Authors : Ben Isaacson
January 01, 2011
In the booming global remittances market, banks can capitalise on their strengths in global payments and harness new banking products and technology. This is true whether they decide to compete against money transfer organisations (MTOs) and exchange houses in banked-to-banked transactions or partner with them on the sending side. By leveraging Internet service and distribution capabilities, the low-cost infrastructure afforded by reloadable prepaid cards and mobile technologies, as well as their access to superior foreign exchange (F/X) rates, banks can gain share.
* After achieving $443 billion in global gross dollar volume (GDV), remittances are projected to grow by 9.2 percent in 2010 to 2011.1
* While banks handle 70 percent of receiving volume globally, MTOs have the largest share of sending volume.2
As remittance pioneers, MTOs built significant infrastructure on both the sending and receiving sides of key remittance routes (called corridors) in response to consumer needs.
On the sending side, MTOs provide convenience, payment assurance, and multiple language capabilities; on the receiving side, they made it possible for clients to receive money in places where banks simply didn't exist. The increase in banked consumers reduces the importance of MTOs' distribution network, formerly their great advantage on the receiving side. On the sending side, the advent of the Internet and innovative bank-sponsored products, such as general purpose reloadable prepaid cards, mitigate MTOs' advantages, or at least make banks attractive partners for MTOs. These technology advances will not only allow banks to solidify their advantage with white-collar workers, who are mostly banked, but to capture share with blue-collar workers, who (even if banked) tend to remit through MTOs/exchange houses.
The remittances market is large and growing, representing an attractive opportunity for banks in both sending and receiving markets. In 2008, globalremittances stood at $443 billion, with $315 billion, or 71 percent, flowing from the developed world to developing economies. 3 After a slight decline in 2009, MasterCard expects remittances to achieve positive growth in 2010 (see Figure 1). New payment providers and facilitators are also entering the market, contending for customers across all segments. As the competition increases, the providers that best meet evolving consumer needs will win.
This paper will show that banks are now in an excellent position to meet these consumer needs, whether the banks go it alone with an end-to-end solution for banked senders and receivers, or partner with MTOs for a hybrid solution. Indeed, the challenges facing the remittance world parallel those in more traditional consumer banking environments: It all comes down to moving share from paper to electronic payments. This is one of the reasons banks are so well suited to be the long-term providers of remittance payments.
Currently, the main drivers of global remittance growth are:
* The shift from informal to formal electronic channels of payment
* An increasing reliance on the part of developed economies for labor from the developing world
The first of these drivers reflects efforts on the part of banks and governments globally to expand access to banking. Their changing policies are catalyzing bank access and making remittances easier.
Meanwhile, rising demand for low-cost labor from developing economies enables those workers to find work and send their wages back to their home countries.
In order to better understand the dynamics of the remittance opportunity, this paper focuses on two of the world's largest corridors: the United Arab Emirates (UAE) to India and Singapore to the Philippines.
United Arab Emirates to India: India is the largest recipient of remittances in the world, receiving $49 billion in 2008;4 $6.2 billion or 12 percent of this amount comes from the UAE. The flow of funds from the UAE to India is the most important corridor for the home country, representing 27 percent of the UAE's remittances.5
Singapore to Philippines: Despite the global downturn, remittances in the Singapore-Philippines corridor totaled $6.98 billion in the first five months of 2009, growing 2.8 percent over the same period in 2008.6 Successful initiatives on the part of the Philippine government to increase the banked population have mitigated the need to build receiving infrastructure to serve remittance customers. Seventy percent of total remittances to the Philippines is destined to banked recipients, compared to 50 percent in 2005.7
The size and favorable market dynamics in these two corridors make them ideal focal points for banks looking to increase their remittance business. While there is still significant work to be done to unseat incumbent providers, banks can capture share by capitalising on existing strengths to meet consumer needs.
Consumers in the two remittance corridors share many remittance needs. They need to transfer money quickly and inexpensively and want a system that makes obtaining the funds easy for recipients. These needs can be divided into three categories: the end-to-end payments process, service reliability, and customer service (see Figure 2).
The end-to-end payments process - including accessing the bank or exchange house, wait time, and documentation needs- should be as painless as possible. The reality, however, is quite different. Senders find it difficult to gain access to banks or exchange houses, encounter long wait times at the physical location (sometimes in excess of half a day), and face complex documentation demands.
MasterCard research shows that service reliability-the ability to guarantee that money will be received safely and without incident-is a major driver of consumer choice, as fraud and robbery are well-founded concerns.9 When dealing with trusted remittance providers, consumers are more likely to believe a real-time alert (such as an SMS) telling them that the money has been transferred. In this regard, banks' and their technology partners' reputations for reliability give them a big advantage. Many MTOs are not able to send real-time authentication messages, so consumers require nothing less than cash in hand to believe the remittance has gone through.10
Customer service is also essential, including a system for tracking funds in the event of disputes, convenient hours of operation, representatives who speak the customers' language, and a method for properly collecting essential customer details.
