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International Remittances




Universal Banking Solution System Integration Consulting Business Process Outsourcing
“Remittance is the act of transmitting money to a                     Migrant-receiving country:
distant location to fulfill an obligation”
                                                                      •   Availability of employment
This Knowledge Paper makes an effort to
elucidate the concept of remittances in the                           •   Friendly migration policies
international context and is focused on the                           •   Shortage of skilled resources
remittances sent by emigrants to their families                       •   Financial liberalization
back home, for domestic consumption and
investment. The paper highlights the significance                     •   Abundance of natural resources
of International Remittances to the global
                                                                      A few examples of such corridors (sender
economy, details existing business models, and
                                                                      country-receiving country) are Mexico-US,
examines emerging trends as well as challenges
                                                                      South Asia-UAE and India-US.
faced by an industry which is to poised to play a
bigger role in the globalization process.
                                                                      Impact on Global Economy
Remittances Overview
                                                                      This section highlights the magnitude and impact
In this globalizing world, migration of people                        of increased migration on the world economy.
from one country to another for employment
opportunities has become a common                                     The World Bank estimates that remittances
phenomenon. Dominant migration corridors have                         in 2009 totaled $420 billion - out of which
been formed between various countries/regions.                        $317 billion went to developing countries - and
This is primarily due to the socio-economic                           involved some 192 million migrants or 3.0% of
conditions prevailing in the migrants’ countries                      the world population.
of origin and destination. A few examples:
                                                                      Figures 1 and 2 respectively depict the remittances
Migrant-sending country:                                              of top remittance sending and receiving countries
•    Lack of job opportunity                                          for 3 consecutive years.
•    Lower wage rates
                                                                      Figure 3 expresses the quantum of this incoming
•    Social insecurity                                                money as a percentage of GDP thereby indicating
•    Political instability                                            its significance to the destination country’s overall
•    Extreme geographical conditions                                  development. (Source: World Bank website)




Figure 1 Top Remittance-Sending Countries (figures in US $ million)




                                                                                      International Remittances
Figure 2 Top Remittance-Receiving Countries (figures in US $ million)




Figure 3 Remittances as a Percentage of GDP

Operating Models in the Remittance Business                             banks globally, through which remittance
                                                                        transactions are routed
An International Remittance business may follow
the conventional banking model or any of the                        Figure 4 illustrates the Nostro-based setup,
non-banking models.                                                 wherein the Beneficiary Bank has an account
                                                                    with the Correspondent Bank, while Figure 5
Conventional Banking Model                                          shows the generic process involved in a remittance
In this model, an end-to-end remittance transaction                 transaction based on a Nostro account model.
involves the following parties:
•    Remitter’s Bank - the bank where the
     remitter has an account that is debited for
     transferring money to the beneficiary
•    Beneficiary’s Bank - the bank where
     the beneficiary of the remittance has an
     account that is credited for the remittance
     money received
•    Correspondent Bank (only in cases where
     the above-mentioned entities do not have
     a direct business tie-up) - an intermediary
     bank which has associated with various                        Figure 4 Nostro-based setup




                                                                                     International Remittances
Non-Banking Channels

                                                      Non-banking players play a vital role in the
                                                      remittance space and have a larger share in the
                                                      Global Remittance business than conventional
                                                      banks. These entities operate in various forms:

                                                      Money Transfer Operators

                                                      MTOs (Money transfer Operators) like Western
                                                      Union and Money Gram have a network of
                                                      agents across the globe and serve as non-bank
                                                      remittance channels.

                                                      The remitter can visit an MTO outlet and pay cash
Figure 5 Remittance Transaction Process in a          in foreign currency to send money to any part of
Nostro-based Setup
                                                      the globe where the MTO’s agent is present. The
Modes of Remittance                                   receiver can visit the MTO agent at his location
                                                      and collect the money in local currency.
There are various Origination Modes, which are
                                                      Figure 6 depicts the process for an International
used by the remitter to transfer money.
                                                      Remittance transaction effected through an MTO.
The remitter can issue a remittance request to
his bank either
a.   by visiting the branch and furnishing a
     Remittance Instruction Form prescribed by
     the Remitting Bank, bearing all details
     necessary for effecting the remittance along
     with an account debit mandate
     or
b.   by dropping a cheque from an account with
     the Remitting Bank along with the Remittance
     Instruction Form

