Republished: July 27, 2018, updated to reflect the latest industry news, trends and insights.
Sending money back home is a driving force for many of the 200 million international migrant workers. They send a lot of money, totally over USD $600 billion according to a recent World Bank report and an estimated $6.5 trillion in remittances will be sent to low and middle-income countries between 2015 and 2030.
Unfortunately, it’s often a cumbersome, inefficient, costly process. Traditionally, the sender would have to get themselves to a money transfer retail location, provide accurate sending information, and then the receiver has to get themselves to a location to receive the money. Depending, on the location, the travel can end up being substantial in both time and money.
Then, there is the delay as the process often takes up to 4 businesses days. It can take even longer, as each intermediary can follow a three-day good funds model, to ensure that the transaction is not fraudulent. Of course, if there is incorrect information or any other issues that can add even more time to the transfer.
On top of that, fees and costly exchange rates take a big cut of the amount. For example, sending money to Africa costs almost ten percent of the transaction value and the global average is seven percent; the UN Sustainable Development Goals are three percent.
While there are many reasons why international money transfer is problematic, one of the most significant is that it is still mainly a cash business. The sender brings in cash and the receiver gets cash out. Using cash slows the process down and adds cost.
One solution that has the potential to dramatically shake up the industry, improve performance and reduce fees is mobile money, transferring funds phone to phone. International mobile money transfers are forecast to grow to 25 billion a year by 2018. While the growth is significant — 67% up from 2015 — that represents only four percent of the total value of international remittance.
There are many factors pointing to significant growth beyond that, or as PaymentsComplance states, “mobile remittances are a promising market.”
- 70% of people will be using smart phones by 2020
- 80% of new smart phone subscriptions will be in Asia, Middle East and Africa
- Mobile money is available in 85% of countries where there are less than 20% of people having bank accounts
- Global remittance flows to developing countries, such as the Philippines, reached $466 billion in 2017
Mobile money is an added-value revenue opportunity for MNOs (Mobile Network Operators). They know how to operate in a rural areas and serve customer who don’t have bank accounts. They can tolerate lower transactional fees, as it’s not their main business. And, as they already have infrastructure in place, their operational costs are lower than non-mobile competitors.
The growth of mobile money is also filling a market gap, as some banks are de-risking and dropping support for money transmission. As a New York Times article — Tighter Rules on Money Transfers Put Squeeze on Businesses — notes, “But what was once viewed as a big consumer business opportunity for American banks is now seen as a liability. Banks are refusing to do business with money transmitters, closing or freezing their accounts over concerns about money laundering and extra regulatory scrutiny.”
While the opportunity is significant, there are many hurdles in the way that slow down growth. MNOs are not banks; they don’t have expertise in handling money transfers and all the associated issues and regulations. How you they flag problematic transactions? How do they interoperate with various other money transmitters? How do they manage risk?
A key issue is Know Your Customer (KYC) requirements, regulations that financial institutions (FIs) such as money transmitters must comply with. These laws, part of Anti-Money Laundering and Counter-Terrorist Funding (AML/CTF) initiatives, require that FIs verify customer identity. However, many people receiving funds simply don’t have proper identification. They never were issued ID, or by becoming refugees, their ID was lost or negated.
As Ross Buckley, Professor of International Finance Law at UNSW Sydney, states, “In poor countries, AML/CTF regulations often cause more problems than they address, especially by dissuading banks from providing the accounts that low-cost money transfer operators need to provide affordable remittance services.”
Some jurisdictions have responded by relaxing KYC requirements. This tactic is fraught with issues, as fraudsters and terrorists are always looking for systematic weaknesses to exploit to move their illicit funds.
A better solution is to use associated mobile technology to verify ID. As people tend to use the same number over time, the phone number plus other data, such as location, SIM card data and usage patterns, provides an ongoing profile of the user. Social media apps enable the building of social profiles, adding another date source to match identity with.
Already with top-of-the-line smart phones, biometric inputs such as fingerprint scanners can validate the user. Soon, these techniques will be wide-spread, reliable and provide another ID reference point.
There are other RegTech solutions out there that use technology to ease compliance, cut fraud and enable fast, low-cost money international money transfer. The recent RemTECH Awards, where Trulioo was named the winner in the 2108 Compliance Innovation category, highlighted some of innovations including blockchain and digital cash. Taken together, these technologies can assist in the KYC process, while not adding significant costs to the MNO or customer.
To get to a situation where mobile money transfer for international remittances is the norm, there are some fundamental, but doable steps:
- Improve the payment infrastructure
- Create new interoperability networks
- Enact policies that balance AML/KYC compliance, cost and financial inclusion
The opportunity for mobile money transfer to improve lives is substantial. People in areas where money is most needed will receive a higher percentage of funds. An extra four percent or more, adds up; if you consider the overall picture, that’s an extra $20 billion. The speed and convenience is a major improvement to the lives of the recipients.
For anyone in the industry, delivering on these opportunities is good business, improving the world, making money and setting up for future developments. Developing powerful mobile money transfer solutions that work internationally is a huge goal, but very worthwhile.