The concept of remittances is a tale as old as time.
Fintechs have played a huge role in turning the remittances market into what it is today
During the 19th and 20th centuries, Spain, Italy, and Ireland were all heavily dependent on remittances received from emigrants working abroad in countries like the USA, Argentina, and Australia.
Remittances represent a payment that is transferred to another party, commonly sent by someone working abroad to their family back home. They constitute an important part of the economy, with the transfer of remittances to low and middle-income countries estimated to be worth over $550 billion at their 2019 peak – a sizeable chunk of global GDP. They can also make up an enormous amount of developing countries’ economies. The Philippines, for example, relies on remittances for 12% of its GDP, according to the Asian Development Bank.
Over the past decade, fintech has helped transform international remittances, which traditionally involved lengthy and complicated processes that came with hidden charges. The World Bank’s Q1 2021 Remittance Prices World Quarterly Report found that banks are the most expensive type of service provider when it comes to remittances, with an average charge of 10.66% due to transaction and processing fees, commissions, FX spreads, and conversion rates. Money transfer operators (MTOs), on the other hand, offer transfers at a significantly lower cost of 5.43%.
MTOs and related fintechs have been a game changer and redefined the way people make cross-border payments. They managed to make global remittances faster, more cost-effective, and accessible.
In the early 2010s, remittances represented the perfect entry point to financial services for many fintechs. High costs and complex legacy systems, combined with an estimated $18 trillion of transfers across borders every year, called for the creation of specialised businesses that could improve the status quo and increase competition.
However, today’s remittance market is not only reaching a level of saturation, with less opportunity to stand out, but we are also seeing more acquisitions and fintechs turning into “super-apps” as they add to their offering. This can open access to services such as stock trading or delivery of goods to an audience that never had that opportunity in the past, which ultimately leads to a re-bundling of financial services. With remittance fees in decline and fewer fintechs with specialised solutions available, one could think that the evolution of remittances has come to an end.
But fintechs can’t rest on their laurels. The 2030 Sustainable Development Goals targets of average fees for remittances of less than 3% and no corridors with costs higher than 5% are still far from being reached, and the speed of globalisation means that there will always be new untapped payment corridors.
Continued innovations and adaptations
The challenges the remittances sector overcame in the past are not necessarily the ones that need solving today. The world is undergoing massive changes, with conflicts such as the war in Ukraine and pandemic recovery moving the needle in the sector. The World Bank has seen an 8% jump in remittances to Ukraine as money is sent to support families during the war, while Covid-19 has led to the flow of remittances shrinking by 14% as it slowed global migration. The pandemic has also led to the digital payment options within the remittances segment growing by 10%, changing a model that mostly transferred cash to one that is now almost 50% digital.
This shows that flexible solutions for remittances are needed now more than ever to service evolving customer needs.
With remote working on the rise, the global migration of the workforce will change and affect the future of remittances. This may be that more people stay in their home country while working for businesses in other parts of the world, reducing the need for remittance transfers. On the other hand, these trends might also give younger generations the opportunity to travel the world or move to new countries to work remotely from more affordable parts of those countries, which in turn could lead to money moving in unprecedented directions. These trends will ultimately affect the demand for remittances and need to be considered by money transfer specialists.
The shift in international migration patterns will also lead to new payment corridors that have to be serviced and might make way for young local innovators that will be able to gain market share. This in turn will attract the maturing larger fintechs, which want to expand their network of local accounts around the world and can partner with these innovators to create a more integrated cross-border payment ecosystem.
Further, according to the World Bank, 1.4 billion people worldwide remain unbanked, which creates an opportunity for the remittances segment to include underserved populations by helping them access funds outside traditional banking. This can be done by offering payments into mobile wallets, for example, and making it easier to access financial tools for those in developing countries.
Fintechs have played a huge role in turning the remittances market into what it is today. But we have not reached the best possible solution yet – and will we ever? Fintechs need to keep asking the question: ‘Have we solved this?’ And the answer will keep changing as the world evolves.
by Richard Arundel