Missing a trick

The migrant remittance market has in the past suffered from negative perceptions among banks. Even today remittances are viewed with suspicion and some feel that the barriers to entering the market are too high and the potential revenue rewards too low. The temptation to speak in stereotypes is strong among some bankers. They will talk of impoverished migrants, shuffling into their local newsagents and sending bags of cash home to needy families in far-flung developing countries. These same bankers will cite fraud and know your customer concerns as prominent reasons to keep well away from involvement in migrant remittances. Others will tell you simply it is not worth the investment for the tiny sums individual migrants remit. Better to focus on the core customer, with his or her bank account and regular salary.

This view, however, is outdated and the financial services industry is waking up to the potential opportunities this untapped market can offer.

The global market for remittances has experienced phenomenal growth in the past decade and recent figures from the World Bank show that cross-border remittance flows to developing countries grew 8.5% in 2008 to a staggering $305bn. According to the Organisation for Economic Co-operation and Development, this is three times the total official development assistance received by developing countries.

Phenomenal potential

It is a market that is becoming too big for banks to ignore. The prospect of steady revenue flows and an entire new customer base with which to cross-sell services to, particularly at a time of deep financial uncertainty, is highly appealing. According to a report from management consultant McKinsey, the average global revenue margin is about 4.5% and the total annual revenue pool could be about $14bn.

"It's only in the past few years that banks have been focusing on remittances and the potential is phenomenal," says Joanne Strobel, who is responsible for remittances strategy at Deutsche Bank in New York. "It's a very big market and a very fragmented market, which makes the potential quite large." According to Ms Strobel, banks collectively have about 30% of the market. "That leaves a lot of fragmentation and opportunity to capitalise on," she says.

Ms Strobel admits that banks have in the past been put off entering the remittance market due to concerns over compliance and know your customer. However, there is change in the air. "Now there is more focus on this market from organisations like the World Bank, understanding is improving," Ms Strobel says. "Fear over such things as terrorist financing, which were always prevalent, have [been alleviated] by more clarity."

Relationship building

Money transfer operators (MTO) have about 25% market share, of which Western Union accounted for 17% share in 2008. Kevin Keen, the director responsible for developing banking channels at Western Union, has seen attitudes among banks towards remittances change over the years. "Five to 10 years ago, most banks didn't want the international remittance custom of migrant workers," he says. "But banks have now recognised the opportunities presented by remittance flows, which can have a significant impact on their bottom line."

There are a number of ways a bank can enter this market. It can take a wholesale approach, such as Deutsche Bank, and sell remittance services to other financial institutions, or it can be more direct, using transfers based on Swift. Some banks create a separate network outside their branches, tailored to migrants. Another interesting way is to work with an MTO to use its products, technology, expertise and distribution network. The small amounts of cash each immigrant sends home may not initially be attractive to a bank, but once these immigrants get established in their new countries, start earning more money and building a credit history, many of them open bank accounts.

"Once banked, the financial requirements of the migrant customers become more sophisticated and just like the bank's regular customers, they buy additional financial services such as insurance policies, mortgages, and so forth," says Mr Keen. "By working together with an MTO to offer remittance services, banks will have the opportunity to not only develop a new customer base, but build a successful cross and up-sell strategy, hooking into the migrant life cycle."

The principle is that once a migrant customer becomes banked, and less reliant on cash-to-cash remittances, they will have access to a bank-based, account-to-cash remittance product. "That means instead of the customer withdrawing cash from their bank, crossing the street to their nearest money remittance outlet, they would be able to do so directly from their bank account through online banking or call centre," says Mr Keen. In doing so, banks are able to not only keep that liquidity, but retain the annuity benefits of the imminent transaction.

There is, however, still some scepticism among banks towards taking the partnership approach. "Not all banks will want the footflow into their branches on the sending side. They don't want these guys coming into their branches and cluttering up their nice clean offices," says one former banker and remittances specialist, who did not wish to be named. Another concern for some banks is branding. "Many banks would rather not put money transfer agent stickers in their windows because they don't want to dilute their brand," according to the source. He also cites difficulties over pricing and establishing how profits would be shared between money transfer agents and partner banks. Technology spend too is an issue. Pulling up the complex plumbing of banks' payments systems and establishing online portals, unique to remittance customers, is an expensive business, and particularly galling in such tough financial times.

Banking on the unbanked

One bank that has targeted the remittance market is Spain's Grupo Santander. The bank long ago saw the potential of the remittance market and, unlike Deutsche Bank's wholesale strategy, it favours the direct approach. Fernando Alonso Becerra, general manager of Grupo Santander's remittances business, Santander Envios, says that banks can enter the market using various strategies. "In Spain, most financial institutions provide remittance services, but they have chosen different models to do it," he says. "Some signed agreements with money transfer providers such as Western Union or Money Gram, others developed systems based on transfers via Swift, and finally there were others who preferred to keep remittance services outside their branches, creating a separate network just for immigrants." Mr Becerra says that Santander's strategy was to acquire. "We bought a small remittance company called Latinoenvíos which was apparently not very attractive, but its small size enabled us to quickly integrate the remittance service in our bank," he says.

