 percent) in the last quarter of 2017. Who are today’s remittance innovators and what will they do to deliver cheaper, faster and more convenient services?
Over the past five years, we have seen a new wave of players and a renewed push toward digitizing remittances. User-friendly apps and new processes to onboard clients, smarter ways to connect to domestic payments systems and new business models are emerging. Money transfer companies partnering with mobile money providers for remittance payouts, companies that use cryptocurrencies as an instant settlement mechanism (reducing the need to maintain bank accounts in multiple countries), and technologies like machine learning and remote digital identity verification offer potentially more efficient ways to comply with the broad and fragmented regulatory requirements that characterize the industry and deliver better service to customers.
Remittances in the Digital Age
Are we entering a pivotal moment in the short history of the international remittance industry? One that could fundamentally change (and improve) how business is done? If you’d like to examine remittances more closely, and think about the future economic migrants and the US $600 billion that they send home each year, the Digital Frontiers Institute will launch in June the first edition of “Remittances in the Digital Age.” In this course, we’ll talk about the roots of the industry, the needs and demands of remittance customers, the technological and business advances that underpin these specialized services, key players, and what innovative ideas and technologies might power remittance services toward their next leap forward.