Remittances – how the banks missed out - Editor's Blog -

Banks are looking to tie-up with the new players in the remittance business that have made sending small sums of money cheaper and easier. But, asks Brian Caplen, what’s in it for them?

The global remittance business is booming. The World Bank estimates that remittances to low- and middle-income countries hit $466bn in 2017, an 8% increase on 2016. With migration continuing to rise, the flow of money from countries such as the US to developing regions can only carry on upward. The top recipient countries are India with $69bn, then China with $64bn, Mexico ($31bn), Nigeria ($22bn) and Egypt ($22bn).

As with most financial services these days, the remittance business is being transformed by an influx of new digital players such as Transferwise, Payoneer and Pangea. The banks may be less worried about this threat from fintechs compared with some others because they never really conquered the low end of the remittance business and left the major spoils to specialist operators such as Western Union. All the same, they are now faced with going cap in hand to the new players if they are going to benefit from the spin-offs of this dynamic business.

These new players are large so a tie-up could be costly.

The kind of fintech that can penetrate the remittance market successfully is not “just two guys in a garage”, as Pangea’s vice-president for global partnerships, Joshua Gordon-Blake, puts it, because it involves substantial costs in acquiring licences (in the US each state requires its own licence) and in marketing. “You can’t just build it and wait for people to show up,” says Mr Gordon-Blake. Pangea uses a combination of social media, ads on Spanish language TV and brand ambassadors at community events to promote itself.

So the companies making headway in the remittance business are substantial and are gaining ground through being digital, focusing on mobile and apps, having lower costs and, crucially, charging lower and more transparent fees than the incumbents. This makes it attractive for users to send small amounts frequently without incurring huge delays and charges.

In this respect the new players are leaving the banks behind. Average fees charged by banks are 11% whereas money transfer operators are at 6.1%, and many lower than that, with pressure from bodies such as the UN to get costs down to 3%.

Pangea’s Mr Gordon-Blake says that the company has been approached by a numbers of banks about working together but is so far undecided about going in this direction.

This is understandable since many banks have a poor record in delivering remittance services, whereas the new players have made the whole process cheap and easy. Banks should have seen the value in this business years ago and not let it slip from their gasp. As with the current account, a regular user of remittance services is someone who can be sold a heap of other financial products.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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