United Arab Emirates to India
In the UAE-India corridor, two major types of remittance providers compete with banks for consumers' business: MTOs or exchange houses (which partner with a variety of MTOs) and hawala (see Figure 3). There are over 100 MTOs operating in the UAE,11 with vast differences in size, service, and pricing. The largest players, such as Western Union, tend to be the most reliable but also the most costly. Other providers compete on price, but with lower reliability and more limited options.
While banks in India receive fully 75 percent of remittances, on the UAE sender side, MTOs are the dominant provider. Blue-collar workers, who make up between 65 and 70 percent of Indians in the UAE, mainly remit from MTOs to bank accounts in India. MasterCard estimates that hawala makes up 20 to 25 percent of the market.12 The dominance of MTOs on the sending side becomes clearer in light of the competitive landscape. In terms of consumer needs-the end-to-end payments process, service reliability, and customer service-MTOs outperform their competitors and are uniquely positioned to serve blue-collar workers, especially with regard to customer service and local language support. As a result, banked senders remitting to banked receivers represent the most promising prospects for banks seeking to take market share in remittances. However, even banked customers will send remittances through MTOs due to better infrastructure on the sending side.
Regarding the features that matter most to receivers-reliability and ease of receiving funds-banks and hawala operators have different strengths. While hawala boasts a superior delivery network and no taxes, they are also illegal and do not comply with foreign exchange requirements. Therefore, consumers view banks as more reliable and secure. White-collar workers who wish to
transfer large amounts of money also prefer banks, as remittances to India via MTOs are currently capped at $2,500. For banked senders who have access to e-banking, bank-to-bank transfers are the most robust option.
An analysis of various pricing schemas shows that current bank pricing clearly favors white-collar workers with high-value remittance needs, as shown in Figure 4. By moving consumers who do not require high-value services to online channels or alternative products, banks can reduce these pricing discrepancies while maintaining the exclusivity of the branch. Leveraging online channels- without the costly service infrastructure that MTOs have put in place-can give banks a cost advantage that should allow them to offer lower prices than MTOs.
Singapore to Philippines
In Singapore, the three major remittance providers are MTOs/exchange houses, mobile phone companies/telcos, and banks (see Figure 5).
Initiatives by the Philippine government have brought the banked population to 70 percent, making blue-collar workers-who typically have preferred using MTOs because of their speed and foreign exchange capability-attractive prospects for banks. While many banks have partnered with MTOs to capture pieces of this opportunity, these partnerships require banks to share revenues and often rely on MTOs to set pricing. However, banks offer MTOs many attractive reasons to join forces, including security and F/X cushions unavailable to non-banks. Just as important, partnerships allow receiving-side banks to get their brand and service story in front of a large portion of the remittance sending population.
For these reasons, in this corridor as in others, e-banking is the optimal choice for the banked-to-banked segment, which values reliability and security as well as convenience and price.
Using the banked receiver population as a revenue base, banks can leverage technology to grow their business on the sending side and take share away from both MTOs and hawala, while keeping the option open to partner with the former for the business of the unbanked. In competing against MTOs, banks should promote price, speed, and convenience. To unseat hawala, banks should emphasise security and legality of transfers, which should outweigh the tax advantages hawala offers. In making the decision whether or not to partner with MTOs and exchange houses, banks must keep in mind that while the increase in the size of the banked population neutralises the investment MTOs have made over the years in a receiving infrastructure, their investments on the sending side are more difficult to overcome.
Counteracting specific MTO advantages may require banks to offer some new services, while others will draw on core bank competencies. Banks need to identify the areas in which they have a cost advantage over MTOs-and can afford to reduce margins-versus the areas where they need to enhance capabilities. A range of potential solutions that address key needs is provided in Figure 6; naturally, it is up to each bank to build the solution that makes sense for them.
Capitalising on Banks' Core Competencies
Global payment capabilities. Through direct payment or bilateral agreements, moving money globally is a core bank competency-and something they ought to be able to do more cost-effectively than other businesses. The largest global banks have an edge here, which manifests itself in three areas:
* Direct access to payment systems
* F/X rates
* Multicurrency reserves
For banks that rely on correspondent relationships for access to the networks of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), assurance and reporting of payments aren't always seamless.
Additionally, for larger banks, access to F/X trading desks and spot rates should give them lower-cost F/X transactions than any but the largest MTOs can provide. Banks that don't have significant global banking infrastructure won't be quite as well positioned relative to their competitors.
