Growing in volumes and values
every year, remittances seem crisis-proof. But many, including the
G8 and the World Bank, believe that reduced costs can help to grow
profits in the sector and also set fairer conditions for migrant
workers who remit money back home. Carlos Martin Tornero
reports
Go deeper with GlobalData
Despite the ongoing economic turmoil,
remittances grew to USD501bn in 2011 worldwide. According to the
World Bank Migration and Development Brief published in
April, that figure is expected to grow to USD615bn by 2014.
The lion’s share of cross-border payments
results from earnings generated in high-income areas as migrant
workers send part of their wages back home.
The World Bank reports that developing
countries received USD372bn in 2011, around 12% more than the
previous year. Moreover, remittances are expected to grow by around
8% over the next two years, reaching USD467bn by 2014.
Many of the developed and rapidly developing
countries that host migrant workers suffered a large exposure to
the financial crisis. Their economies suffered stagnation and
higher unemployment rates, but the traffic of remittances continues
to grow at a steady pace.
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By GlobalDataAccording to the World Bank, remittances have
proven more resilient than any other financial inflow, mainly
because migrants have always found a way to keep sending money back
to their families.
To put things into perspective, these
cross-border payments could be considered as ‘umbilical cords’
which create an effect similar to foreign aid in international
relations.
In some low-income countries, remittance inflow
might be small in absolute terms; however, when considered as a
share of GDP, the whole economy of a country could depend on this
flow of money. That is the case in Tajikistan or Lesotho, for
example, where the transfers from expatriates can amount to 30% of
the country’s GDP.
Golden corridors
India and China rank at the top of
recipient countries in 2011, with estimated flows of USD64bn and
USD62bn respectively. Mexico (USD24bn) and the Philippines
(USD23bn) follow these two countries, and represent a major chunk
of total worldwide remittance transfers.
The corridor with the highest volume is the US
to Mexico, with around 92.5% of remittances coming from Mexicans
working north of the border. Filipino expatriates in the US sent
almost half (43%) of the total USD23bn received by their home
country last year. Equally remarkable is that some 19% of India’s
and China’s remittances were sent from the US.
Another corridor growing in importance is the
UAE to India. The gulf’s oil and construction industries employ a
large Indian workforce whose remittances amount to some 21.5% of
total transfers between the two countries.
The Indian diaspora in Saudi Arabia and the UK
contributed around 8% and 6% respectively, and created two
important corridors through which remittances are channelled into
the country.
The 5 by 5 objective
In 2009 the G8 proposed reducing the
global average costs of transferring remittances from 10% to 5%
within five years. Known as the ‘5 by 5’ objective, the reduction
is aimed at saving USD15bn annually for recipient countries.
The underlying principle of the 5 by 5
objective is not narrowing down the margins received by money
transfer operators. On the contrary, 5 by 5 is aimed at creating a
more efficient market. Certainly, the 5 by 5 objective represents a
collective effort to lighten bureaucracy and the regulatory
environment, making the sector more competitive.
According to the World Bank’s Remittances
Prices Worldwide database, the simple average costs at the
global level decreased between 2008 and 2010. But since then the
World Bank has noticed an upward trend. Nonetheless, weighted by
bilateral flows, the average cost decreased from 8.8% in 2008 to
7.3% in the third quarter of 2011.
Chris Gerrard from Developing Markets
Associates (DMA), who has managed remittances projects such as the
World Bank’s ongoing global remittance prices database, says the
proposed 5 by 5 reduction is an approximation.
“There are many aspects to be taken into
account,” he notes. “For instance, a lot of the research is
weighted. You might be looking at market prices of a country such
as Germany where there are fewer options for those looking to remit
money out than there are in the UK, for instance.
“You would be collecting prices from Western
Union or MoneyGram but also from German bank accounts which are
often more expensive, and probably not widely used by the migrant
communities sending low-level remittances.”
Banks charge an average of 12%, compared to the
9% fee levied by money-transfer agents, according to data from the
World Bank.
The two largest global remittance specialist
handle USD100bn between them every year. Of that, Western Union
processes USD80bn, and MoneyGram about USD20bn.
Hawalla – the black
market
The DMA’s Gerrard says thatmuch of 5 by
5’s spirit stemmed from the UN’s Millennium Development Goals,
which aimed to tackle global poverty by 2015. However the data
available on remittance flows does not reflect the unofficial
market, commonly known as the hawalla.
