NB Financial Health
It’s Not Just About Price: Innovative Solutions to Africa’s Remittances Problem
You want to send money home because your sister is desperately ill and your mom can’t afford to get her to the doctor. They need the funds as soon as possible, so you go to the closest remittance outlet, fill out the paperwork, make the payment and wait for confirmation from your mother. It’s not about the cost – wherever needs are critical, price becomes secondary.
Yet those costs still have an impact. Through remittances, millions of migrants to the U.K. support the basic needs of those in their home countries. But with limited alternatives available, substantial costs are incurred – particularly in Africa where the average cost of sending money is 9.8 percent of the remittance amount, compared with the global average of 7.5 percent.
Sending money to sub-Saharan Africa necessitates using the most expensive remittance corridors in the world. With remittances being essential for everyday life, the cost being incurred by senders is undermining the potential for poverty reduction and development. For example, a study from the World Bank found that if the price of remittance services to Nigeria were reduced to 5 percent, the money saved could buy an additional 1.5 kilos of rice, which could provide dinner for a family of four for a week.
Across Africa, one major driver of high remittance costs is the lack of competitive infrastructure. The established financial infrastructure was largely designed for high-value corporate trade payments, making it inappropriate for low-value remittance payments. New financial infrastructure for remittances is limited largely to cities where demand is visible and where support infrastructure is in place.
As a result, the cross-border retail payment market has been dominated by money transfer operators who still rely on expensive bilateral agreements and closed-loop systems. These expand access to remittances for millions of adults across Africa, but the limited competition from other providers means that there is little incentive for them to improve their offerings. The inefficiencies caused by this result in persistently high costs for consumers. There is a trade-off between cost and access.
But simply focusing on reducing the national average cost, rather than also considering access, misses these dynamics and has the potential to further entrench financial infrastructure in cities, away from those who need it most. It’s a simple formula for providers. They cannot justify investment in these harder-to-reach areas if they cannot recoup revenue for it. Thus, while lowering average costs might save remote customers some money on the price of remittance services, these customers will still incur additional costs to use them.
To bring down remittance costs without undermining access, pockets of innovation can offer important insights. One such innovation in Africa is the emergence of centralized connections – known as “hubs” – between different payment providers. The hubs replace bilateral agreements and create one centralized mechanism where these providers can leverage one another’s systems and infrastructure – known commonly as “interoperability.” Hubs connect the emerging digital payments market that is gaining traction in representing the majority of domestic remittance payments in Africa. One such hub, MFS Africa, facilitates intra-Africa payments, connecting mobile money systems to one another and to other financial service providers to allow remittances to be sent to and from mobile money accounts. In East Africa, the MFS hub integrates Vodacom’s M-Pesa and MTN’s Mobile Money platforms. Customers in Kenya, the DRC, Tanzania, Uganda, Zambia and Rwanda can now send remittances across borders for only 3 percent–6 percent of the cost by using their mobile wallets.
As digital acceptance develops further in Africa and usage becomes even more widespread, these hubs are in a prime position to open networks to international remittance flows. For example, in the Southern African Development Community (SADC), 11 countries and 95 banks are currently linked into the SADC Integrated Regional Settlement System (SIRESS) for real-time, high-value payments. Leveraging this infrastructure to support mobile wallet interoperability in Africa and providing linked access to U.K.-based providers will improve efficiency and lower costs.
A recent report by FSD Africa and DMA on remittances from the U.K. to Africa explores how these hubs can be leveraged. It emphasizes that price should not undermine access nor the potential to support livelihoods and opportunities at home. Innovative solutions have been driven by policymakers and donors facilitating change in Africa’s markets. The same approach is now needed globally.