The globalisation trends of the past few decades have resulted in ever-increasing numbers of people moving around the world. According to the UN, nearly 200 million individuals now live outside their country of birth. These record levels of migration have fed a dramatic growth in international remittances – money sent by migrants working abroad to family and friends back home. Most of these workers’ remittances are small, but collectively they are worth billions, making it lucrative business for specialist money transfer operators, banks, post offices and other players.
The common stereotype of the migrant remittance customer is of the foreign, penniless blue-collar worker. He or she visits the local post officer or corner shop and sends cash home to family in developing markets. Remittances have in the past been viewed with some suspicion, that mainstream financial institutions have tended to ignore this market due to perceived low margins involved in banking the unbanked. Money transfer operators (MTOs) have dominated the migrant remittance arena, distributing migrants’ cash across the developing world. There are many banks involved in the business through co-operation agreements with MTOs across the world, but to date this is mainly limited to receiver side remittance activity. Times, however, are changing.
Most migrants still prefer to send cash; approximately 80% of the remittance market is cash-to-cash. While cash-to-cash remittances continue to dominate, it is increasingly being viewed as the starting point in what has become known as the ‘migrant lifecycle’. While often migrants begin life in a new country as unbanked, blue-collar workers, banks are increasingly recognising that migrants are an integral part of the national social system, and therefore require formal and sophisticated banking services, just as their regular clients.
The onward march of technology continues to change the market dramatically, where mobile and online services are revolutionising delivery channels. Internet-initiated remittances are soon expected to rise to account for about 5% of the market.
“Cash is still king but more and more people in developed markets are becoming banked and do not have as much need for a cash pay-out,” says Joan Strobel, head of strategy for remittances at Deutsche Bank in New York. “The change is perhaps not as quick as we would like but there is definitely a slow shift from cash towards mobile and online services. It’s a slow evolution but I think that it is coming and I think that it’s going to be a very big part of the future of remittances.”
Banks are increasingly getting involved on the origination side too. “This is happening because the profile of remitters is changing,” says Ebru Pakcan, head of payments, EMEA, in Citi’s global transaction services division. “In the past, immigrants tended to be blue-collar workers, but more of them are getting white-collar professional jobs and opening bank accounts, not only for remittance needs, but broader banking needs.” That means the opportunities are increasing for banks to provide money transfer services – either direct to consumers through their retail arms, or indirectly through the facilities that their transaction banking units offer other money transfer providers.
Migrant remittances are changing in more ways than one. It is not just migrants from developing markets that increasingly want to remit money, but middle class people, referred to in the trade as ‘mainstream customers’, in more advanced economies are too. Typical remittance usage of the mainstream customer is for emergency cash while travelling, child or student support during gap years abroad, special occasions or gifts, and in some cases for small business transactions.
Remittance usage by this customer segment is, however, becoming more conventional. One financier interviewed for this article explained how he used a remittance company to send money to his wife in Beijing. “She was sub-letting a flat and called to say she needed €900 to pay the landlord. A traditional SWIFT payment was going to be very complicated and we thought, let’s try an MTO and it worked like a dream. She picked the money up from a bank in the city,” he says. As further proof of how the world is changing, the woman sub-letting the apartment in Beijing was a Mexican with a bank account in Mexico. “Through traditional channels this would have been a nightmare – but through a remittance agent it was simple,” the financer adds.
Another woman interviewed for this article, a US professional living in London, got so fed up with transferring money between Barclays and Fleet Bank in Boston that does money transfers at the post office. “It is quicker and more convenient,” she says. “I’m not sending over tens of thousands of pounds, it is usually just a few hundred. Why would I pay Barclays £28 to send over £500 when I could just go to the post office and pay £10?” This view is backed up by Deutsche Bank’s Strobel: “For smaller transactions, the ease and cheapness of the service will mean it’s going to be used by a lot more people that don’t necessarily conform to the traditional view of the migrant remitter,” she says.
If banks are to penetrate the remittance market, and capitalise on the opportunity to be involved in a market that grew by almost 9% in 2008 to be worth more that US$300bn, they will need to tailor their products to the thoroughly modern, mobile migrant. A far cry from the cash-strapped, blue-collar migrant of old.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
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This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?