Mobile International Remittance – Changing Money Transfer
A quite, disruptive revolution is slowly taking place across the globe – mobile international remittance.
The concept of remittance has been around since the beginning of civilization. Throughout history, family members have worked away from where they live and sent money back home to their family. What has changed dramatically now is they way in which these funds are sent and received – by mobile phone.
Remittance – the sending of money to friends and family back home – has long been the domain of the giant Money Transfer Organisations (MTO’s) such as Western Union and Moneygram. To a lesser degree the banking sector has also participated in this industry although for regular remittance, their association has been limited as we shall see below.
International remittance, the sending of money to friends and family overseas, can be separated into three pillars: 1) banks (don’t serve the unbanked), 2) MTOs (slow, inefficient and have high fees), and now 3) mobile international remittance operators (cheap, easy and designed for unbanked).
There are several factors which have disrupted traditional international remittance, why mobile remittance is successful and why it will likely eventually dominate. A combination of need, solutions, and service providers are naturally aligning to produce a perfect storm in this sector.
Money flows from rich to poor countries
Most remittance flows are usually from richer to poorer counties. The real value of money and earning power in rich countries is also far greater than that in poor countries which means that what may seem a small amount of money in a sending country (e.g. USD 100) goes a long way when sent to Africa for example. The high number of bank accounts in rich countries, coupled with easy electronic mobile and online payment options means senders in rich countries now have a greater choice of sending methods.
Poor countries have large numbers of unbanked
The low number of bank accounts in poor countries means that it has always been difficult to have money sent directly to end recipients. This effectively means bank participation in international remittance has been and will continue to be limited. Instead, recipients have traditionally relied on MTO’s and their affiliated agent networks at both the sender and receiver ends where over-the-counter cash-in and cash-out points are used.
Mobile money operators are the channel for terminating funds
The expansion of mobile money services in poor countries means that for the first time there is now a viable and very simple way of personally addressing (or routing) payment directly to an end recipient – via their mobile number. This can eliminate the need for banks and potentially also reduces significantly the reliance on MTOs. While to some degree the same MTO agents are still used as cash-out points, reliance on these will reduce as funds can be spent electronically within the receiving mobile money ecosystem without the need to cash out.
Mobile international remittance requires trusted and complex integration of participating sending and receiving remittance partners. Their systems use real-time transaction processing platforms, which mean funds can be transferred instantaneously – faster than many banking systems operate.
Much lower transaction costs
Real-time transaction processing means operating costs are lower which can in turn be passed on to end users in the form of lower transaction fees. The World Bank estimates that reducing remittance fees by 2-5% could increase the flow of formal remittances by 50-70%. Reducing the cost of sending each individual remittance encourages the delivery of lower value remittances, at values far less than today’s average transfer of US$200.
Fraud and AML
Fraud is constant concern for international remittance. However, there is a strong argument that because mobile international remittance services operate digitally, they are inherently more secure than traditional MTOs which in some cases still employ manual processes at the agent level which may be vulnerable to fraud – particularly at cash-in and cash-out points. Furthermore, real-time digital remittance systems have the ability to impose transaction limits, automatically block, flag or report suspicious transactions, perform real-time transaction screening and identify transaction patterns in the movement of money.
This new paradigm created by international mobile money means that in many markets, regulation has not caught up with services in the market. In some cases, regulators have opted to block or severely restrict the operation of mobile money and also mobile international remittance for fear of loosing control of the financial system. While understandable, this approach is largely unwarranted and potentially damaging to an economy. Evidence has shown that proactive involvement and participation by the regulators to encourage these services is far more successful that a fear and ignorance driven protectionist approach which has the effect of paralyzing the sector and stifling innovation.
For an interesting perspective on this issue and other related mobile money matters see the Jonathan Greenacre paper: The Rise of Mobile Money.