The remittance industry is one of the largest global business verticals, and the numbers of global cross-border remittance volume are ever-growing. As the world population continues to become increasingly globalized, migrants are continuing to look for higher paying work outside of their home country’s borders to help support their families. This is the primary base of the entire industry, which was recorded to have globally remitted approximately $583 billion in 2014. Still, in an industry this large, there are several areas where there’s room for growth.
Migrant workers continue to battle transfer fees.
The pain points that migrants are experiencing are primarily a result of hefty fees that banks and money transfer operators apply to transfers. For migrant workers looking to support their families through higher incomes abroad, these fees pose an unfortunate hurdle. However, this may not be the case in the near future.
As the world population becomes more and more digitalized, a number of digital-first startups and third party money transfer services are disrupting the remittance industry with a new focus on providing more affordable remittance services to migrant workers. Remitly is an excellent example of this new, digital approach to remittance. They offer low fees, locked-in exchange rates, and a user-friendly experience via their website or mobile app. Other examples of new remittance startup companies include WorldRemit and TransferWise, as both companies take a completely digital approach to remittance.
Their person-to-person system makes sending and receiving funds fast and easy, which is what individuals are looking for when they’re trying to support loved ones in another country. Remitly is only one of many companies taking a more digital approach to remittance. As a result, banks and established money transfer operators are being forced to keep up by looking to lower fees and increase accessibility. As the demand for simpler, more affordable remittance options increases, the availability of these resources is expected to increase, as well, with the possibility of there being widespread fee-free options in the near future.
Despite technological advances making transfers easier and generally more cost-effective, there are still some drawbacks.
Although online remittance companies offer lower client-risk, people are still at risk of being involved in a scam when they use brick and mortar remittance services such as Western Union or Moneygram. Because these brick and mortar establishments have been failing to keep up with the technological advances of online remittance companies, they’ve been unable to reduce their client risks.
However, even though online remittance companies are effectively cheaper and less risky than brick and mortar operations, they also have their own limitations. In order to make their operations more cost effective for customers, online remittance companies do not accept cash and do not send money to or from high risk areas, like Nigeria. This limits the range of people who can use their services, excluding the poorest members of the migrant working class who don’t have a bank account, and those looking to help loved ones in high risk areas. That means that currently most of the remittances companies are giving up on significant portions of their clientele. Transferwise, which is the best known startup in this industry reaches less than 10% of its “real” target audience.
Overseas sellers are losing out to exchange rates.
Migrant workers are not the only ones who are suffering as a result of the high fees levied by traditional institutions. While migrant workers need to use services like Moneygram or Western Union, most online sellers who sell abroad rely on their selling platform (such as Amazon, Ebay, Ali, Etsy) to exchange funds for them to local currencies.
Amazon foreign currency payments are expensive almost as much as sending the funds via Paypal. They charge up to a whooping 4% markup on the exchange rates which is a massive chunk of the online seller revenues.
This area is also being completely innovated by companies like OFX, World First, Currencies Direct, Payoneer, and a few other payment companies which are geared at business clients rather than immigrants.
With the demand for digitalization comes the demand for transparency.
As those involved in the remittance industry begin to demand lower fees and a more user-friendly digital experience, a need for transparency in remittance transactions will take precedence. For a money transfer service, either a bank or a separate licensed entity, to be transparent, information must be provided to the consumer.
While transparency in any industry can be difficult, especially when global finances are involved, but is necessary just the same. Fees, exchange rate margin, types of services, speed of transfer, etc. are all factors that need to be clearly expressed to people who are sending money – with an emphasis on “clearly.”
The downside of businesses and banks working to prove they are truly the cheapest, most effective option, for money transfers, they can work to intentionally cover the true facts and figures that impact those who are using their services. This is negatively impacting new digital-first startups, as they have to work to not only prove that they’re the least expensive option for users, but also that the figures users regularly believe to be accurate transfer costs from established money transfer services are inaccurate.
All that said, what’s the big picture?
Even though digitalization has it’s unarguable drawbacks, it’s overall making a positive and hopefully lasting impact on the remittance industry as a whole. From fewer and lower fees to a more transparent process for people looking to send money, as the industry continues to move forward and become increasingly technologically advanced, more benefits and increased ease of transactions will undoubtedly come with it.
As fees become less and less, possibly even nonexistent in the near future, companies will look to monetize in other ways by offering a wider variety of financial services, products, and software programs that could benefit the niche group of migrant workers, or online sellers, who are regularly sending money.