Evolution and revolution in global remittances

The concept of money transfers is a story as old as time.

Fintechs have played a major role in making the money transfer market what it is today

During the 19th and 20th centuries, Spain, Italy and Ireland all relied heavily on remittances received from emigrants working abroad in countries such as the United States, Argentina and Australia.

Remittances represent a payment transferred to another party, usually sent by someone working abroad to their family back home. They form an important part of the economy, with remittances to low- and middle-income countries estimated to be worth over $550 billion at their peak in 2019 – a significant portion of global GDP. They can also make up a huge amount of developing countries’ economies. The Philippines, for example, relies on remittances for 12% of GDP, according to the Asian Development Bank.

Over the past decade, fintech has helped transform international money transfers, which traditionally involved long and complicated processes that came with hidden costs. The World Bank’s Q1 2021 Remittance Prices World Quarterly Report found that banks are the most expensive type of service provider when it comes to remittances, with an average cost of 10.66% due to transaction and processing fees, commissions, currency spreads and conversion rates. Money transfer operators (MTOs), on the other hand, offer transfers at a significantly lower cost of 5.43%.

MTOs and related fintechs have been a game changer and redefined the way people make payments across borders. They managed to make global transfers faster, more cost-effective and accessible.

In the early 2010s, money transfers represented the perfect entry point into financial services for many fintechs. High costs and complex legacy systems, combined with an estimated $18 trillion in cross-border transfers each year, required the creation of specialized businesses that could improve the status quo and increase competition.

However, today’s money transfer market is not only reaching a saturation level, with less opportunity to stand out, but we are also seeing more acquisitions and fintechs turning into “super apps” as they add to the offering. This can open up access to services such as stock trading or the delivery of goods to an audience that has never had that opportunity before, ultimately leading to a re-bundling of financial services. With remittance fees on the decline and fewer fintechs with specialized solutions available, one might think that the evolution of remittances has come to an end.

But fintechs cannot rest on their laurels. The 2030 Sustainable Development Goals targets of average remittance fees below 3% and no corridors with costs higher than 5% are still far from being met, and the speed of globalization means that there will always be new untapped payment corridors.

Continued innovations and adaptations

The challenges the transmission sector overcame in the past are not necessarily the ones that need to be solved today. The world is undergoing huge changes, with conflicts such as the war in Ukraine and pandemic recovery moving the needle in the sector. The World Bank has seen an 8% jump in remittances to Ukraine as money is sent to support families during the war, while Covid-19 has seen the flow of remittances shrink by 14% as it slows global migration. The pandemic has also seen digital payment options in the remittance segment grow by 10%, changing a model that mostly transferred cash to one that is now almost 50% digital.

This shows that flexible solutions for transfers are needed now more than ever to serve changing customer needs.

With remote work on the rise, the global migration of the workforce will change and affect the future of remittances. This could be more people staying in their home country while working for companies in other parts of the world, reducing the need for remittances. On the other hand, these trends can also give younger generations the opportunity to travel the world or move to new countries to work remotely from cheaper parts of those countries, which in turn can cause money to move in unprecedented directions. These trends will ultimately affect the demand for remittances and need to be assessed by remittance specialists.

The change in international migration patterns will also lead to new payment corridors that need to be served and may make way for young local innovators who will be able to take market shares. This in turn will attract the maturing larger fintechs, who want to expand their network of local accounts around the world and can partner with these innovators to create a more integrated cross-border payment ecosystem.

Furthermore, according to the World Bank, 1.4 billion people worldwide remain unbanked, creating an opportunity for the remittance segment to include underserved populations by helping them access funds outside of traditional banking. This can be done by offering payments to, for example, mobile wallets, and making it easier to access financial tools for those in developing countries.

Fintechs have played a major role in making the money transfer market what it is today. But we haven’t arrived at the best possible solution yet – and will we ever? Fintechs must continue to ask the question: ‘Have we solved this?’ And the answer will continue to change as the world evolves.