Banks looking to be successful in the £145 billion global remittance face the challenge of developing a pervasive distribution network to service both remitters and receivers.
When the money transfer firm First Solution collapsed in June, the Bangladeshi community in the East End of London was shocked and angry – and none more than Dullah Miah who lost the £70,000 he was going to use to build a holiday home in Bangladesh for his family.
During the company’s meltdown over 2,000 transfers failed to complete with the total loss of close to £2 million – money that was mostly being sent home to relatives in one of the world’s poorest countries.
This tragedy hightlights a qualitative change that has occurred in the global remittance market: remitters, many of whom are migrant workers or immigrants in developed countries, are wiring home much larger sums of money than ever before. As emerging economies develop, there is substantial investment in these countries in mutual funds, directly into stocks or property purchases. Remittances are viewed as high volume, low value transfers, yet over half (52%) of remitters send more than £500 per transaction, according to a survey by ICM and the UK Department for International Development.
Tapodyuti Bose, head of global remittances at Citi Global Transaction Services, says that the increase in value was a good reason for Citi to get into the market. “From a strategic point of view, when we look at our payment business, it is all about flows – mediating flows business-to-business and business-to-consumer in a variety of ways. Remittance flows was one area we wanted to really concentrate on because it is huge in terms of magnitude, and very diverse from point of origination to point of distribution. Entering the global remittance market was a strategic decision,” he says.
Joanne Strobel, payments strategy and infrastructures, Global Transaction Banking, Cash Management at Deutsche Bank, agrees but focuses more on the sheer volume: “The overseas worker remittance market, which is estimated to be around 800 million cross-border transactions a year and expected to grow between 7% and 8% annually, is mainly untapped by the banking industry. Deutsche Bank is exploring a wholesale approach to this largely retail market, concentrating on a few corridors via bilateral and multilateral partnerships.”
Banks are in a better position than other newcomers to enter the remittances market because, as Marc Hollanders, special adviser on financial stability and market infrastructure at the Bank for International Settlement, points out, they already have the infrastructure in branches and networks. He believes that it would be beneficial if the banking industry were to enter the market because it would encourage competition and provide a better service for a better price.
Banks have also already overcome a big hurdle – trust. Consumers trust a bank and it would take new entrants years to gain the credibility of the money transfer giants like Western Union, especially with high profile meltdowns like First Solution.
Citi is currently working with VocaLink to develop a service under the Payport brand that gives people the confidence of using a bank and a service that is integrated into the bank’s channels, so customers can use internet banking, phone banking or mobile banking. The financial institution is acting as a distribution channel into 40 countries, which covers over 85% of the outflow of international remittances from the UK.
But banks also have a number of problems. Stemming from the correspondent banking relationship, money transfers can take days because the banks need to have the funds before they release funds – versus the fast track traditional cash to cash business of remittances. And most banks, even those with as big a global footprint as Citi, Santander or HSBC, do not have the physical distribution network needed to get money from anywhere to anywhere.
Distribution is key because the wider, deeper and easier the distribution method is fundamentally defines the experience for the user. Recently Citi Markets & Banking teamed up with Eurogiro, a low value payments network of postal organisations and financial institutions, to extend their respective payment networks. The alliance will bring together Eurogiro’s 61 connections in 50 countries across the globe with Citi’s existing payment network encompassing over 100 countries (News, page 10).
Financial services firms are also looking to new technology, like mobile, to extend their reach. Earlier this year MasterCard Worldwide and GSM wireless network operators partnered to pilot an international person-to-person money transfer programme. Vodafone has teamed up with Citi to address the remittance market from the UK to Kenya. Citi has also done a similar deal with DiGi Telecommunications in Malaysia.
Bose is clear: “What Vodafone brings is thousands and millions of subscribers for their mobile service. What they could also make available to this wide subscription base are other services, not just telephony, with remittance being one of them.
“It is not only about the origination side where there is a subscription base but about leveraging the distribution side of the mobile networks as well. For example the Philippines is a huge market where mobile phones are more pervasive than bank accounts.”
A big problem for banks is that most remitters are unbanked, whether because of their precarious status in the developed world or lack of banking infrastructure in the developing world. The traditional players in this market have been more of a cash to cash business. But the banks have realised that there is a considerable market there to offer extra services on both sides.
This is where the banks have an edge on the money transfer agents: the increase in money means that receivers need to have a bank account on the other end to hold the money –you can’t walk up to a shop and withdraw £70,000. Hollander calls it ‘bankerisation’ – encouraging people to open an account on both sides –which opens up the ability to offer additional services.
Case study: Unistream targets Armenian money transfers
The money transfer business is growing at 8% per year. In countries such as Moldova, Tonga, Guyana and Haiti remittances exceed 20% of GDP.
For Armenia money transfers have a considerable social and humanitarian significance as the continuous inflow of the funds supports of 40% of local households. In 2006 incoming transfers reached $1 billion and the figure is expected to increase by 35% in 2007.
Unibank (Armenia) implemented the Unistream system of money transfers without an account opening in 2001. The system is based on Unistream Bank, an affiliate of the Moscow Uniastrum Bank. The idea was simple – the market needed an accessible system of transfers designed for the emigrants making regular transfers of small amounts.
“When analysing the market we understood that the main competitors and players in the local market of money transfers were the western systems that were not adapted to the specifics of local consumers. Thus, The Western Union system required that Roman characters were used to fill in the payment documents, which is why the system was not very popular with guest workers,” said Vardan Atayan, the chairman of executive board of Unibank. “And besides, the tariffs set by the western systems were too high. We entered the market and offered a new approach. Unlike the tariff-scale-using western systems, Unistream offered fee at a fixed percent – a commission at 1% of the amount to be transferred. As a result, we have achieved a growth in transfers and increased trust of the population.”
Based on CBA statistical data, Unistream’s share in the local incoming money transfers market is the biggest – above 47% – compared to Western Union, MoneyGram, Anelik, Bistraya Pochta and Express.