The World Bank predicted a fall in global remittances by 20% owing to COVID-19. However, there has been a sharp rise in digital remittances.
Digital remittances grew three-fold from $60 billion in 2014 to $183 billion in 2017, and are estimated to balloon to $277 billion by 2020. Due to a spurt in digital transfers, several money transfer operators have doubled their digital transactions over the past few months.
Forecast: Global remittance volume
Yet, even as digital remittances continue to grow dramatically for some providers, the traditional remittance industry has struggled to digitise flows, mirroring the slow progress made over the past 10 years. Here are three likely reasons:
Income origination is not digital – wages are paid in cash
When wages are paid into a bank account, it is much easier to use a digital money transfer provider. But for a large number of people, wages are still paid in cash. Waiting for their employers to shift from cash-based to digital wage payments is a luxury they simply can’t afford. If they are lucky enough to have a bank account, making cash deposits is the only way forward in many countries currently reeling from recent lockdowns.
Behaviour change is hard – technology has been around for sometime
For instance, all the technology we are currently using to work-from-home has been around for at least the last five years. Yet, only a small percentage of the workforce who could work from home, did so. Now that we have no choice, millions of workers have taken to working remotely from their homes. Similarly, it’s no surprise that despite digital offerings with much cheaper prices, migrant workers continued to use cash-based agents, with whom they have built relationships. Changing one’s behaviour has always been a challenge across all industries, and is probably more so in the case of remittances.
Majority of digital offerings are poorly designed – especially from incumbents
It’s shocking how bad some user journeys are. The cost of customer acquisition is expensive and after getting potential customers to the point where they downloaded an app, losing them right after that point, before they can initiate a transaction, ends up wasting the upfront investment. Improving on-boarding experiences will be important to remain competitive.
The role of startups
In the face of these challenges, new startups are gaining market share. They are finding solutions to these barriers and reaching those who have been slow in adopting digital via superior customer experience.
One such startup is Chipper Cash, an intra-African remittance provider operating in corridors with some of the highest fees in the world. It is among the first remittance providers to not charge any fees at all to send money – even when money has to be sent across borders.
In just 12 months, it has become the largest mobile cross-border money transfer platform in Africa, with over 700,000 users and having processed more than three million transactions on its no-fee, P2P, cross-border mobile money payments product. The company recently announced a strategic partnership with Visa to further step up financial inclusion across Africa.
Another startup is Mama Money, a company that provides a cool, modern, safe and low-cost way for migrants in South Africa to send money home to support their families. It enabled intra-Africa remittances totalling $17.6 billion in 2018. Rather than looking at profit-maximisation, the company directly assists people who don’t earn a lot. Mama Money is designed to help African migrants who have left their homes and their communities in search of better opportunities, contribute better and more directly to their families’ survival and development.
Mama Money’s transaction volumes grew by over 300% in 2019, with the majority of money transfers being below $50.
In the face of these challenges, new startups are gaining market share. They are finding solutions to these barriers and reaching those who have been slow in adopting digital via superior customer experience.
Another example is Eversend, a neobank for Africans anywhere in the world. For Africans and Africans in the diaspora who experience inconvenient and expensive financial services and hidden fees, Eversend is a one-stop financial services hub allowing them to exchange, save, manage and send money at the best possible rates, both online and offline.
“Let me tell you what we’re not. We are not just a money transfer company. I like to refer to us as the financial services marketplace or octopus. Or the Amazon of financial services. We’re an app where you can easily go get something to make finance work for you,” says Ugandan Founder and CEO, Stone Atwine.
Beyond sending money across borders securely, cheaply and immediately, Eversend makes it possible for customers to save, buy insurance, pay bills and get credit – all from a touch on their mobile phones.
And finally, there is NALA, a YC backed fintech. NALA previously used to do domestic payments ‘offline’ in East Africa, and grew its user base to over 250,000 users in less than a year. Recently, NALA announced its new product to enable money transfers from the UK to Eastern Africa. NALA has over 5,000 African diaspora people signed up on its waitlist within two weeks of announcing it.
“Africa is the most expensive continent in the world to send money to, and even in 2020, remittances are still broken. Technology enables automation, increases efficiency, and decreases costs. We see money transfer as a first step to building a bank for Africans globally,” says Tanzanian Founder and CEO, Benjamin Fernandes.
Traditional money transfer operators must step up
Traditional money transfer operators still have a window to remake their business models. In a recent survey by IAMTN and UNCDF, two-thirds reported that their top priority is to focus on digital remittances. Additionally, half the respondents said they will struggle if the crisis lasts more than six months – which it already has.
COVID-19 is proving particularly severe on migrants and their families who have lost their jobs and income. The crisis is driving more digitisation and financial inclusion, with the potential to create financial services for recipients – something no one has previously focused on.
Money transfer operators with scale (millions of monthly active users) have the opportunity to partner with other financial companies to offer additional digital products to change their customers’ lives, including credit, savings and insurance products.
COVID-19 is proving particularly severe on migrants and their families who have lost their jobs and income. The crisis is driving more digitisation and financial inclusion, with the potential to create financial services for recipients – something no one has previously focused on.
Here are some ways these services can be brought to life:
- Most recipients receive money on a monthly basis, and this is effectively a proxy for a salary. When received digitally, the data can be used to provide loans, including emergency or longer-term loans.
- Digital savings can be a safe and convenient place for people to store money. Recipients can be offered savings products, in partnership with a licensed deposit taking institution. Once they opt in to make a contribution from every remittance, the set amount is automatically transferred to a savings account.
- Money transfer operators can also offer insurance products for free as a customer retention tool. For example, after five transfers, a micro-insurance policy is issued which requires one transfer per month to keep the policy active. The value of the policy could also increase every month as the customer continues to use the service.
There is a clear need for money transfer operators to enable low-value or micro money transfers. For years the incumbents have had hefty minimum fees, making the effective cost for micro transfers exorbitant.
It’s time for the model to change, and those who do will recover from this crisis with greater market share and a more loyal customer base.
Arunjay Katakam
Arunjay Katakam is a former EY consultant who has co-founded multiple startups – one of which sold to Twitter. Arunjay is founder and CEO of a London-based cross-border remittance startup called Yooz. He also advises founders at DFS Lab and Catalyst Fund. In 2020, Arunjay created the Inclusion Action Lab, a non-profit that is incubating moonshot ideas to end poverty for the last billion people by 2030. Arunjay is the author of ‘The Power of Micro Money Transfers’ and he co-authored the GSMA’s 2013 and 2014 State of the Industry: mobile money reports and contributed to the 2015, 2017 and 2018 editions.
