Tuesday, May 5, 2015

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Bringing Down the Cost of Remittances

Lower costs and technological innovations are changing the remittance industry for the better – we should embrace it.
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Mobile money transfer in action. Photograph by the Gates Foundation.

The traditional money transfer networks that dominate transfer routes to Africa are failing the families of migrant workers who rely on international remittances for their livelihoods. The remittance market in Africa is characterised by very high fees that are at least three times those in Asia – a pricing structure that imposes extortionate minimum charges and uniformly poor services.

The root cause of the problem goes back to anti-competitive practices imposed by Western Union on its agents across Africa. As the first mover in the industry, Western Union established long-term agreements with their correspondent agents and imposed restrictive exclusivity clauses that barred them from working with any company considered a Western Union competitor.

With near-monopoly position in many of the key corridors, Western Union was able to set commission fees at prohibitively higher levels than would be found in a more competitive environment.

As a result of these practices, the cost of sending in Africa continues to be high. According to the World Bank, at least the five mostly costly corridors along which to send money are in Africa. Sending $200 from South Africa to Zambia, for example would cost on average $45.87 while sending that same sum from Ghana to Nigeria would cost $44.56. By contrast, transferring $200 from the United Arab Emirates to Pakistan would on average set you back just $4.92.

Responding to effective campaigns staged by African diaspora groups calling for the boycotting of Western Union services, some African governments belatedly addressed these market failures by outlawing the exclusivity clauses. Calling it an abuse of dominant positions that harmed competition, regulators in West Africa in particular have been successful in rolling back the barriers created by these arrangements.

However, while the markets have since opened up and there is more competition in most corridors, banks and other financial service providers that had exclusivity agreements with Western Union have been slow in entering into new relationships with competitors offering lower prices. The existing arrangements benefited both parties, and institutions found themselves facing commercial pressures from Western Union against working with new competitors – those that maintained exclusivity received better terms.

Smart money

Although migrants – particularly those who earn weekly wages – would prefer to send relatively small amounts per week, the high minimum fees have often left them with little choice but to wait for the end of the month to remit comparatively large amounts of money (typically values greater than $200).

In 2009, the Global Remittances Working Group, with strong support from G8 heads of state, pledged that it would:

“work to achieve in particular the objective of a reduction of the global average costs of transferring remittances from the present 10% to 5% in 5 years through enhanced information, transparency, competition and cooperation with partners, generating a significant net increase in income for migrants and their families in the developing world."

As we draw closer to the five-year anniversary of this pledge, there is still a long way to go. The World Bank was mandated to facilitate international efforts aimed at reducing the cost of remittances, but its flagship project – the remittance price comparison website – uses a flawed assumption in calculating the cost of sending $200 and $500 to Africa. It fails to understand that only a small proportion of African migrants send sums of $500 or more, and those that send even $200 tend to do so because of the prohibitive minimum fees.

Indeed, when we remove the high fees and ambiguous commission structure system that confuses users, it emerges that many would rather transfer smaller amounts of money more frequently.

At WorldRemit, we have seen that offering comparatively low fees for transferring small amounts of money results in a lower average transaction value (around $154 to Africa) than the industry average of about $561. When looking at transfers from the UK to Ghana, for example, we found that 60% are below $80 in value, and we have seen huge take-up of airtime top-up, which allows migrants to send mobile airtime without incurring any fees.

Aside from responding to customer needs, lowering the price of remittance to Africa has clear implications for development: according to the World Bank, reducing fees would generate a net increase in income for migrants and their families in developing countries of about $15 billion – this more than the GDP of many African countries.

In Africa, where remittances are an extremely important source of income - at the most extreme end, it is estimated that 40% of Somali households rely exclusively on remittances for their continued existence - the ability to send small amounts of money quickly is crucially important. We see African migrants sending as little as £1 ($1.60) in airtime top-up. Often this is in response to an emergency, where a family member requires the small amount to make an important business call or pay for transport to a doctor, for example. This level of cross-border support was not possible five years ago due to high minimum fees and because transfers could take days to reach their destination.

Mobile money

Undoubtedly, the solution to many of the problems associated with the traditional, inefficient and costly means of sending money abroad lies in the use of new technologies that are revolutionising the way international remittances are conducted. Innovations such as money transfer to mobile wallets, international airtime top-up services and pre-paid cards are beginning to drive down the cost of remitting money, allowing for smaller transactions to be made more frequently.

In Africa, the widespread adoption of SMS-based mobile money transfer is beginning to disrupt the traditional models which have exclusively relied on agents at pay-out locations owned by money transfer networks. Mobile money transfer services enable users to make a deposit into an account stored on their mobile phone, which they can in turn use to buy goods and services or withdraw funds at retail shops that are members of the mobile network. Even some of the smallest mobile phone operators in individual African countries have already established agent networks bigger than Western Union's entire network of agents in Africa.

While organisations in almost every other non-commoditised industry carefully study their target markets and tailor their products and services to meet their requirements, the international remittance industry has made assumptions about its market and created services based on those assumptions. The result has been misalignment between the needs of migrant workers and the options provided by the industry. This needs to change.

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