Moving Money: Capturing the Digital Remittances Opportunity
Visa has seen high growth in person-to-person (P2P) flows, payroll flows and government benefit flows during the past year. For example, during fiscal year 2020, P2P transactions saw a 75% increase globally as more people exchanged funds virtually.1
Across Central Europe, Middle East and Africa (CEMEA), small businesses and merchants are discovering the benefits of receiving fast access to their funds to improve cash flow through Visa Direct, Visa’s capability for pushing funds directly to a card or bank account.2 In the wake of COVID-19, more governments are adopting Visa Direct to distribute funds quickly, safely and broadly, often reaching the unbanked with prepaid cards.3
What the pandemic has highlighted is that some forms of payment and transactions, like cash and cheques, are no longer the preferred payment forms for many consumers. For instance, more workers seek to access their earned wages between pay days, in lieu of waiting for payment on the traditional weekly or monthly cycle. Real-time access to earnings can be a lifeline for these workers, allowing them to meet immediate needs for themselves and their families, near and abroad.
The same holds true for cross-border remittances – international money transfers typically made by overseas workers to send money to their home countries, which are the focus of this article. These monetary lifelines sent by overseas workers back home are hugely important for millions of families around the world. Over 250 million overseas workers use remittances to send financial support back to their countries of origin, and the United Nations believes one in nine people globally could be supported by them.4
The pandemic has catalyzed the shift to digital remittances
Although digital remittance options have been available for some time, the market has been slow to evolve. Physical cash-in, cash-out transactions dominated the market – with the sender visiting a local money transfer agent and handing over cash, and the recipient visiting the corresponding agent in their home country to collect cash.
The net result was millions of people spending precious time traveling to their physical agent location, standing in line, and providing details of the money transfer (country, receiver information, and channel).
With the impact of lockdowns, and the closure of physical agents during the COVID-19 crisis, consumers quickly shifted to online and mobile channels to send remittances back home. Some of the largest money transfer organizations reported triple-digit growth in digital remittance transactions and customer acquisitions, suggesting a shift that will have long-term sustainability.
Acknowledging the importance of cross-border remittances
Remittances are extremely important for many countries around the globe. Every year overseas workers send hundreds of billions of dollars5 to their home countries. A report by the Visa Economic Empowerment Institute (VEEI)6 shows that 28 countries received more than 10% of their GDP in remittances in 2019, and remittances to low and middle-income countries totaled $554 billion in 2020, exceeding the amounts for foreign direct investments ($259bn) and overseas development ($179bn).7
While these funds are important for many countries, they are vital for many of the families involved. As the Migration Policy Institute puts it, “Besides pure monetary gains, remittances are associated with greater human development outcomes across several areas such as health, education and gender equality. This money acts as a lifeline for the poor, increasing income for individuals and families. Research on the impact of remittances in particular settings show such effects as lower school dropout rates and increased average birth weights for children born to remittance-receiving.”8
The CEMEA region sees significant remittances flows, both inbound and outbound. Egypt, Pakistan, Nigeria and Ukraine rank among the top ten countries worldwide for receiving remittances, while Saudi Arabia and the UAE, together with the USA, make up the top three countries of origin for remittance payments.9
The opportunity to send remittances home is one of the most important motivations for overseas workers. It is fueled by economic opportunity, job growth across a variety of industries (e.g., agriculture, health care, transportation, etc.), access to networks - both physical cash-in and digital networks, a variety of channel offerings coupled with strong value propositions, and favorable and compliant regulatory policies. In turn, the flow of remittances can affect economic growth, labor markets, poverty rates and future migration rates in recipient countries.
Remittances have become deeply embedded into the everyday routines for many overseas workers around the world – and represent a sizeable opportunity for those banks and financial services providers who cater to their needs.
The sector proved resilient amidst challenges, performing far better than anticipated
In June 2020, the International Monetary Fund10 warned that the COVID-19 pandemic could cause a worldwide drop in remittances, which would further harm the economies of recipient countries: “Overseas workers who lose their employment are likely to reduce remittances to their families back home. Recipient countries will lose an important source of income and tax revenue just when they need it most.”
In the event, remittances to low and middle-income countries declined by $8 billion11 worldwide, but the impact was not as bad as predicted, and in some countries including Egypt and Morocco, inbound remittances remained strong. Global growth is expected to rebound further in 2021 and 2022, with remittance flows to low and middle-income countries expected to increase by 2.6% to $553 billion in 2021 and by 2.2% to $565 billion in 2022.12
Given the stellar results cited by digitally enabled operators, it would be logical to assume that the availability of digital solutions played a factor in the early rebound and the way the sector defied expectations.
Here we set out five points to consider when developing a digital remittance program:
1 - It must be quick – and it must be transparent
Increasingly, consumers expect – and deserve – near real-time cross-border money transfers.
All of us have become accustomed to instant gratification with full transparency in other areas of consumer experiences (like with your taxi app, for example, that tells you where your driver is and when they will arrive). It should be the same for remittances – giving clarity, certainty and convenience to senders and receivers alike.
However, cross-border payment methods like wire transfers and ACH payments are traditionally processed in batches and may take hours or days to settle – and this is how many cross-border payments continue to be made today.
A better approach for most payments would be to integrate existing real-time enabled bank networks and infrastructures with those operated by the cross-border specialists. This would mean that banks in both send-markets and receive-markets could add value – enabling consumers to benefit from quick, convenient, transparent payment choices to reach recipients via cards and bank accounts.
2 - It must be interoperable
Traditionally, the world’s cross-border remittance services have operated as a series of parallel tracks – limiting their potential reach and adding to the overall cost-base.