Banks such as Santander recognise that the traditional image of the migrant remitter as a "cleaner who sends small amounts of money home to his family" is outdated. The reality is that migrants are becoming increasingly sophisticated. The vast majority have banks accounts, earn good money and are making use of new technologies such as mobile and online banking. "We wanted these customers to come to the branches and to apply for bank products," says Mr Becerra. Accordingly, just a month after acquiring the company, Latinoenvíos' service was available throughout the Santander branch network in Spain.

Multicultural banking

Similarly, UK-based HSBC, targets specific migrant groups and requires all remitters to transfer money from account to account. "HSBC looks at migrants in a targeted way. In the UK we focused on the Polish community and in Canada we looked at the Hong Kong community," says Tony Richter, head of business development in the bank's payments and cash management Europe division. "We provide them with a whole package of services, which includes remittances." This strategy is often referred to as multicultural banking and is fast becoming more common place in retail banking. "What that really means is focusing on specific areas of the community that might have specific banking needs and you tailor your products to meet those needs as those people arrive and settle in this country," says Mr Richter. "That is a long way from being the guy who earns some money in a kitchen somewhere and sends it back to his family for survival purposes. Some of these are very interesting customers and go on to become major clients of the bank."

A multicultural banking strategy recognises that, certainly within the EU, populations are increasingly mobile. Traditional remitter stereotypes no longer apply and many migrants are paid very well. It is the same in the US, where Wells Fargo has for a long time seen the potential of a mobile, hard-working migrant population. The bank recognised some time ago that most migrants were high-earning individuals that were, for one reason or another, not served by the banking system. By targeting this group it unlocked a new customer segment and could cross-sell other banking services. Wells Fargo also uses partnerships to widen its geographic spread. In 2006, the bank joined forces with the Agricultural Bank of China (ABC) and by doing so gained access to the Chinese bank's 31,000 branches. In return, ABC got access to the custom of Wells Fargo's Chinese American clients. The benefit to banks in developed countries of gaining access to distribution networks in far-flung markets, which have traditionally been hard to penetrate, do not need to be spelt out.

Attitude problem

The idea of a fully banked migrant population in developed countries is still a long way off. Ebru Pakcan, head of payments, EMEA, in Citi's global transaction services division estimates that about 90% of the remittances market worldwide is still cash to cash. However, the number of transfers sent to bank accounts is increasing. "There is an expectation that bank account-ending transfers will double to take up 10% of the market by 2012," she says. Banks are slowly getting involved on the origination side too, with internet-initiated remittances expected to rise to about 5% of the market.

Looking ahead, one of the biggest challenges faced by money transfer agents who wish to work with banks to provide remittance services is in altering perceptions. Many banks still regard the remittance market with scepticism and believe the potential benefits do not outweigh the potential risks and expense of setting up a remittance business. One sceptic is Chiel Leizenberg, co-founder of Netherlands based payments consultant Innopay. "There is a huge grey area and that is why I think banks are a little bit reluctant because they say, there is a business, but if [a migrant] was able to get a bank account he would probably already have one and then he would not have to resort to money transfer agents to make payments," he says. "Perhaps it is not a real market for banks, it's just a big money flow and they can't touch it because there are perhaps shady reasons why these people don't use a bank account in the first place."

Western Union's Mr Keen emphasises that concerns over the so-called 'shady' aspects of remittances, such as money laundering and knowing the customer, are dealt with strongly by Western Union. "We have worked with many national and international organisations, including FATF (Financial Action Task Force) to help develop anti-money laundering (AML) regulation," he says. "We have invested more than $30m annually over the past few years to continuously upgrade our technology and processes for monitoring transactions and training our agents. I think it is important to correct the misconception that AML compliance is only possible with pre-registration of the customer, and therefore only banks can meet compliance requirements. This is not true," adds Mr Keen. "Western Union's compliance, legal and AML systems and policies are first class and on par with leading global financial institutions."

Banking models

The financial crisis has also restrained banks from entering new markets. "Given the heads-down attitude they've got at the moment, in terms of the financial crisis, many have more important issues on their plate," says one remittances specialist who did not wish to be named. Banks offering remittance services is still an area that is in its relative infancy. "At the moment many banks' remittance services are a bit 'Mickey Mouse'," says the specialist. "Banks simply don't have anything like the up-country distribution network that the global money transfer agents have. All you end up with is a rather traditional banking model where the end receiver is probably an account holder. It's just old school correspondent banking."

When it comes to remittances, the receiver side is crucial. Remittances are sent across the globe to often remote locations beyond the scope of traditional Swift account-based infrastructure. An effective remittance business will require a network that has the scale and scope to reach locations such as these, which by themselves, banks are unable to deliver to.

Once banks have overcome their initial fears of involvement in the remittance market, there are a plethora of strategies available. According to McKinsey's recent report on remittances, banks that wish to succeed in this arena should create widespread awareness that they can offer migrants a compelling range of services, beyond what they have traditionally been used to. "Banks need to create comfortable access points for unbanked or under-banked senders, and highlight their competitive pricing compared to money transfer agents," says the report. "Banks should also aim to strengthen their relationships with new remittance customers [by using] tools including multilingual capabilities, entry-level product packages and financial education resources."

Whatever stereotypes some in the financial services industry still retain, it is perhaps a sign of the times that McKinsey, one of the world's leading management consultants, has produced a report advising on how banks can harness the potential of the remittance market. This would have been unheard of in times gone by.