Anyone in any doubt of how important remittances sent home by migrant workers are to developing countries should consider the World Bank’s Global Economic Prospects report for 2006. It found that more than 70 per cent of the $232bn remittances made by migrant workers worldwide in 2005 were sent to developing nations.
This comes to $167bn: it amounts to more than twice the level of development aid from all sources and plays an extremely important role in boosting the local economies.
Banks, however, play only a small role in this movement of money. The migrants tend not to have bank accounts, and most of the transactions are low- value and cash-based.
Even those with bank accounts prefer the convenience of non-bank institutions such as Western Union and Moneygram, or unregulated, unlicensed money transmission companies.
However, in recent years, due to government pressures and the post-September 11 focus on preventing money laundering, as well as “know your customer” regulations, there has been a decline in flows through unlicensed channels. Keen to gain a share of the pie, banks are now trying to make their presence felt in the high-growth remittance business, where profit margins often go beyond 30 per cent.
“Often, the payment originator and the recipient are both unbanked. The challenge banks face is to create the right distribution network that matches the reach and convenience offered by existing service providers. In addition, most banks have been notoriously poor marketers when it comes to attracting and promoting remittances,” explains Dan Schatt, senior analyst at research firm, Celent LLC.
By comparison, Western Union, the worldwide remittance market leader, has agents in 225,000 locations across more than 200 countries that allow remittances to be sent and received in cash, and it spends more than $450m a year on marketing to ethnic communities.
Realising that it is impossible to create a branch-based model to compete against focused non-bank players – Western Union, the worldwide remittance market leader, has agents in 225,000 locations across more than 200 countries that allow remittances to be sent and received in cash – banks are using technology to provide alternative distribution channels.
ICICI Bank of India is one such success story. Despite limited international presence, the bank has successfully captured about 20 per cent of the $21.7bn Indian remittance flow by focusing on online services. The bank has also formed alliances with leading local banks in all parts of the world, such as Wells Fargo in the US and Lloyds TSB in the UK, to allow Indian remitters to use their branches, ATMs, or internet banking services.
Over the past few years several leading US banks such as Bank of America have aggressively targeted the US-Mexico remittance corridor through ATM cards, which enable Mexican migrants in the US to send a pre-paid ATM card to their relatives back home which they can use to withdraw money from ATMs in Mexico.
But such schemes face hurdles. Schatt says: “Banks need to understand the ethnic demographics of not only remitters but the recipients as well. BofA’s Safesend initiative, in which Mexico remittance recipients were sent ATM cards to withdraw their remittances, largely failed because there was an assumption that recipients in Mexico would be comfortable taking money from an ATM. The reality has been that most prefer face-to-face interaction and the security of obtaining the cash in a more secure location. In addition, many expressed complaints about not being able to get exact change out of an ATM machine.
“Even though the technology behind the ATM service is great, it was not very successful because of a lack of understanding about the local market,” he notes.
Schatt says the channel that could help banks make a bigger impact in the remittance sector is the mobile phone, since this is the most widespread technology in many high remittance economies.
In the Philippines, mobile phones are already being used to transfer money. Australian technology vendor Utiba has designed a platform that allows one of the largest Philippine mobile carriers, Globe Telecom, to offer a “mobile wallet” that allows subscribers to send or receive domestic or international remittances.
Unlike in Globe Telecom’s mobile wallet model, where banks merely ensure fund transfers, Canadian technology vendor, CPNI, in partnership with IBM and CSC, has created a system which gives banks a much bigger role. It enables bank customers to make phone-authorised transfers of funds, either to another bank account or to a retail outlet from where the recipient can collect the money.
It is expected to go live by the middle of this year, targeting first the Germany-Turkey remittance corridor, says Patrick Bird, CEO of CPNI. He predicts a coming wave of payments from phone devices will help re-establish banks in the remittance process: “Phones are much more pervasive than computers, the cost is very low and does not require sophisticated infrastructure from either the payer or recipient’s side.”