This Arabic term describes an informal
agreement between the sender, a broker and the recipient of the
money transfer. These unofficial channels are often the choice of
the most vulnerable migrant workers who want to avoid the expensive
fees attached to transactions in the regulated system.
Gerrard argues the 5 by 5 objective might help
to attract remittance flows from the hawalla. “You can
argue on some level that a more competitive market helps everyone.
If prices come down in the regulated market, then in theory the
regulated market becomes busier and there would be less traffic
going through the hawalla,” he says.
Increasing transparency is, says Gerrard,
another aim of the 5 by 5 initiative, and one shared by the EU’s
Payment Services Directive (PSD).
“It is still the case that some money
transfer operators or banks would be able to tell you the fee that
you are paying but not the exchange rate that you are paying,” he
says. “As such, the sender is not able to ascertain the true cost
of the transfer.”
Mobile remittance
The development of mobile commerce poses
the question of whether mobile remittances can drive down prices in
the cross-border payments. Certainly, mobile channels represent
cost reductions in terms of staffing, office space and
cash-handling security costs.
A report by Juniper Research forecasts that
around USD55bn in international remittances will be sent using
mobile devices by 2016, up from just USD12bn in 2011. But the
business case for mobile remittances goes beyond the money-transfer
operators.
Diarmuid Mallon, head of product marketing for
SAP subsidiary Sybase 365, which provides software solutions for
m-commerce, says mobile remittance is still a relatively untapped
market worth exploring.
He says there are already mobile remittance
services in most markets, but many are based on sending large sums
of money.
The phenomenon of remittances presents three
faces, Mallon explains:
Paying people, such as relatives or friends,
who lend the migrant worker the money to go abroad;
Sending money to the family that was left
behind;
Enabling the worker to save money to return
home.
The three faces that Mallon describes encourage
different service models. The mobile phone will become an essential
tool in the first two, he says. Therefore, as Mallon points out, it
seems a natural proposition to use the same device to send
money.
Behind the scenes
Mallon says many of the firms Sybase 365
works with have started to think more strategically in an attempt
to promote interoperability between their companies.
Axiata Group, owner of Malaysian mobile
operator Celcom, has deployed a mobile commerce hub for the
different operator companies across the group, rather than building
up mobile remittance solutions country by country.
More recently, Sybase 365 has partnered with
Telefónica to provide its global mobile wallet services. At the
heart of this project, Mallon says, is the concept of mobile
wallets that will work everywhere.
“If you look at Telefonica’s footprint in both
Western Europe and Latin America, they already span a strong
remittance corridor,” he says.
The first mile and the
last
Luup, a mobile payment and financial
service solution provider, launched its mobile payments platform in
September last year. Luup’s platform covers the whole range of
m-payments including corporate payments, branchless banking, mobile
banking, P2P payments and mobile international remittances.
Luup CEO Martin Wilson says the technology is
aimed at addressing what he calls the first mile and the last mile
of remittances – in other words, the process of how remittances get
in and out of a mobile payment system.
Luup is powering a solution for the National
Bank of Abu Dhabi (NBAD) that allows workers in the UAE to receive
their wages via a mobile wallet and send account-to-account
remittances to India in real time.
The real-time service is available for
recipients who have an account with the Federal Bank of India. If
they have an account with other bank, then the money transfer is
placed in the Indian clearing network and it is available within 24
hours.
Wilson says they have managed to remove many
steps from the process and reduce the cost of the transaction in
line with the 5 by 5 initiative. The service allows both NBAD and
non-NBAD customers to send remittances to bank accounts in India at
a fee of AED12, which Wilson stresses “is at least 20% cheaper than
the market rate”.
“The 5 by 5 objective is a great initiative,”
Wilson says. “A good start, but quite modest at the same time.
“What has been fascinating for many years is
the way banks and financial institutions have not really got
involved in international remittances. It’s not their core
business.”
And that lack of interest shown by the banks
has not helped the consumer market. Low competition has led to
laborious, manual and expensive processes.
Wilson concludes: “How can we make this more
efficient, securer, more reliable, faster and cheaper for the end
user? The answer must be – use the mobile phone
networks.”