Based on the details in the form, the Remitter’s
Bank debits his bank account and sends a
SWIFT message to transfer the money to the
Beneficiary’s Bank.
                                                      Figure 6
Listed below are the various Disbursement
Modes of remittance using which the money
can be tendered to the beneficiary.                   The settlement between the MTOs in the two
                                                      countries takes place through their partner
1.   Direct Credit to the beneficiary’s account
                                                      banks. On receiving the remittance amount in
     with the Beneficiary Bank
                                                      cash from the remitter, MTOs deposit those
2.   Disbursement of Cash to the beneficiary on       funds in their local bank accounts. MTOs
     furnishing appropriate photo - identification/   request their bank to transfer the consolidated
     address proof in the event of his not having     amount to the bank account of the MTO agent
     a bank account                                   in the receiving country. In order to minimize
3.   Transfer of Money by the Beneficiary             costs, only the net amount (total amount to be
     Bank to the beneficiary’s account with           sent to the recipient country minus total amount
     some other local bank using the local            to be received from that country) is sent.
     payment mechanism
                                                      Please note that the beneficiary receives the money much
4.   DD issuance in the name of the beneficiary       before the settlement between the MTOs




                                                                      International Remittances
Figure 7 Fund Movement for an MTO



Costs                                                       have started spending on advertising and
                                                            brand building.
The fixed costs incurred by an MTO are
listed below:                                          4.   Compliance and Regulatory Costs
                                                            Various mandatory compliance/regulatory
1.   Origination and Disbursement Agent
                                                            procedures in the remittance business are
     Network Costs
                                                            listed below. Expenses involved in following
     Setting up agency networks/outlets in the              them form a sizeable part of the total cost.
     country of origination and disbursement
                                                            •   KYC of Remitter / Beneficiary
     forms a significant portion of an MTO’s
                                                                To prevent practices like transfer of
     costs. Though traditionally, MTOs have had
                                                                money between anti-social elements,
     proprietary agents, of late, third party agents
                                                                the “Know Your Customer” checks are
     have also been appointed by Western
                                                                done by the Remitter’s and the
     Union and Money Gram. While these agents
                                                                Beneficiary’s Bank. KYC would typically
     receive a fixed minimum compensation,
                                                                involve obtaining documents such as
     major incentives are linked to the number
                                                                photo-ID, address proof, passport
     and value of transactions. The MTOs thus
                                                                details, driving license details etc.
     share the risk of expanding their network
     with these partners.                                   •   Regular Reporting of Transaction
                                                                Details to the Central Bank
2.   Processing and Money Transfer Costs                        Central Banks place limits on the value
                                                                of an individual’s remittances within a
     These are the fees to be paid to the
                                                                certain time frame.
     local bank which buys and sells various
                                                                Additionally, institutions are also
     international currencies, on behalf of the
                                                                supposed to comply with Anti-Money
     remittance service provider. These costs are
                                                                Laundering requirements and report
     linked to the aggregate transaction value
                                                                any suspicious/fraudulent transactions
     and MTOs with large volume transactions
                                                                to the Central Bank.
     could negotiate lower fees.
                                                       5.   Administrative and IT costs
3.   Marketing Costs
                                                            The MTO will also have to bear office
     This simple transaction processing business            maintenance expenses as well as system
     has now become commoditized and players                development and maintenance costs.




                                                                      International Remittances
Risks                                                             Exchange Houses

                                                                  Exchange Houses are extensively used for
Currency Hedging
                                                                  remittances from the Middle East. Unlike the
When there is an International Remittance                         banking channel, this channel is based on
transaction through an MTO, there is a time lag                   Vostro accounts i.e. the accounts maintained
between fund availability to the recipients                       by exchange houses with various banks in
(money is generally received the same day)                        the beneficiary countries. These accounts are
and actual international transfer by the MTO’s                    pre-funded by the exchange houses.
partner bank through its Correspondent Bank
                                                                  The Remittance Transaction Process
(generally takes 3 business days). This implies
a currency rate risk which is borne by the MTO.
                                                                  Step 1    The remitter deposits the remittance
                                                                            money in the overseas currency in cash
Salient Features of the MTO model
                                                                            at the Exchange House counter.
1.   It is the fastest mode of transfer since the                 Step 2    The exchange rate and the transaction
     beneficiary can receive the money within                               fee are communicated and confirmed
     seconds after it is sent.                                              over the counter.
2.   People without bank accounts can also                        Step 3    The beneficiary account details are
     transact in this model.                                                provided by the remitter.
3.   The cost per transaction is lower compared                   Step 4    The exchange house instructs the
     to other models.                                                       Beneficiary Bank with whom it has a
4.   MTOs have the biggest market share in the                              tie-up for transferring the requisite
     remittance business.                                                   amount in the beneficiary country’s
5.   Setup costs are high, acting as a barrier for                          local currency using one of the
     new entrants.                                                          following modes:




Figure 8 depicts the Vostro-based setup wherein the Correspondent Bank has an account with the Beneficiary Bank


           a. E-mail: The exchange house sends                    Costs: The costs involved are similar to that of
              e-mail to the Beneficiary Bank                      the MTO channel.
              instructing it to transfer the amount
              to the furnished beneficiary account.               Salient Features of the Exchange House
                                                                  Channel
           b. Integration of exchange house and
              Beneficiary Bank systems                            1.   Since the Vostro accounts are pre-funded,
                                                                       the beneficiary amount is paid based
           c. Beneficiary Bank’s proprietary                           on the funding in this account. Hence,
              remittance platform                                      on receiving the Exchange House’s




                                                                                    International Remittances
instruction, the beneficiary receives the         costs
     amount almost instantaneously.
                                                       1.   Creating a network of banks in the countries
                                                            of origination and disbursement would be
2.   The Exchange House has to fund its
                                                            a major cost.
     account with the Beneficiary Bank; hence
     the latter enjoys the float.                      2.   The cost involved in creating and maintaining
                                                            a robust and scalable IT platform would also
3.   The Exchange House can draw a DD on its                be significant.
     Vostro account in favor of the beneficiary
     and hand it over to the remitter over the         Salient Features of the Online Model
     counter, which can then be dispatched by
                                                       1.   Transaction is effected from the convenience
     courier or even sent along with a friend
                                                            of one’s home.
     travelling back home. Alternatively, the
     DD can also be drawn in favor of the              2.   The transaction can be effectively tracked.
     remitter, who can then carry it back to his       3.   TATs are on the higher side (3 to 5
     home country on his return and get it                  working days).
     cleared there. This is a secure option for
                                                       4.   The remitter has to undergo a one-time
     blue collar workers who would otherwise
                                                            registration process which has a TAT of 4 to
     have to travel with hard cash.
                                                            5 working days.
Emerging Non-Banking Channels
                                                       White Label Platform Providers
Online Channels                                        A White Label Platform provider is a variant of
                                                       the online platform channel, wherein a third
Online Players, which provide platforms                party enables banks and FIs operating in the
encompassing the entire remittance process,            remittance corridors to launch remittance
are a recent development. They have created            services by providing the following:
global networks with banks/FIs in origination
                                                       •    A gamut of innovative products based
and destination countries. From the comfort of
                                                            on the latest demand, which could be
his home, the remitter can initiate a remittance
                                                            further customized to meet specific
request by registering himself on the online
                                                            requirements of banks and end customers
entity’s website and furnishing his and the
                                                            in various geographies
beneficiary’s bank account details.
                                                       •    Best-in-class technology for new age business
The Remittance Transaction Process
                                                       •    Marketing and sales support for promoting
                                                            the product range
Step 1: Select the recipient country and enter
        the amount to be remitted                      •    24*7 operations support in case the client
                                                            proposes to outsource transaction processing
Step 2: Choose the mode in which the recipient
                                                       •    Round the clock customer service through
        would receive funds
                                                            toll-free numbers, email support and online
        • Cash pickup                                       live chats

        • Direct deposit into bank account             •    Built-in international compliance and
                                                            regulatory practices
        • Cash delivery to the recipient's home
                                                       •    Adherence to the best practices in IT security
Step 3: Choose a payment method to confirm
                                                       Costs:
        the money transfer
                                                       1.   The major cost involved is in hosting and
        Through a card or by debiting his account
                                                            maintaining the platform.
        with the local bank in the remitting country
                                                       2.   Marketing expenses form a significant part of
Step 4: Notify the recipient about the transaction          the total cost.




                                                                       International Remittances
Salient Features of a White Label Platform                  b. Offer high-level reach and scalability
Provider                                                    c. Bring about efficiency in operations
1.   The provider need not be part of the                   d. Ensure more consistent and faster
     banking/financial domain.                                 delivery of remittance services
2.   Without investing in technology and
                                                            This system is currently being evaluated by
     operations, banks and FIs can use this
                                                            leading banks and institutions, which provide
     plug-and-play offering to provide world-class
                                                            remittance services.
     remittance services.

