The Disruptors Are Forcing Change in the Remittance Industry
Friday, August 14, 2015
Remittances to Africa have grown rapidly in recent times, and it forms an integral part of the $500 billion global money transfer market. This is because several African nations rely heavily on money sent home by friends and relatives working abroad. Hundreds of Africansare migrating daily to keep growing the influx. But the biggest gainers in this have for long being a few firms, whose near-monopoly costs the continent about $2 billion annually in remittance fees. However, a new breed of companies are causing much needed disruption in the money transfer market and are putting consumers back in control of their money.
The massive increase in external financial flows (sum of gross private capital flows, official development assistance and remittances) to Africa, to more than $120 billion in 2012 from just $20 billion naira in 1990 has been driven by the growth of remittance to the continent. The continent received $32 billion in 2013 and is expected to receive more than $40 billion by 2016. But high street banks and money transfer companies, majorly Western Union and MoneyGram have dominated the market for years, charging exorbitant fees, with opaque foreign currency charges and agent-exclusivity arrangements, undermining competition and favouring price hike.
UK-based think-thank, Overseas Development Institute (ODI), estimates that Western Union and MoneyGram, through which two-thirds of remittance transfers are done, accounted for $586 million of the loss associated with the remittance ‘super tax’. But a Moneygram spokesman told the Guardian newspaper that ODI’s estimates were inaccurate. “We don’t recognise those numbers at all. There is no Africa premium”.
A Western Union spokesperson also claimed that the company’s average global revenue was between 5-6 percent of money transferred through it. He explained that consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility, and other market efficiencies were factors that determine the MTO’s pricing. However, ODI has called for greater transparency over remittance charges and has also urged an investigation into foreign exchange conversion rates.
For some of the distruptors of the money transfer market, it is more than just business, it is a way of ensuring hardworking Africans, who send more money home than what traditional Western donors send as Official Development Assistance (ODA), do not continue to lose money to the “Remittance Super Racket”. “There is a social cause here,” says Rajesh Agrawal, founder and CEO of Xendpay.
Xendpay says it offers a competitive exchange rate by adding customer transfers onto larger sums sent by corporations via its sister MTO RationalFX. This enables it to offer customers ‘pay what you like’ for the service. Agrawal posits that if transfer costs were slashed, an extra $40 billion would go to developing countries which make up 80 percent of recipients.