Global remittances — connecting payment systems across borders

Remittance — sending money across international borders back to family — is a massive contributor to the global economy. According to the World Bank, $689 billion was transferred in 2018, growing 8.8 percent from 2017. Considering that the bulk of these funds flow to low- and middle-income countries, these transfers now represent these countries’ largest source of external financing.

As globalization expands and introduces more opportunities for migrant workers, and because these opportunities pay significantly higher wages than in their home countries, remittance is primed for considerable growth. However, complex international payment systems and the resulting higher fees contribute to a major drag on the sector.

How can remittance companies improve their cross-border workflows, create better experiences and outcomes for customers, and ensure that the necessary security and compliance measures are in place?

Long and winding payment chains

Consider the international money transfer ecosystem: multiple parties in multiple jurisdictions, with different markets, different technologies and varying social attitudes to money. Any cross-border money transfer needs to securely transfer funds between two individuals across time zones and languages using these convoluted payment networks that are have their own agendas, processes and procedures.

If remittance is sent through banking services, often the sender’s bank has no direct payment connection with the receiver’s bank, thus requiring at least one intermediary financial institution, if not more. This adds time and fees as each bank has to ensure transaction validity, set aside enough funds to cover the transaction plus exchange fees and, of course, include their commission. If any questions arise in the process and require clarification, the whole process stalls further.

The same general rule also applies to money services businesses or other remittance providers; the more parties in the payment chain, the longer it takes for the receiver to get their money and the higher the transaction costs. While the UN Sustainable Development Goal calls for a transaction fee of 3 percent, average transaction fees to send to low- and middle-income countries are 7 percent, and it goes to over 10 percent in some remittance corridors. For example, if a foreign worker sent $1,000 back home, their family would only receive $900 in those high-fee corridors; these costs and delays have real-world impacts on how people pay rent, buy food and conduct other economic activities.

Overcoming legacy technologies and systems and creating more direct and quicker payment channels is a massive opportunity for those remittance providers who can deliver, but it is also a way to fundamentally help people out in their daily lives. It’s important to note that overall revenue from transaction fees and foreign exchange is up to $200 billion globally per year and remittance is a key driver of growth.

The promise of online money transfers

Any information system that relies on paperwork, old communication standards and physical locations is ripe for innovation. Thus, it’s no surprise that remittance channels are increasingly going digital and using online and mobile technologies.

Traditional money transfer operators (MTOs), which have built up vast networks of agents in locales around the world, can provide digital options to those that are online while still providing wide access to those that aren’t. For example, Western Union, the money transfer giant, continues to expand its digital money transfer services, which is the fastest growing part of its business.

Well-established channels, such as banks and MTOs, can clearly see the rise of fintech operators who are quickly gaining adoption. Consider TransferWise, the fintech international money transfer service, which already has a 7 percent market share, making it the second largest player in the remittance industry. Their announcement of connecting with Alipay, offering the ability to send Chinese yuan to more than 1.2 billion people worldwide, is a whole new level of opportunity.

As mobile technology continues to make inroads into developing markets, the option to transfer money from mobile to mobile is becoming commonplace. One company that is heavily involved in these transfers is WorldRemit, which according to their website processes 74 percent of all international money transfers to mobile money accounts sent via money transfer operators.

Another business offering digital cross-border money transfers is InstaReM, a Singapore-headquartered fintech company that has built a payment mesh stretching over 50 countries and counting.  Driven by its mission to democratize payments across the world, InstaReM is committed to building a large and ubiquitous payments network, and offering its clients an easy and seamless digital experience.

The advantages of mobile money transfer — such as wide availability, encouraging new entrants to the industry, better personal control of the account by the end user, as well as all the advantages of digitalization — make it an area to pay special attention to. Developing apps or other mobile approaches is almost a necessity for any player looking to grow their business.

Other technologies are appearing on the horizon, promising to disrupt the industry even more. Specifically, cryptocurrencies, such as Bitcoin, or central bank digital currencies (CBDCs) offer the promise of almost instant transfers at extremely low transaction fees. At this point, the impact of crypto on remittance is unknown and CBDCs are still TBD.

Pump the brakes and hold the horses

While the promises of technology for remittance are wonderous, it’s important to understand that there remain major educational, social and economic barriers to adopting various online and mobile money transfers. After all, there are still people in developed countries who hide their money under their mattresses as they don’t trust banks or technology. Changing people’s habits and beliefs is exceedingly difficult, especially when it comes to money.

There’s also the thorny issues of security, accountability, legality and compliance. Developments in technology always seem to pace ahead of the frameworks that ensure fairness, trust and safety.

How do you ensure that the correct individual is getting the transfer? How can you stop illegal funds from entering the financial system from your services? How can you prove to various regulators, partners and customers that you are a trustworthy service?

These issues can’t be afterthoughts, secondary to amazing technology. Rather, these are fundamental operational considerations that will materially impact the success of your business. According to Chris McCann, General Partner at Proof of Capital, in his article “Remittance Market — Primer and Landscape”:

“What most startups don’t realize is the cost of transferring money is not the most expensive part, but rather compliance costs. It is inherently difficult to ensure money is being sent compliantly in multiple jurisdictions 24/7, which is why 20-40 percent of the remittance cost is due to compliance alone.”

Systems for online compliance

As digital-first money transfer solutions are fundamentally altering the remittance market, so should digital-first compliance solutions. Compliance technologies that seamlessly plug into complex workflows will make global remittance companies more able to scale, quicker to adapt and more responsive to user needs.

Providing account opening processes that are reasonably quick while implementing the necessary compliance and security measures will help get customers transferring money, not looking for alternatives. Simultaneously, these processes protect all parties involved and help create a layer of fundamental trust that contributes to success.

Effectively providing global remittance starts with a person and ends with a person; meeting their needs is at the core of the service. Connecting payment systems is, in effect, about connecting people. With the right payment channels, technology and experience, digital remittance solutions can impact lives, create growth and build a more inclusive, prosperous world.