Why are remittance payments and cross-border money transfers surging?
By Puja Sharma
A remittance is a payment of money that is transferred to another party. Generally, a part of an individual’s earnings via cash, check, money order, credit card, debit card, or debit instruction is received by e-mail, phone, or internet. It has been growing rapidly in the past few years and now represents the largest source of foreign income for many developing economies.
Because many remittances take place through unofficial channels, it is difficult to estimate their amount. Globally, international migrant remittances reached $596 billion in 2017, of which $450 billion will flow to developing economies. In the balance of payments, an international technology group is currently reviewing how these should be recorded. It is estimated that informal channels account for at least half of all flows unrecorded, according to the report by the IMF.
For delivery of local currency to the beneficiary in another country, a currency-conversion fee is charged by the sending agent and usually paid by the sender.
Cost disruption
Historically, international transfers have been expensive. Money has traditionally been sent across borders via banks, which are, in many cases, the only options available.
The cost of remittances is growing increasingly perceived as excessive. Considering that the cost of remittance services is not dependent on the size of the sum sent, the IMF has suggested charging a fixed fee rather than a percentage. It is likely that the real cost of the transaction – in terms of labor and overhead – is significantly lower than what most banks charge.
There is no doubt that remittances will become even more important as a source of income for emerging economies and financial service providers. For some time, Gulf countries have been in the lead when it comes to remittances. Compared to the US, Gulf countries send more outgoing remittances, with most of them going to countries with fast-growing mobile money markets, such as India, Pakistan, the Philippines, Bangladesh, and Indonesia.
This explains why some 85% of MENA FinTech firms work in the payments, transfers, and remittances areas. Rise, an organization founded in the UAE to facilitate remittances to migrants, is an industry leader in this field.
This year’s Eid-ul-Adha was one of the busiest periods for remittance payments globally, according to Ria Money Transfer. Data shows that since 2016, Eid-ul-Adha is one of the busiest remittance periods, second only to Ramadan. On average, Ria processes around 15% more transactions during the holiday. The company predicts that this trend will continue this year, as the UK’s Muslim community gears up to celebrate an Eid free from restrictions for the first time in two years.
Eid is the biggest holiday in the Muslim calendar, with 1.9 billion people around the world preparing for the festivities. There are over 2.6 million Muslims in the United Kingdom, making up 4.3% of the country’s population. In most countries, it is tradition to send money to families in other countries so they can buy a lamb to celebrate – this is why the value of payments sent is usually higher than the rest of the year, varying from £400 to £2000. Around the world, international remittance payments to low and middle-income countries were estimated at over $600 billion in 2021.
FinTechs being the game changer
Several FinTech startups focused on remittances are gaining traction in emerging markets. They are thus gaining ground on established providers who previously dominated the market. This expansion has been particularly swift in emerging markets, with FinTech funding in the first half of 2021 some 69% higher than the full-year 2020. But more important than policy changes in this regard has been the massive expansion of FinTech solutions during the pandemic, according to the study by the Oxford business group.
Many FinTech start-ups are keen to move into the remittances space, which is seen as having significant potential. Tellimer estimates that 45% of the global fee pool is above the 3% mark and hence ripe for disruption. Meanwhile, statistics firm Statista anticipates that the digital remittances segment will reach $127.3bn in 2022, while by 2025 this figure will be $166.4bn, transferred between some 15.6m users.
The market is increasingly characterised by intense competition on fees, with different apps striving to outdo each other in terms of price reductions.
Some have even cut remittance fees altogether. For example, in October last year leading digital bank Revolut announced that US customers would be able to make 10 free international transfers a month. It followed this up at the end of January with an announcement that customers would also be able to make 10 fee-free transfers to Mexico every month, according to the study by the Oxford business group.
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