Bill Postgate points out that failing to investigate the remittance business is a missed opportunity.
Banks are currently missing out on profits by failing to consider the remittance business. There are various reasons for this. Many banks view payments simply as extensions of their other services, not as revenue generators in their own right. Banks may also be wary of investing in a market they do not understand consisting of migrants – who they believe do not fit their target market profile. (Migrants suffer from a bad image, whether they live in Birmingham or the Bahamas.) One large international bank hesitated because it had just completed a major branch refurbishment.
Additionally, there are still gaps in our knowledge of the market. The first official estimates of the flows were in the region of $70bn but these have been revised upwards to $250bn and are still growing; for example, Electronic Payments and Commerce has identified significant corridors into Bangladesh from the Arabian Gulf countries, and from South Africa into its neighbours.
Some banks may feel remittances are a low margin/high volume business. Of course, in themselves, remittances are a simple international money transfer. However, they offer other opportunities for higher margins. La Caixa in Spain has, for example, demonstrated remittances’ potential to attract new business, while Lloyds TSB is building on its corridor to India in partnership with ICICI Bank.
Infrastructure already in place
So what kind of investment is needed? We have been involved in the design of a Caribbean corridor so we have studied the kind of effort needed by an institution considering entering this market. We concluded that most of the technology and infrastructure is in place (on that point, it is going to be very interesting to see how SWIFT responds to this opportunity). The investment required is in creating the support systems and the client interface. Our work and discussions with many market players indicate that a relatively low investment of $3m may do, although the cost of delivering the service in the originating bank could double this.
It is unlikely that there is going to be a single future model. The work done to date clearly indicates that the successful solutions will be quite corridor-specific, such as the Lloyds TSB/ICICI partnership. The biggest issue over developing new corridors remains confidence in the payment to the ultimate beneficiary.
Both the development agencies and the central banks of receiving nations need to focus on building a regulatory and settlement infrastructure that would generate confidence in banks considering such an initiative. There is good work being done at the Bank for International Settlements and World Bank level on the development of core principles. However, much more needs to be done ‘in country’ if the initiative is to succeed.
Variable market
Bear in mind the market can vary enormously. Video stores in the UK have been running remittance services to the Philippines, for example, for years (see Viewpoint), while in Zimbabwe we came across one scenario where the villagers sent their representative to collect remittances from the local bank (he was never a victim of robbery, being the local ‘witch doctor’).
Central banks also differ immensely from nation to nation. In one recent experience, we encountered staggering indifference, which was particularly strange considering that the country in question was a major beneficiary from remittance payments. Conversely, we have recently been engaged with the monetary authorities and industry in South Africa and they are giving the subject very serious attention indeed.
It is important that we address remittances for several reasons. Significant amounts of funds flowing through various levels of the black economy are not in anyone’s best interest. We are not suggesting that every bank stands its strategy on its head to pursue remittance opportunities but that the industry takes a considered view of the remittance market. Equally, we should all be alive to the risks inherent in ignoring this undoubted opportunity.
Bill Postgate is the director of Electronic Payments and Commerce Ltd.
