Remittances move into the light
With high volumes, strong growth and resilience in the face of severe economic headwinds, the global remittance market is gaining new ground. But banks that wish to capitalise on this growth will have to think hard about what strategy they adopt. Charlie Corbett reports.
The global market for migrant remittances is increasingly being seen by mainstream banks as a fertile hunting ground for steady, resilient revenues and opportunities to grab more customers. As banks recovered from the worst excesses of the financial crisis, it became clear that once unfashionable areas of banking, such as payments and cash management, were holding up impressively in the face of market turbulence. Risk taking is out, and slow but steady revenue growth is back in favour. One area that has been under the bank's microscope is the migrant remittance market. Traditionally dismissed as the domain of money transfer operators, working out of post offices and corner shops, the global remittance industry has taken on a new lustre of late.
Banks are being wooed not only by the sheer volumes involved in this market - in 2008 the global remittance market was worth $305bn according to the World Bank - but its continuing growth, resilience in the face of the global downturn and the cross-selling potential of migrants. Research has shown that over time remittances are more stable than private capital flows, showing a steady rise over the past 17 years. Remittances also tend to be counter-cyclical, meaning that they are stable during economic downturns, in times of political turmoil, or when natural disasters strike.
Partnership approach
This guide will focus on the various strategies that banks are employing in order to tap into the potential of the modern migrant. There are myriad obstacles for banks to overcome, such as a misguided perception of risk within the market, but also the distribution aspect of the remittance market. The biggest problem for banks is not on the so-called 'sending' side of the remittance business, but on the receiving side. Few banks in the developed market have anything like the country distribution networks required to dispense cash in far flung parts of Africa, Latin America and Asia.
The migrant market is also changing. The more mobile migrant increasingly wants the flexibility to deliver the money to different end points - usually in cash.
Chiel Leizenberg, co-founder of Netherlands payments consultant Innopay, says that banks and money transfer operators, rather than competing for the custom of migrants, are increasingly looking at partnerships. "There is no worldwide inter-bank infrastructure to facilitate these money flows. Because most of those on the receiving end of these transactions are not banked, so the banking network does not help them and they need something else," he says. Money transfer operators, however, have myriad end points and in many cases act as a bank for those receiving the cash.
PSD effect
The introduction of the Payments Services Directive (PSD) will also have a dramatic impact on banking in Europe. This guide will explore how the market will change as a result of the PSD, and in particular how new regulated payments institutions will co-exist alongside banks. What impact will this all have on the remittance market in Europe and will it increase competition or encourage partnerships? This is a question many banks would like to answer and is explored in more detail later on.
The world of remittances is changing, as is the profile of the migrant remitter. This guide will also explore how migrants in developed countries are becoming more sophisticated, taking advantage of new technologies such as online and mobile telephone services, as well as offering big opportunities for banks to cross-sell products as they become more formalised in their new countries.
Finally, the image of the remittance market as a 'shady' area with large inherent risks will be revaluated, particularly in the area of anti-money laundering (AML). According to Western Union, this is an area the firm takes very seriously indeed and huge steps have been taken in order to mitigate the risks. The firm collaborates with law enforcement agencies across the world and works with many national and international organisations, including FATF (Financial Action Task Force) to help develop AML regulation.
