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April 2021


11 - 13 Minutes

Five considerations for banks to capture 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 an 80 percent increase in the U.S. and 75 percent increase globally as more people exchanged funds virtually.1

More than 2.35 million U.S. small businesses and merchants received fast access to funds to improve cash flow through Visa Direct, Visa’s capability for pushing funds directly to a card or bank account.2 And, 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 checks, are no longer the preferred payment forms for many consumers. For instance, more workers seek to access their earned wages between paychecks, in lieu of waiting for payment on the traditional two-week 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 migrant workers to send money to their home countries. These monetary lifelines sent by migrant workers back home are hugely important for millions of families around the world, and for many countries as well. Over 250 million workers send remittances, and the United Nations believes one in nine people globally could be supported by them.4

In this paper, we look at these cross-border remittances – the opportunities for financial institutions and the potential to bring more convenience, certainty and security to some of the world’s most significant cross-border payment flows.

Defining remittances

A remittance is a transfer of money between two individuals that typically takes place between two different countries.

Remittances are primarily sent by migrants back to friends and family in their home country. The largest remittance flows are sent from North America and CEMEA (Central Europe, the Middle East and Africa) to Asia.5

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 travellers 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.

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 workers send hundreds of billions of dollars6 to their home countries. Research indicates that these flows might be more stable than other inflows, investments, and aid.7 They already account for more than five percent of GDP in at least 60 low-to-middle-income countries (LMICs)8, and often the share is much larger.

In April 2020, a report from the Financial Stability Board citing World Bank data stated, “annual remittance flows grew 50 percent from 2010 to 2018 to reach $707 billion, of which $529 billion were to low- and middle-income countries.”9 Workers in G20 countries sent more than half of this total.10

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 families.”11

The chart below shows the countries that are the largest receivers of remittances and importance of inflows relative to GDP.

Source: World Bank

As one of the most important destinations of global migration, North America, which includes Canada and the U.S., represents the largest source of outbound remittances globally.12 The opportunity to send remittances home is one of the most important motivations for migrants. 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 North America as well as in recipient countries.

Remittances have become deeply embedded into the everyday routines for many migrant workers living in the U.S. and Canada – and represent a sizable opportunity for those banks and financial services providers who cater to their needs.

The sector proved resilient amidst challenges, performing far better than anticipated

Remittances to some countries have remained strong despite initial expectations.

A summer 2020 report from the International Monetary Fund set out the risks: “The pandemic will deliver a blow to remittance flows that may be even worse than during the financial crisis of 2008, and it will come just as poor countries are grappling with the impact of COVID-19 on their own economies. Migrant 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 fact, according to the World Bank, remittance flows are expected to drop by about $100 billion in 2020, which represents roughly a 20 percent drop from their 2019 level.”13

In April 2020, the World Bank predicted that 2020 remittance flows to LMICs would contract by 20 percent. In fact, they reduced by 7.5 percent (with a further 7.5 percent forecast for 2021).14 It is still a significant contraction, but several factors were at play which helped reduce the impact.

Mexico, for example, experienced one of the lowest decreases in remittances among Latin American countries at 2.6 percent (in April 2020). The buoyancy was partly driven by a favorable exchange rate between the Mexican peso and U.S. dollar. According to the Pew Research Center, Mexico and the Dominican Republic received more remittances through the first half of 2020 than in the first half of 2019. Pew also found that other regions experienced a decline during the first six months of 2020, then showed signs of a rebound. “For example, remittances to the Philippines and Bangladesh, two countries that are among the world’s top sources of international migrants, were down 4.2 percent and 1.4 percent, respectively, compared with 2019, with especially sharp declines in April. But monthly remittances to both countries rebounded in June.”15

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, the growing number of domestic real-time payment schemes, including the Real-Time Payments network in the U.S., the Real-Time Rail by Payments Canada and the New Payments Platform in Australia are accelerating the demand for equivalent, interoperable systems that make it seamless to move money and data across borders.

