Fintech revolutionising remittance process 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 decades and now 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 has only gathered pace, with the importance of remittances as a source of income for emerging economies and financial service providers alike set to rise further.

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 a recently released report, the World Bank’s Global Knowledge Partnership on Migration and Development (KNOMAD) estimated that remittances to low- and middle-income countries (LMICs) will grow by 4.2% to $630bn in 2022. The figure builds on 8.6% growth in 2021 and follows two years that have highlighted the value of these inflows to many emerging markets. Indeed, 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 as pandemic-related curfews and other health restrictions significantly curtailed the ability of many people to work in person – particularly those active in the informal sector.

Just as remittances proved crucial during the pandemic, they are also likely to be vital in 2022 following Russia’s invasion of Ukraine in February of that year. Rising inflation and the increase in food prices, which reached all-time highs across March and April 2022, have significantly increased the cost of living in many countries and weighed on households, especially in emerging markets. A continued flow of remittances would therefore be a welcome contribution to many emerging market economies: approximately 800m people around the world benefit from remittances, which are often used to cover essentials such as groceries, health care, school fees and housing, according to a June 2022 report from the UN’s International Fund for Agricultural Development (IFAD).

Regional Differences

While KNOMAD has predicted that remittances will follow the upward trend seen in recent years, it nevertheless expects the rate of expansion to slow as inflation erodes wages and Russia’s invasion of Ukraine places significant pressure on certain economies. There are also expected to be notable regional differences, much of which will depend on the source country of the remittances and how the countries sending the money transfers will be affected economically.

KNOMAD expects to see a 9.1% increase in remittances to Latin America and the Caribbean in 2022, followed by significant growth in flows to sub-Saharan Africa (7.1%), MENA (6%) and South Asia (4.4%). However, remittances to Central Asian countries, for which the main source is Russia, are expected to fall dramatically amid the decline in the value of the rouble and sanctions on Russia. According to the report, remittances to Kyrgyzstan are forecast to fall by 32%, while those to Tajikistan (-22%), Azerbaijan (-21%), Uzbekistan (-21%), Armenia (-19%) and Kazakhstan (-19%) are also expected to experience significant contractions. Just as strong remittance flows are expected to provide support to many emerging markets, such declines could have economic repercussions for Central Asia. World Bank figures show that remittances made up 31.3% of Kyrgyzstan’s GDP in 2020, compared to 26.7% in Tajikistan, 11.6% in Uzbekistan and 10.5% in Armenia.

Egyptian Dynamics

Egypt is no exception to the broader trend of robust remittance growth. The country is the largest recipient of remittances in MENA, receiving 51% of the region’s inflows in 2021. In the 2010-20 period the value of inbound remittances to the country more than doubled, from $12.5bn to $29.6bn, as reported by the World Bank. This trend has continued: remittance inflows increased by 12.8% year-on-year in March 2022 to $3.3bn, according to the Central Bank of Egypt.

Much of the growth in remittances to Egypt is also is attributable to the flotation of the Egyptian pound in 2016. During this period many Egyptians living oversees refrained from sending their money through the interbank system given the uncompetitive exchange rates offered for exchanging foreign currency to the Egyptian pound. This created a black market for more favourable rates, which virtually disappeared in the years since 2016.

The value of remittances grew substantially in the subsequent years; by 2019 Egyptian foreign exchange reserves were at an historic high, partially as a result of larger inbound remittances. The year 2021 brought higher oil prices – bolstering incomes in the Gulf – alongside stronger economic activity in Europe and North America, all of which are home to substantial Egyptian populations. Income from these countries substantially drove inflows to Egypt to a record $32bn in 2021.

Tech Evolution

While the overwhelming majority – at around 97% – of global remittance inflows are paid in cash and transmitted via traditional brickand-mortar banks and financial institutions, there has been a noticeable increase in fund transfers using alternative methods. Lockdowns and border closures led to a 48% increase in mobile phone payments in 2021 alone. A number of remittance-focused fintech players are accelerating operations in emerging markets. 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. For example, in October 2021 leading digital bank Revolut announced that US customers would be able to make 10 free international transfers per month. The following January the company expanded the programme to include Mexico as well.

Reducing Costs

These developments come as companies and institutions seek to reduce the cost of international transfers. IFAD estimated that currency conversions and fees account for an average of 6% of the total amount of cash sent, double the 3% target laid out in the UN Sustainable Development Goals. Initiatives such as the Remittance Community Task Force, launched by IFAD in March 2020, are pushing for far-reaching changes in policy and legislation on remittances, while some financial institutions have sought to cut or reduce fees.

Across emerging markets, both public and private sector bodies are working to facilitate lower-cost remittances, often by expanding their own digital offerings or by partnering with a fintech firm. For example, 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. Similarly, in December 2021 Money-Gram – another legacy remittance provider – partnered with urpay on cross-border money transfers. The latter is a digital wallet powered by Saudi Arabia-based start-up Neo Leap.

Crypto Expansion

In parallel to these 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.