Remittances: The World’s Tellers Go Digital
By Tom Stevens
Since their genesis, large remittance companies like Western Union (WU) and MoneyGram have often had to repurpose their vast agent networks when new technologies have threatened to erode their market position. Now, as methods have evolved, they are quickly shifting operations from cash to virtual remittances.
Traditional remittances on the wane?
They would be unwise not to. By some analysts’ estimates, digital (online and mobile) transactions already make up to 10 percent of total global consumer remittances. And, with the arrival of mobile money –- long the wunderkind of future digital payments in the developing world — to the world stage, this figure could well increase. For instance, GSMA, in their most recent State of the Industry report, estimated global cross-border mobile transactions grew by 51.8% in 2015 and were operational in 93 countries.
The great digital conversion on the receive side has been matched by a rapid emergence of Fintech start-ups on the send end, which in union, are undermining the physical agent model Western Union and others pioneered. WorldRemit for example — an online and mobile specialist started in 2010 — earned a valuation of around $500 million, hit 400,000 digital transactions a month, and opened a new flagship office in London last year — all without an extensive branch network.
It is this capacity to undermine traditional MTOs’ cash (to cash) cow, which most threatens conventional service providers: cheaper overheads and improved availability in send markets have left the average cost of digital services a percentage point lower than cash internationally, and widened online and mobile coverage worldwide.
Hedging their bets — Digitisation by the market’s big players
Despite its subversive potential however, the new digital economy has not been a zero-sum game for RSPs, where, in actuality, traditional remittance companies have capitalised well on the shift in technology. Indeed, WU is now recognised as the largest digital remittance company in the world. Its early investment and digital modification of its enormous pay-out network of over 500,000 agents has pushed its online arm to consistent double digit revenue growth in 2015; 17% for the year and 28% for the final quarter, all while traditional business has been tepid. Low promotional pricing online [Graph 1] has provided a good entry base to their broadening digital network, offering services at an average of 1.5 percentage points lower than cash to cash (C2C) services in the corridors where they are offered side by side.
The digital drive by big firms has also changed the market landscape noticeably, with the ratio of cash-to-cash to digital payments falling dramatically as online services on the send end have spread [Graph 2].
Long-established firms, such as WU, are also moving into payment spaces previously considered blind spots, namely mobile payments, which currently make up less than one percent of their revenues. Press releases have regularly drawn attention to fresh investment (in the case of Western Union $50 million in their new WU ConnectTM instant-messaging based service), as well as their partnerships with Mobile Network Operators in multiple countries.
And, although growth in remittance start-ups has been healthy, the law of small numbers may be exaggerating the threat posed to bigger firms by digital technology, with many disruptive new Fintech ideas struggling to establish themselves in practice. ‘Rebittances’ — C2C money transfers utilising the cheaper bitcoin payment system — have faltered, as pay-out agents charge start-ups the same levels of commission as they do non-digital C2C firms, as pay-out agents charge start-ups the same levels of commission as they do non-digital C2C firms, thus undermining these start ups’ initial cost advantages.
Limits to Growth
Cash still remains the world’s preferred payment medium, with transfers centred around physical currency still making up over 90 percent of the Big Two’s revenues. The perception that it’s the easiest way to send and receive money is persistent, as are the sending habits of various diasporas. Qualitative studies in the Australasia-Pacific region point to strong community ties to sending cash in person as the reason behind the slow adoption of digital remittance schemes in the area.
Practicality matters too. Another study by the Ericsson ConsumerLab on 5 Sub-Saharan African countries, estimates 63% of people in the region remain unbanked, with only 20% possessing a mobile wallet. Throw in the fact that four in ten of those surveyed did not have the “basic pre-requisites” needed to start a mobile account, and the future of cash looks less vulnerable than recent groupthink suggests. In fact, any significant turnaround in remittances technology is likely to be hamstrung by the limited spread of technology in developing nations.
However long it may take for the infrastructure to fully develop, digital cross-border payments are set to take up a larger proportion of all money transfer companies’s’ revenue streams. The fact that W.U and Moneygram combined are responsible for 39% of all online services in the latest iteration of the World Bank’s Remittance Prices Worldwide, is testament to the Big Two’s commitment to, and early advantage in, online payments.
Indeed, the cheaper operating costs, ease of accessibility, and innovation present in today’s increasingly virtual marketplace all point to a slow decline forr cash as remitters’ dominant medium.
 Data collected by DMA.
Originally published at http://www.developingmarkets.com/perspectives .
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