The clear need here is for a global, interoperable, real-time payments platform 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 percent of adults worldwide do not have a transactional bank account.16

A requirement for a truly interoperable service should be to reach as many endpoints as logically possible, whether they be traditional bank accounts, prepaid accounts, digital wallets, and so on. 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 an account, 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 percent increase in transaction activity and volume, with at least five incremental transactions.17

#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:

  1. Compliance controls and tools to promote a secure and trusted network for real-time money movement
  2. Deep and rigorous due diligence of any entity that wishes to connect to the platform
  3. Ongoing vetting of all participants monitoring, for example, adherence to operating rules, transaction controls, sanctions screening protocols and post transaction monitoring and compliance actions

Global remittances in action – helping Canadians securely send money in more ways to more places

In September 2020, Toronto-Dominion Bank, which is the sixth largest bank in North America by branches and serves over 26 million customers, announced it was offering its customers the ability to transfer money globally to family and friends right from their bank account.

The new online service allows customers to send money in several ways, including sending money directly to a recipient's bank account in over 180 countries and territories, cash pick-up through a money transfer operator or sending money internationally to an eligible Visa Debit Card, Visa Credit Card or Reloadable Prepaid Visa Card, powered by Visa Direct, in 170 countries and territories.

The solution offers a simple user experience, provides transparency around considerations such as currency exchange rates, transfer fees and expected time for the funds to arrive, and helps customers understand the option that works best for them. In addition, customers can send with confidence knowing recipients can typically expect cash pick-up in as little as two to four hours, within 24-48 hours for transfers to eligible Visa Cards with Visa Direct, and within one to five business days to bank accounts.

#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.
  • 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.

1 “Visa Annual Report 2020”, Visa.com, https://annualreport.visa.com/home/default.aspx

2 “Visa Annual Report 2020”, Visa.com, https://annualreport.visa.com/home/default.aspx

3 “Visa Annual Report 2020”, Visa.com, https://annualreport.visa.com/home/default.aspx

4 “International Migration 2019 Report”, United Nations, Department of Economic and Social Affairs, 2019, https://www.un.org/en/development/desa/population/migration/publications/migrationreport/docs/InternationalMigration2019_Report.pdf

5 Remittance Outflows Report, World Bank, October 2020, https://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data

6 Cross Border Remittance Data, World Bank, October 2020, https://www.worldbank.org/en/topic/migrationremittancesdiasporaissues/brief/migration-remittances-data

7 Maimbo, Samuel Munzele & Dilip Ratha, “Remittances: Development Impact and Future Prospects”, World Bank, 2005, https://openknowledge.worldbank.org/handle/10986/7339

8 “Remittances in Crisis, How to Keep Them Flowing, 2021”, The Global Knowledge Partnership on Migration and Development (KNOMAD), 2021, https://www.knomad.org/covid-19-remittances-call-to-action/

9 “Global Financial Stability Report: Markets in the Time of COVID-19”, Financial Stability Board, April 2020, https://www.imf.org/en/Publications/GFSR/Issues/2020/04/14/global-financial-stability-report-april-2020

10 “Enhancing Cross-border Payments: Stage 3 roadmap”, Financial Stability Board, October 2020, https://www.fsb.org/2020/10/enhancing-cross-border-payments-stage-3-roadmap/

11 “The Impact of Remittances on Economic Growth and Poverty Reduction”, Migration Policy Institute , 2013, https://www.migrationpolicy.org/research/impact-remittances-economic-growth-and-poverty-reduction

12 “World Migration Report”, World Economic Forum, Feb 2020, https://www.weforum.org/agenda/2020/02/world-migration-report-2020-international-migrants-trends/

13 “Lifelines in Danger”, International Monetary Fund, 2020, https://www.imf.org/external/pubs/ft/fandd/2020/06/COVID19-pandemic-impact-on-remittance-flows-sayeh.htm

14 “The remittance effect, a lifeline for developing economies through the pandemic and into recovery”, Oxford Economics, 2021, https://www.oxfordeconomics.com/recent-releases/The-remittance-effect-A-lifeline-for-developing-economies-through-the-pandemic-and-into-recovery

15Luis Noe-Bustamante, “Amid COVID-19, remittances to some Latin American nations fell sharply in April, then rebounded”, Pew Research Center, 2020, https://www.pewresearch.org/fact-tank/2020/08/31/amid-covid-19-remittances-to-some-latin-american-nations-fell-sharply-in-april-then-rebounded/

16“Global Findex Database”, World Bank, 2017, https://globalfindex.worldbank.org/

17“Impact of Push Payments on Cardholder Engagement study”, Visa, Sept. 2018.

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