Written By: Alon Rajic, Managing Director, Finofin LTD
A growing army of international migrant workers in 2015 reportedly sent an estimated $601 billion to their home countries. $441 billion of this went to developing countries, helping those in poverty significantly improve their quality of life. However, it is also estimated that an annual $16 billion of these funds is lost each year through large fees of up to 29% on transfers, as well as exploitative practices that target the world’s most vulnerable socioeconomic groups.
The global population of migrant workers reached an all time high last year, with over 250 million fleeing conflict, crisis and lack of opportunities in their homelands. The international money transfer of these foreign workers, referred to as remittance, provides a life-line for millions across the globe, as it supports health, education and investments for new small businesses of people in at-risk communities.
Those sending money home to friends and family through remittances generated three times more than the total global aid budget in 2015, constituting over 10% of the GDP in 25 developing countries. The World Bank’s recent Migration and Remittances Factbook 2016 reported that in 2015 India was the top destination of remittance. The country, in which 271.4 million individuals, or 29.5% of the population, are under the poverty line, received $72 billion in remittances in 2015. Imagine what an additional $16 billion could do.
Large companies like Moneygram and Western Union dominate the migrant remittances niche through restrictive practices, preventing the entry of new players, and obscenely high fees embedded in the costs. However, emerging contenders in the international money transfer industry look to even the playing field, fueled by significant funding and new technologies.
“Fundamentally, the problem comes down to three related issues: lack of competition, insufficient transparency and restrictive business practices,” claims Maria Quattri, co-author of a recent report by the Overseas Development Institute (ODI) on Africa’s remittance sector.
Here I will explore how new players in the money transfer industry are directly helping to solve these 3 challenges, and in so doing, helping a growing number of migrant workers to more effectively share money with those at home.
- “Lack of competition” rivalled by increased investment in startups
New companies have attracted serious investment in this space and are displaying rapid growth as they compete with powerful household names of Moneygram and Western Union. This equates to a greater level of competition in what has traditionally been a niche market.
One of the most notable players is Transferwise . Currently valued at over $1 billion and operating in 22 countries, Transferwise claims to reduce the costs for those sending money abroad by up to 90%. The UK-based online money transfer startup is backed by Virgin’s Richard Branson and Paypal’s Peter Thiel, and has raised almost $100 million in four rounds of funding. In December of 2015 the British “unicorn” announced a partnership with Estonia’s largest domestic bank, LHV. This new alliance will see the rock bottom money transfer prices made available to LHV customers through the mobile application.
Remitly, still small in comparison with the fastest growing startups, has positioned itself as a “mobile innovator.” Remitly is focused on long term growth and development of the platform, in favor of short term wins. In July 2015 they purchased the messaging app Talio in continued efforts to improve their mobile offering. They operate across fewer corridors and as such are still small in this industry.
These companies together exhibit wide global reach without minimum transfer amounts, and take much smaller margins – making them fundamentally remittance-oriented.
- Advanced technologies break down existing issues of “insufficient transparency”
Remittance prices through traditional routes, via banks and the likes of Western Union, have traditionally been very high and opaque. Whilst a fee is charged for the sending of money, the margin is also baked into the exchange rate, and in some cases a further fee is charged to the recipient of the funds. Critics of the these methods report that in fact very few customers are aware of these true costs, especially when adverts proclaim a bank’s ‘low fees’ or ‘zero commission’ for exchanges.
The costs vary depending on a number of factors, such as whether the funds are sent in cash, to an account, the speed of the transfer and even the ability of the sender to provide information about the recipient. Users are required to sign up, or even handle cash transfers directly over the phone, with little explanation of the embedded costs they are forced to pay.
While the World Bank has cited concerns over money laundering and an increase in compliance costs for commercial banks and money transfer services as a reason for high rates, once again we see the startups turn this process on its head, using smart technology and disclosing full transparency.
New companies such as CurrencyFair are ultra-transparent, showing real, detailed costs – including exchange rate markups, comparing this to the bank’s rates on their homepages, without the need to sign up. Users simply enter the amount they wish to send, to which countries, and they can see their costs and savings against the bank’s rates. CurrencyFair, like Transferwise, also offers peer-to-peer trading through their Marketplace or QuickTrade express options.
- An end to restrictive business practices, exclusivity and high costs
Maria Quattri’s final point of “restrictive business practices” refers specifically to the exclusivity agreements in place today that bind banks and money transfer agents. These agreements stipulate that once a bank or agent works with Western Union or MoneyGram they cannot work for other providers, restricting entry for new players. Due to lack of competition in the field, these two money transfer services can then set huge fees of up to 29%, which drive unreasonably large margins.
Over the last decade, more than 20 countries have made exclusivity clauses illegal, though there is still a huge amount of work to be done here, particularly in Africa.
Country-to-country transfers through the dominating agents suffer fees of 8% on average – money that could significantly improve the living conditions of the migrant and those in poverty in their home countries. By cutting out the bank or agent, startups can push online platforms with lower charges and provide an alternative for money senders.
The fees charged by startups like Transferwise and CurrencyFair sit at around 0.5%. CurrencyFair boasts average rates of 0.35%+ €3 – so the more customers transfer the more they save. However, different corridors have different markups. WorldRemit and Azimo are the best international transfer options for developing countries.
The UN Sustainable Development Goals have a target to drop global transaction costs to under 3%, and to eliminate remittance corridors with costs over 5% by 2030. All these startups are helping to break the monopoly in the market, bringing costs under this target by reducing their operational costs through cutting out branch networks and using technology to automate the wire process. They are also able to set tight fixed margins, making minimal profits in contrast to the large amounts of venture capital they have been poured into them.
Critics forecast that these startups exhibiting fairer alternatives for the migrant market may struggle in the future to turn in profit with their current business models, which may lead to higher margins. Of course, the only way to tackle this will be the next generation onslaught of Fintech services that will further help to shift the power through a new wave of tech advances.
The World Bank has predicted a 4-5% annual growth of the international remittance market, and has set expectations that the growth of migration will be “a permanent feature of the global economy for decades to come.”
As a diverse market of commercial financial remittance providers gains credibility, they can additionally expect a growing market, with fairer prices. In light of the above trends pioneered by the smaller startups disrupting this space, migrant workers would steer away from traditional providers and use remittance startups. Hopefuly, it will change the lives of those in desperate poverty – due to low employment levels and poorly performing currencies – and allow them them to send more money home to help reshape the economic development of some of the poorest countries of today.