If Bill Gates thinks remittance is important, we probably should too. Microsoft’s founder and one of the richest people on the planet addressed maximizing remittance payments during his speech at the 2011 G20. In Gates’ view, every cent of the $581 billion market for global remittance is vital for many individuals in developing countries. Although the concept of exchanging currencies and sending them back home hasn’t changed much, new technological advances have changed the way the way these payments work.
Here’s an overview of remittance and how fintech is changing it.
What is remittance?
Simply put, remittance is when a migrant worker sends money back to an individual in his/her home country.
Who uses remittance?
Classic remittance users are people from underdeveloped countries who, seeking economic opportunities, work in developed countries and send funds back to their homeland. Modern remittance users are not limited to the classic example; another type of sender could be an individual working for a multinational corporation and working in a different country than home for a bit. Other remittance senders would include foreign students, international volunteers, and retired expatriates. Regardless of economic level or the dollar amount, all these individuals use remittance.
What countries are the biggest recipients of remittance?
Of 2015’s $581b in global remittance, $431b went to developing countries. The highest recipients included India ($69 billion), China ($64b), the Philippines ($29b), Mexico ($25B), and Nigeria ($21B).
Who are the classic remittance facilitators?
Obviously, we’re only talking about official transfers, since dealing drugs or arms and dropping duffel bags full of cash from a low flying plane can’t be tracked.
The largest remittance facilitators are incumbent money transfer operators (MTOs) like Western Union, Money Gram and Ria. All three serve between 150-200 countries and have over 1 million agents. Other large incumbents offering remittance services are banks, as customers can use bank services to wire funds back home.
Individual and corporate forex brokers are another type of remittance facilitator. Workers can use services of small and large forex traders to change and/or transfer wages to their native currencies.
The final classical facilitators are post offices, where customers can purchase and send money orders to their homelands. Although they may not be the fastest or most efficient, post offices are one of the cheaper classical remittance options for individuals.
What’s changing remittance?
One simple word: Fees. Users using banks or incumbent MTOs have to pay high fees to send money back home. When Bill Gates spoke at the G20 summit in 2011, he addressed the importance of lowering remittance costs. “We must continue lowering the transaction costs of remittances, so that this growing pool of money has as big an impact as possible on the poorest. Reducing these costs to an average of 5 percent (compared to the current average, which is roughly twice that) would save $15 billion,” remarked Gates.
The high cost associated with remittance can be best seen by the forex rate that MTOs give for remittance payments. Disruptors like TransferWise frequently offer more competitive forex rates and lower fees. Below is a side-by-side shot of the exchange rates on the same day and time from Western Union and TransferWise:
As you can see, TransferWise offers a lower forex rate than Western Union. By offering lower fees, better forex rates, and more transparency, new fintech companies are slowly chipping away at the 800lb remittance gorillas.
Who are the new remittance players?
Digital MTOs TransferWise and WorldRemit are the biggest competitors to incumbent remittance leaders. Various P2P models and low overhead result in substantially lower fees and better forex rates than the incumbents. Other companies allow workers to fill debit cards remotely through an app, and digital wallets allow remittance users to transfer funds through online and mobile apps to their native countries. Finally, with new cryptocurrencies like Bitcoin and Etherium, workers can convert funds to digital assets and send the money home, as well.