– Fintechs focused on remittances are capturing legacy lenders’ market share
– The UN and other bodies are calling for remittance fees to be capped at 3%
– Emerging markets have been at the forefront of mobile-first fintech growth
– Cryptocurrency is also increasingly disrupting the remittances space
A number of remittance-focused financial technology (fintech) start-ups are gaining traction in emerging markets. In doing so, they are making inroads on market share that was formerly the preserve of established providers.
Remittances have grown in importance in recent decades, to the point where they now constitute the largest source of foreign income for many developing economies.
Remittance flows tend to be more stable than broader capital flows. They also tend to be countercyclical, increasing during downturns or catastrophes, when other capital flows generally dwindle.
This growth has only gathered pace, with remittances set to further increase in importance as a source of income for emerging economies and financial service providers alike.
In the past, a key issue has been the high costs associated with international transfers.
Banks have traditionally been the most common – and, in many cases, the only – means of sending money across borders.
In turn, remittances constitute a significant revenue stream for many banks, which typically charge at least 7% of the sum transferred, although this figure can rise to as high as 20% in smaller migration corridors; research firm Tellimer has found that, for low and middle-income countries, remittances have an average transaction cost of 5.3%.
However, there is an increasing sense that remittance costs are excessively high.
For instance, the IMF has argued that a fixed fee rather than a percentage should be charged, given that the cost of remittance services is not dependent on the size of the sum sent. Further to this, the real cost of the transaction – in terms of labour and other overheads – is likely significantly lower than what many banks charge.
Change is in the air, however.
On the one hand, a growing number of international initiatives are focused on the issue.
One such is the Remittance Community Task Force (RCTF). Launched by the UN’s International Fund for Agricultural Development in March 2020, the RCTF pushes for far-reaching changes in policy and legislation on remittances.
Such efforts contribute to the UN’s broader goal of reducing remittance costs to 3% across the board by 2030, in line with its Sustainable Development Goal 10. This target may prove to be achievable: the proportion of corridors with average costs of less than 5% rose from 17% in the first quarter of 2009 to 41% in the second quarter of 2021, according to data from World Bank.
But more important than policy changes in this regard has been the massive expansion of fintech solutions during the pandemic.
This expansion has been particularly swift in emerging markets, with fintech funding in the first half of 2021 some 69% higher than the full-year 2020.
Many fintech start-ups are keen to move into the remittances space, which is seen as having significant potential. Tellimer estimates that 45% of the global fee pool is above the 3% mark and hence ripe for disruption. Meanwhile, statistics firm Statista anticipates that the digital remittances segment will reach $127.3bn in 2022, while by 2025 this figure will be $166.4bn, transferred between some 15.6m users.
The market is increasingly characterised by intense competition on fees, with different apps striving to outdo each other in terms of price reductions.
Some have even cut remittance fees altogether. For example, in October last year leading digital bank Revolut announced that US customers would be able to make 10 free international transfers a month. It followed this up at the end of January with an announcement that customers would also be able to make 10 fee-free transfers to Mexico every month.
Public and private bodies are likewise working to facilitate the expansion of lower-cost remittances, often by expanding their own digital offerings, or by partnering with a fintech firm.
To take an example, this month the Nigerian Postal Service launched an e-debit card and finalised arrangements to launch a microfinance bank that will enable 52m unbanked Nigerians to conduct financial transactions.
Also in Africa, in October last year Western Union – an established 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.
Similarly, in December last year MoneyGram – another legacy remittance service provider – partnered with urpay on cross-border money transfers; the latter is a digital wallet powered by Saudi Arabia-based start-up Neo Leap.
Indeed, the Gulf region has been ahead of the curve on remittances for some time.
Gulf countries' total outgoing remittances are higher than those of the US, with most of them going to some of the fastest-growing mobile money markets in the world: India, Pakistan, the Philippines, Bangladesh and Indonesia.
In this light, it is not surprising that some 85% of fintech firms in MENA operate in the payments, transfer and remittances sectors.
A leader in the field is the UAE-based company Rise, which was established precisely to help migrants send remittances.
Another prominent player is Hubpay, which in 2020 was the first digital money services start-up to be licenced in the UAE, and which earlier this month announced it had raised $20 million in a Series A funding round.
In parallel to such developments, the remittances space is being rapidly disrupted by blockchain-based digital currencies.
Among other advantages, cryptocurrency does not recognise borders and its transfer requires no intermediaries. If crypto expands as far and as fast as its most fervent champions predict, it could well challenge legacy providers and fintech firms alike for a slice of the remittances pie.
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