Migrant remittances are no longer the petty cash of the global financial system. With recorded remittances the second largest source of external financing in developing countries after foreign direct investment, and 10.1% annual growth pushing official flows to a forecast $345bn in 2008, money transfer is big business with big growth potential.
Western Union, the biggest provider, says there are now 191 million people living outside their country and this is expected to grow to 280 million by 2050.
But, as remittances expand and spending potential increases, are banks tapping into this rich seam of banking prospects? A recent study conducted by Visa shows that the remittance market in Latin America and the Caribbean reached $52bn in 2005, a 15% increase over 2004. But while 50% of remittance volume to the region is distributed via financial firms, only 11% is received in bank accounts; the remainder is distributed in cash. The benefits of banking have still to be fully explored and many markets remain largely unbanked.
Piece of the action
Nevertheless, banks, established providers and new technologies are looking at the expanding global market and trying to grab a slice (see page 196). Compared with many of the informal systems, such as hawala or hundi, banks can be more expensive and take longer. Also mobile phones, in markets where they are used effectively, such as India, are having an impact but do require bank accounts.
With new players, such as PayPal, and new card-based services, the only certainty is that money transfer is in the midst of significant change, and traditional providers, such as Western Union, with its network of 270,000 offices, are facing stiff competition from a variety of sources.
Banks can see the value in increasing their customer bases and remittances offer them an entry point at both ends of the transaction. Costs for customers have been declining and many major banks have been offering free transfers to attract business. With higher regulation costs, banks face tough challenges to make remittances profitable. But if they do not rise to the challenge, they risk losing huge potential retail markets of the future.
