The U.S. remittance industry is getting bigger – so where are the big banks?
- Foreign workers in the U.S. remit around $165 billion back home every year.
- Trailing in the adoption of technology, big banks have failed to serve the space well, and are losing ground to new fintech providers.
The U.S. is the most popular destination for the world’s migrants, who leave their origin countries in the hope of a better future. It’s home to 19% of the world’s total migrant population. In 2020, the U.S. recorded 27 million foreign-born workers, which made up 17% of the total workforce. These workers remit some $165 billion overseas. Yet, among the financial institutions servicing those transactions, an important group is missing: big American banks.
In a lot of cases, workers that arrive on American shores originate from middle to low-income countries, and the money they make there sustains their families at home — often supporting multiple households. With the advent of the Covid-19 pandemic and the consequent economic hardships, the World Bank projected the sharpest decline of global remittances in recent history. As things played out, however, the global remittances flow defied the projections, falling only 1.6% to $540 billion by the end of the year. In 2021, the flow continued upward, and remittances to low-and middle-income countries alone are projected to have grown by 7.3%, reaching $589 billion.
According to the World Bank, 2022 is set to see 4.4% remittance growth, mainly due to a weaker growth outlook for the United States.
In 2021, the top three remittance destination countries were India, China, and Mexico. For each of these three countries, the U.S. was the biggest source for remittances. Even beyond that, the U.S. is the most significant source country for remittances in the world. With the U.S. playing such a significant role in the global remittance market, and the big banks notably absent from the scene, who’s powering this market? Traditional remittance companies and fintechs.
U.S. banks have missed out on over $10 billion by neglecting remittance programs and allowing fintechs to scoop up this consumer segment, according to Danny Ayala. Ayala spent 18 years in Wells Fargo’s consumer banking division, where he led the Global Remittances Services business. This year, he jumped ship into the fintech space, joining Welcome Tech as the managing director of financial services. The firm provides financial services for American migrant communities.
“The large banks have a highly limited focus on remittances today with few exceptions -- Wells Fargo being the banking leader in consumer remittances among the major banks in the US,” he noted. “Traditional remittance companies dominate with approximately 45% market share, followed by fintechs which have now extended well over 25% market share, leaving the rest to banks, at approximately 20%. The informal/alternative remittance providers hold about 10% market share.”
Global remittances have historically been expensive. With cash agents on the sending and receiving ends, financial services also charged significant fees to move money around. However, as we move into the future, digital transfer networks are helping bring down the costs significantly. With innovations including mobile phone technology, mobile money, digital currencies, distributed ledgers, and electronic identification, the process has not only become instantaneous, but also cheaper.
“In 2000, close to 90% of the remittance activity was completed in person on the receive and send side of the transaction. Today, it has decreased to about 50% for in-person interactions at either end, while 40% now involves a fully digital experience for both sending and receiving. The pandemic accelerated the pace of change significantly,” Ayala revealed.
Digital ecosystems have also proven their ability to mitigate the many risks, barriers, and costs associated with know-your-customer and security. However, as banks have trailed fintechs in the adoption of new technology, they’ve also failed to match the pace with which fintechs are claiming the space.
“Fintechs have taken the time to build the networks, learn the business, and figure out the appropriate approach to effectively manage compliance. Most importantly, fintechs made the investments to build both the network backends connecting to both banks and non-banks overseas while also developing very sophisticated digital solutions,” Ayala said.
Ayala views fintech firms’ focus as a key element of their success, highlighting their desire and ability to focus on a niche market and serve it fully. He believes migrant workers are a community whose financial needs present a lucrative business opportunity, but one that has been left out of the big banks’ attention. “Fintechs have identified the underbanked and unbanked consumer needs as a segment of the population that remains a lower priority for big banks today,” he said. “There are fintechs that specialize in vertical solutions to address the segment needs, an example being Remitly for remittances, PayPal for the unbanked, and Welcome Tech for the immigrant consumer.”
With banks not serving the demographic well, the market was anyone’s to grab. And as fintech service providers focus on the segment and create specific products to serve them, they face little competition in customer acquisition. “To be fully transparent, there is not a single major bank that makes these segments their top priority today. This is why fintechs have little to no trouble finding customers, who are actively looking for a company to meet their unmet needs,” he said.
Welcome Tech is a fintech based in L.A. Its digital platform targets global migrant communities with a financial services portfolio that includes debit, reward, and credit offerings. The firm was born out of personal needs. The founders, within their own families, saw immigrants who needed help navigating financial services in the U.S., so they decided to establish a resource for finance, healthcare, and education.
“Today, we do this by providing a digital ecosystem that is both in language and in culture, offering immigrants and their multi-generational families the critical resources needed to thrive in the U.S. Our platform supports over 3 million active users, with the number continuing to increase each and every day,” said Ayala.
Heading into 2022, the firm intends to continue servicing the needs of U.S. immigrants by further expanding its services from debit into credit and remittances, among others.