Remittance-focused start-ups expand in emerging markets

Financial technology (fintech) firms are gaining market share that was formerly the preserve of established remittance service providers. Remittances have grown in importance in recent years and today constitute the largest source of foreign income for many developing economies. They also tend to be countercyclical, increasing during economic downturns or natural disasters when other capital flows generally dwindle. Growth in the segment has gathered pace, with the importance of remittances as a source of income for emerging economies and financial service providers alike set to rise further in the coming years.

Inflation & Investment

As inflation and global food insecurity place financial pressure on many countries around the world, remittance inflows to emerging markets are expected to continue to provide crucial support in 2022. In a May 2022 report, the World Bank’s Global Knowledge Partnership on Migration and Development (KNOMAD) estimated that remittances to lowand middle-income countries (LMICs) will grow by 4.2% to $630bn in 2022. In sub-Saharan Africa, KNOMAD expects to see 7.1% growth in remittance flows in 2022. Despite projections from the World Bank in April 2020 that the Covid-19 pandemic would lead to a 19.7% contraction in year-end remittance flows to LMICs, they instead held firm and increased by 0.8% in 2020.

Such transfers took on greater importance as foreign direct investment (FDI) to LMICs fell by 13.5% over the course of 2020. Indeed, that year the value of remittances to LMICs ($540bn) surpassed the equivalent value of FDI ($259bn) and overseas development assistance ($179bn) combined. In many instances, these inflows provided a source of replacement income to cover essentials such as housing and food, as pandemic-related curfews and other health restrictions curtailed the ability of many people to work in person – particularly those active in the informal sector.

Tech Evolution

While approximately 97% of global remittance inflows are paid in cash and transmitted via traditional brick-and-mortar banks and financial institutions, there has been a noticeable increase in fund transfers using alternative methods. Indeed, lockdowns and border closures led to a 48% increase in mobile phone payments in 2021 alone. Many fintech start-ups are keen to move into the remittances space, which is seen as having significant potential. London-based consultancy and data provider Tellimer estimates that 45% of the global fee pool is above the 3% mark and therefore ripe for disruption.

Meanwhile, data aggregator Statista anticipates that the digital remittances segment will reach $127.3bn in 2022 and $166.4bn by 2025, with 15.6m users by the end of the period. The market is increasingly characterised by intense competition on fees, with apps competing in terms of price. Some have even eliminated remittance fees altogether.

Reducing Costs

Both public and private sector bodies are working to facilitate lower-cost remittances across emerging markets, often by expanding their own digital offerings or by partnering with a fintech firm. In January 2022 the Nigerian Postal Service launched an e-debit card and finalised arrangements to launch a microfinance bank that will enable 52m previously unbanked Nigerians to conduct financial transactions. Also in Africa, in October 2021 Western Union – an established global remittance company – announced that clients of KCB Bank Kenya, Diamond Trust Bank and the Kenya Post Office Savings Bank would be able to send and receive money via their mobile banking apps.

Crypto Expansion 

In parallel to these regional and global developments, the remittances space is being disrupted by blockchain-based digital currencies. Among other advantages, cryptocurrency is traded internationally and its transfer requires no intermediaries. If cryptocurrency expands as far and as fast as its most ardent supporters predict, the technology could challenge legacy service providers and fintech companies alike for a slice of the global remittances pie.