In addition, countries around the world employ custom cross-border payment standards, and transmitting funds and data requires a great deal of translation, coordination, and investment. Reliance on legacy payment systems can therefore delay sending money between cross-border corridors, making P2P payments more inefficient and more expensive for both senders and receivers.
Meanwhile, in the CEMEA region there are a growing number of near real time payment options that are gaining in popularity, including Push to Card and Push to Account, that show the importance of offering seamless, interoperable solutions.
The clear need here is for a global, interoperable, payments platform, that is fast and reliable, and that allows service providers to transfer funds from an originating account to a recipient account via any card (using a 16-digit PAN) or any bank account (using routing/account numbers). It also needs to handle multiple use-cases and provide strong risk controls, security management protocols, network reliability and settlement/exceptions handling services, with gateways to all global card networks, as well as to local debit/ACH/RTP schemes.
3 - It must have real reach
It is not enough for a cross-border payment solution to reach remote agent locations. It must go further and reach the recipients themselves. In addition, this presupposes that they need some form of an account – to deposit their funds. Yet, an estimated 30% of adults worldwide do not have a transactional bank account.13
A requirement for a truly interoperable service should be to reach as many endpoints as logically possible, whether they be traditional bank accounts and prepaid accounts. Consider, for example, that through the Visa ecosystem alone, there are more than 5 billion potential endpoints, all of which are reachable by a simple, standardized, globally supported 16-digit account numbering convention.
This push-to-card approach has considerable follow-on benefits, by providing a gateway into financial services. As well as encouraging people to open card accounts, the receipt of remittances encourages them to use it. In one Visa study, for example, we found that those debit card users who had received a cross-border remittance into their account via Visa Direct* went on to show a 55% increase in transaction activity and volume, with at least five incremental transactions.14
4 - It must deliver security and compliance
For service providers, this is perhaps the biggest area of complexity – and cost.
As transfer speeds increase, for example, fraudsters can more quickly take advantage of vulnerabilities, by moving funds to fraudulent accounts on real-time payment rails and potentially disappearing before attacks have been detected.
Adopting digital security systems capable of vetting fraudulent transfers in real-time can alleviate this risk but requires significant investment in areas such as authentication methods, behavioral biometrics, velocity and aggregation tracking. Similarly, transaction and algorithmic tools to flag suspicious activity as well as checking global databases are essential components of any real-time payment solution.
A requirement for any cross-border payments platform should, therefore, be a considerable commitment to security which covers three dimensions:
- Compliance controls and tools to promote a secure and trusted network for real-time money movement
- Deep and rigorous due diligence of any entity that wishes to connect to the platform
- Ongoing vetting of all participants monitoring, for example, adherence to operating rules, transaction controls, sanctions screening protocols and post transaction monitoring and compliance actions
5 - It must have added benefits compared to physical alternatives
As the pandemic recedes, people may revert to the familiarity of in-person transactions.
To have lasting relevance, a digital solution must have complementary benefits to its physical alternatives. Being digital is probably not a compelling enough consideration. Other attributes can include:
User experience – The circumstances of the pandemic have perhaps made us tolerant of user experiences that we would not put up with in times that are more normal. Providers should be considering ways to continue to optimize the experience, and to draw on global expertise in digital solutions. Capabilities like using facial recognition or other biometrics to authorize payments are making it easier to move money and bringing a faster, smoother experience to the user.
Trust – Users need to have unwavering trust in the system and trust that the funds will be delivered safely to the recipient. However, they also need to trust that the experience will be quick, secure and convenient, and that the fees will represent value for money. In this regard, the value of a trust vested in a well-known, well-regarded brand should not be underestimated.
Cost – Research suggests that one of the main reasons that deters people from using remittance services is cost. This is one area where, again, digital technologies can bring significant benefits. By avoiding the need for physical locations, a significant layer of cost is avoided. Similarly, the cost burdens faced by providers, such as the infrastructure, compliance and technology costs, can be reduced by collaborating with at-scale international networks.
A remittance is a transfer of money between two individuals that typically takes place between two different countries.
Remittances are primarily sent by overseas workers back to friends and family in their home country. The largest remittance flows are sent from North America and CEMEA (Central Europe, Middle East and Africa) to Asia.15
Remittances may be used to provide regular financial support to family members or to provide emergency funds. They may also be used to send cash to travelers or send support to children studying abroad.
Providers of remittances fall into two broad categories: traditional banks and money transfer operators. However, the space is evolving quickly to include a second category of neobanks and fintechs, who are emerging as key players.
CEMEA’s leading banks helping customers to swiftly and securely send money around the world
Across the CEMEA region, many of the top banks have introduced global remittances enabled by Visa Direct, and the speed, security and convenience of making payments direct to a card account is a gain customer in all markets.
PrivatBank in Ukraine
PrivatBank launched P2P cross-border transfers in 2004. Today, PrivatBank customers can send money to nearly every country in the world, in Ukrainian Hryvnia (UAH), US Dollars or Euros, with just a 1% transfer fee.16
Ecobank across Africa
Rapidtransfer from Ecobank is the only pan-African money transfer service that enables customers to send money easily and quickly online. Ecobank customers can send money to Visa cards across 30 markets in Sub-Saharan Africa through the Ecobank mobile and Rapidtransfer Apps. The service went live in 2017.17
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1 https://s26.q4cdn.com/639886258/files/doc_downloads/Visa-Inc.-Fiscal-2020-Annual-Report.pdf p10
14 Impact of Push Payments on Cardholder Engagement study”, Visa, Sept. 2018.