With international remittances expected to reach $582 billion in 2014, the global community is searching for technologies that will improve the efficiency, safety and – ultimately – positive impact of these cross-border payments. Over the last decade, the growing size of the remittances market has attracted new kinds of players and payment models. Since 2009 the global average cost of sending remittances of $200 has been reduced from 10% to 7.9%, saving migrants an estimated $54 billion. Moreover, analysis suggests that two individuals with access to any digital payment product could pay as little as 3.4% on average.
Technology plays an important role in two key aspects of remittance services: the consumer side (payment instruments) and the transaction side (payment infrastructure). Technological innovations on both sides are equally important to improving the efficiency and safety of these transfers.
Six key trends in applying technology to remittance transfers can be observed:
1. Expanding existing payment system infrastructures for remittances
Card payments schemes and automated clearing houses (ACHs) are widespread and reliable in the payments space and typically have established standards, policies, and procedures. When two systems are directly connected in both sending and receiving countries (as is the case with Directo-a-Mexico), remittances can leverage such systems, incorporating additional rules for foreign exchange conversions and clearing and settlement, with the advantage of being open to a large number of participants. However, the total amounts transferred through these channels remain lower than cash-to-cash transfers.
2. Combining existing payment infrastructure and instruments
In many countries the existing payment systems’ infrastructure can be leveraged to create less expensive innovative products and services. Some banks and financial institutions that have presence in both sending and receiving countries have created new card-based products (e.g. dual cards) through which migrants’ families can withdraw remittances at ATMs or use for payments. Making use of the existing card infrastructure, this approach is more efficient, safer and cheaper than cash. However, not all regulators allow dual cards.
3. Connecting international remittance services and payment instruments for domestic transactions
Electronic payment products are increasingly replacing cash in domestic transactions and, in some cases these products are used to deliver remittances to the beneficiary. E-money is an example of this. E-money issuers can be banks or non-banks depending on a country’s regulatory arrangements. These remittance products are based on contracts between international money transfer operators (MTOs) and payment service providers.
4. New players fill gaps in existing payment infrastructures
In the last few years, new companies have started operating in the remittances market, enhancing the potential of the existing networks and creating bridges across countries. Some of the most notable examples are companies which provide white-label, cross-border payment services by enabling financial institutions to retain ownership of the customer and provide them with transparent and efficient cross-border payment products. Other companies have allowed interoperability among ACHs, the internet and mobile money, thereby creating a hub that allows services originally designed for domestic payments to also be used for international remittance transfers.
5. New players are leveraging existing banking and payment infrastructures
An increasing number of providers are offering online services, providing senders different options to pay for the transaction (from their bank accounts, with either a wire transfer or direct debit, or by debit or credit card). The sender can also choose different ways for the money to be delivered, for example to the beneficiary’s bank account or in cash at an agent in the receiving country.
6. Existing businesses for other services enter money transfer businesses
This trend is not new in remittance businesses. Import companies and retail stores sometimes establish remittance companies. More recently, companies with an online presence are leveraging their own clientele and existing payment infrastructures to provide remittance services. For example, a company which provides foreign exchange information online is offering money transfer services. In this service, upon the customer’s instruction, the customer’s account is debited and the recipient’s bank account is credited.
Despite the innovations outlined above, barriers continue to prevent technology from yielding greater impact on the remittances landscape. For a variety of reasons, the majority of remittances are still sent and/or received in cash. Both senders and/or receivers may lack access to non-cash payment instruments or even a bank or other transactional account. Whatever the technology, a number of intermediaries may still be necessary for transactions to be cleared and settled across borders – especially when two or more currencies are involved. Finally, overly stringent regulation may act as an obstacle to new solutions, while discordant cross-border regulations may pose an additional challenge.
An efficient payment system, a proper regulatory framework, and enabling and competitive market conditions underpin new technology and innovations for remittance services. In addition, providing more people with access to transaction accounts would reduce use of cash in remittance transactions. While the landscape is unlikely to be completely revolutionised overnight, current progress should propel significant changes within the next decade.
Isaku Endo is a senior payment systems and remittances specialist and Marco Nicolì is a payment systems and remittances specialist with the World Bank Group. This piece is independently authored. Views expressed here represent those of the World Bank Group.
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