That said, in order to mitigate daily F/X volatility, global banks must have sufficient currency reserves in each remittance denomination to equal out thedaily gains/losses in individual markets. Establishing the global infrastructure and keeping currency reserves big enough to manage this volatility are both expensive and complicated. On a practical level, banks that haven't already undertaken this initiative as part of a separate global treasury services business are in no position to start now. This makes it difficult for all but the largest global banks to capitalise on the inherent advantages that banks have over MTOs. However, as alternative payments systems build remittance capabilities, national banks can benefit from direct access to a truly global clearing and settlement system. For example, by December 2010, all Maestro cardholders in the Philippines will be able to have remittances deposited directly into their bank accounts.
Alternative networks also have a distribution advantage over the current infrastructure. Western Union, the largest MTO in the world, has 410,000locations worldwide.13 However, with over 1.7 million ATM locations around the world as of December, 2009,14 MasterCard provides more than four times as many outlets for consumers to withdraw cash. Domestic banks may feel the need to price their remittances higher in order to provide a large enough spread to cover F/X risk. Nonetheless, when compared with MTOs, even domestic banks enjoy cost advantages. What is often different is risk tolerance. While banks may need to charge a premium for higher-risk services, their lower cost structure relative to MTOs puts them in a good position to conduct a profitable remittance business.
Secure money transfers. The stringent regulatory environment for banks is designed to ensure that the banking system is secure from fraud, money laundering, and financial loss. Banks can leverage their trusted brands and superior technology to provide consumers with the comfort of reliable transactions through real-time communications indicating when a remittance has been received. If banks and other parties in the transaction (including the technology providers) are perceived as trusted brands, consumers are more likely to utilize banks than most MTOs or hawala.
Through Sending-Side Innovations
Banked senders remitting to banked receivers is currently the target for most banks competing in this market. However, as mentioned earlier, even banked customers will send remittances through MTOs due to better infrastructure on the sending side. Banks looking to break through this barrier can capitalise on the following opportunities:
Enhance self-service and electronic capabilities to provide extended hours and better service. Online and mobile capabilities provide an elegant solution to this challenge by helping banks solve service issues without necessitating costly branch infrastructure investments. Additionally, online solutions can store key documentation information, providing a faster and more efficient user experience than consumers encounter offline, where they must complete extensive forms for every remittance.
Extend bank reach on the sending side through new products such as prepaid cards. As prepaid card functionality continues to improve and channels extend to online and mobile, reloadable prepaid solutions can meet the needs of unbanked remittance senders and receivers.
Reduce the need for multi-currency account maintenance and investment through partnering. For banks that have not been able to
justify the investment required to maintain sufficient currency reserves to manage F/X volatility in all remittance markets, finding a partner that isalready doing so is critical. Whether it is another bank or a non-bank financial institution, the critical success factor is the ability to transfer F/X settlement risk while minimising the impact of the partnership on the consumer.
The Optimal Solution
A comprehensive, sender-based solution that would allow banks to serve the largest share of this market without significant investment would have the following components:
* For both banked and unbanked senders, online and/or mobile capabilities can achieve critical service goals, such as providingextended bank hours and language support without requiring costly branch infrastructure changes. An electronic option can also address keydocumentation needs by storing all necessary information after initial instance. This can allay consumer fear of fraud, an important outcome, as some of the desire for speedy remittance is actually fear of theft.
* For unbanked senders, in addition to online and mobile capabilities, ''lite'' banking platforms based on reloadable prepaid accounts offer banks the ability to compete for this segment without establishing significant incountry physical infrastructure.
* Partnering with employers to provide payroll cards with payment functionality will allow otherwise unbanked consumers the ability to use banks for remittances and will provide a built-in distribution channel. Developing an attractive pricing structure with partner MTOs and exchange houses can make this advantage even more compelling for the unbanked and pry them from hawala.
The changing banking dynamics of countries on the receiving end of remittances, in combination with new technology, make the future of theremittance business very attractive for banks. While there will still be segments of the population that banks won't be able to serve profitably on their own, partnerships offer them the opportunity to gain a portion of the revenue they would have otherwise missed altogether. Innovations in electronic and mobile channels as well as prepaid functionality give banks a path forward that doesn't require heavy branch infrastructure investments. The ongoing migration to electronic payments will make this opportunity even more appealing, and as banks formalise the remittance market, all parties-consumers, businesses, and governments-will benefit.
1 World Bank, 2010.
2 World Bank, December 2006 and 2009; MasterCard and Synovate analysis.
3 World Bank staff estimates based on the International Monetary Fund's Balance of Payments Statistics
4 World Bank staff estimates based on the International Monetary Fund's Balance of Payments Statistics
5 World Bank, December 2006 and 2009; MasterCard and Synovate analysis.
6 World Bank, 2009.
7 World Bank, December 2006 and 2009; MasterCard and Synovate analysis.
8 MasterCard research conducted by Synovate, 2009.
9 MasterCard research conducted by Synovate, 2009.
12 MasterCard estimates based on research conducted by Synovate, 2009.
13 Western Union Company website, as of May 2010.
14 MasterCard 2009 Annual Report.