With an ever-increasing burden of regulation and a significant amount of informal money transfers, the remittance market must adapt and change fast to reduce costs and boost competitiveness by implementing smart compliance solutions. With a sharp decline in global remittances caused by the pandemic, it is more than ever crucial to establish a sustainable and fairer future for all stakeholders, particularly as transaction fees remain high.
Today, technology plays a vital role in facilitating the growth of remittances – allowing existing stakeholders such as banks, agents, and mobile operators to work with multiple money transfer systems providing consumers more options and choices in each market.
Iain Blackwood, chair of QSystems, says the arrival of tech has entirely transformed the market as the agent community – a key part of the ecosystem now chooses to work with multiple transfer systems.
“Historically, when Western Union and MoneyGram monopolised the market, they chose their exclusive partners in say the Philippines, Bangladesh, or Brazil,” says Blackwood. “The bank or mobile operator would become an exclusive agent in a one-on-one relationship with the money transfer system. Technology has blown that monopoly apart. There are now many new entrants and new channels – such as mobile.”
As technology allows new entrants, competition between money transfer systems increases and consumer prices decrease – an essential driver of a more sustainable market for participants and to combat informal remittances.
While national remittance data is far from reliable – with many countries unable to report complete statistics to the IMF or the World Bank – a number of trends are worth noting. For small, personal transfers, remittance costs have reduced on average from 14 to 6.5 percent since 2009, according to the World Bank, although many corridors remain prohibitively expensive – some still between 10 and 15 percent.
High prices generate a market for informal remittances, which account for 35 to 75 percent of official remittances to developing countries, according to the World Bank.
“They are cheaper, illegal, and not regulated. Part of the growth we’ve seen over the recent years is due to people moving from informal, low-cost, unregulated channels into regulated systems as regulations became stricter and prices reduce” says Blackwood.
Smart remittance technology improves the consumer proposition and reduces the cost to consumers, enabling participants to send money more frequently and with greater confidence, which in turn increases the market size and migrates transactions from the informal market.
The implementation of new tech and mobile channels interconnects unbanked individuals using cash-based remittances with the digital world, which meets the long-term needs of consumers and supports financial inclusion.
In 2017, the World Bank revealed that 1.7 billion adults remained unbanked globally – all living in developing economies, with China having the largest unbanked population.
“It’s millions of people disconnected from the digital economy,” says Andrey Aydov, director at QSystems. “We can bring those people in a digital environment for the banks and fintech to start thinking about them as potential clients for mainstream services e.g. loans.”
“If you can digitise the transaction in a way where the value remains in a digital format, it’s in an account on your mobile, for example, or maybe it’s in a bank account, then you can use that digitised value to make local payments for goods and services. A lot of governments see an advantage in that,” adds Blackwood.
“If compliance solutions are deployed on a national basis, they can unify and bring together all remittance transaction data in real-time, which means regulators have significant new options, to manage compliance, FX and relievable risks,” he says.
Digitalising the remittance market can also reduce the regulatory risk faced by regulators. Implementing a modern online AML/CFT solution can fundamentally change how money transfers are verified – from post to pre-verification.
“This means that the national regulator or its authorized body, if it chooses, can make a final independent review of transactions before they are paid out. The system works and has proven effective in two national deployments. We have a clear vision that every money transfer transaction in the global remittance market should be fully traceable and ensure compliance with national and international regulations by marking it with a green token,” Aydov says.
“Hopefully regulators will work with the industry and tech to embrace recent channels such as online, mobile, and social media – enabling them to be both effective and regulated,” adds Blackwood. “Part of the challenge in these markets is that many of the regulations are coming from the US and the threat of sanctions for non-compliance is significant.”
Last year, the remittance market experienced its sharpest decline due to coronavirus. Global remittances dropped by 20 percent, reaching $445bn, compared to $554bn the previous year, according to the World Bank.
Whilst an uptick in remittances is expected this year, Blackwood says the economic viability of existing players and the ability to invest has been largely impacted, meaning the cash-to sector will be particularly less attractive in the short-term, which could reduce competition and decrease innovation. As restrictions across the globe ease and economies recover, tech vendors must ensure they remain close to consumers and clients to anticipate and align the new offerings within the ‘new normal’ – safeguarding the competitiveness of the mark.