3.   It provides all the advantages of an online       6.   Online offerings on the originating side are
     platform channel to the end customer.                  expected to increase in importance, in line
                                                            with the growing education levels and
4.   The platform provider’s economies of scale             computer proficiency of immigrants.
     reduce the per-transaction cost.
                                                       7.   Increasing Role of Software and Analytical
Emerging Trends in the Remittance Business                  Tools

1.   MTOs are leaders in the remittance space,              In addition to SWIFT and the local payments
     but are being challenged by other channels.            system in destination countries, which
                                                            form the IT backbone for the remittance
2.   The following are turning out to be decisive
                                                            business, in-house systems are also being
     factors while choosing a remittance provider:
                                                            used to streamline various processing stages
     a. Transaction cost                                    involved in a remittance transaction. Also,
     b. Exchange Rates                                      several CRM and web analytics software
     c. User-friendly procedures                            are being used by the service providers
     d. TAT of the transaction                              to analyze the transaction data for the
     e. Transaction tracking mechanism                      following purposes:

     f. Reach in the destination country                    a. Understanding customer behavior
                                                            b. Understanding business cycles
3.   Agent exclusivity, one of the strong
     competitive advantages of MTOs on both                 c. Segmenting customers
     the remitting and receiving side of money              d. Launching products targeted at specific
     transfers, is eroding and agents are                      customer segments
     increasingly shifting away from the exclusivity        e. Designing marketing campaigns and
     arrangement.                                              incentive schemes for specific customer
                                                               segments
4.   To increase their market share, conventional
     banks are leveraging their existing client             f. Aligning sales force and customer support
     relationships and are coming up with                      channels for better customer service
     innovative offerings such as prepaid                   g. Effective customer due diligence through
     cards for the beneficiary. This enables them
                                                               i. Transaction monitoring
     to provide account-to-cash and cash-to-
     cash offerings to the customer, allowing the              ii. Customer screening against published
     beneficiary to withdraw cash in tranches.                     black lists
                                                               iii. Identification of risks and suspicious
5.   SWIFT has come up with a Workers’                              transactions
     Remittances solution for banks and FIs
     for settlement of cross-border person-to-         8.   Role of Central Banks in Recipient
     person payments. It aims at providing a                Countries
     standardized, off-the-shelf operational and
     technical framework to                                 Central Banks in recipient countries are
     a. Connect new entities                                playing the role of facilitator and promoter




                                                                       International Remittances
to extract maximum benefit from the               •    The number of migrants is inversely
     opportunities provided by International                proportional to the remittance costs across
     Remittances. They are:                                 different regions and service providers. This
                                                            seems to suggest an important volume
     a. Allowing migrant workers to open foreign            effect that works either through scale
        currency accounts so that                           economies and/or higher competition in a
                                                            large market.
     -   their earnings could be retained in foreign
         currency and can be exempted from             •    Corridors with higher income per capita in
         foreign exchange regulations                       both the sending and receiving countries,
                                                            exhibit on an average, higher costs, which
     -   better interest rates could be offered and         could reflect higher prices of non-tradable
         the interest income could be made tax free.        goods, such as services, in general.

     b. Facilitating securitization of the future      •    Competition and market structure matter.
        flow of remittances, which will result              Corridors with a larger number of providers
        in a better sovereign rating enabling               and countries with more competitive
        local banks to raise cheaper and                    banking sectors exhibit lower costs. On the
        long term finance needed for the                    other hand, costs are greater in corridors
        country’s development.                              where banks have a higher share in the
                                                            remittance business.
Challenges Faced by the Industry
                                                       b.   Grey Channel
a.   Transaction Cost
                                                            The Grey Channel eats into a significant
     The cost that the remitter has to bear varies          share of the remittance business. Apart
     from 2% of the remittance amount and                   from the threat it presents to the established
     may go as high as 10%, depending on the                players, it also poses a security threat
     following factors:                                     since the money remitted could be used for
                                                            anti-social purposes. Since this channel
     1. Exchange rate margin of the service                 does not have to comply with any regulatory
        provider                                            procedures, it offers lower transaction costs
     2. Fixed fee being charged by the service              and faster TATs to the remitter.
        provider
     3. Tax incurred                                   c.   Reconciliation of Remittance Transactions

     4. Origination mode (Online, branch etc.)              Since a remittance transaction flow involves
        chosen by the remitter                              processing by multiple parties, a significant
     5. Disbursement mode (Cash, DD, other                  percentage of transactions are non-STP
        banks’ account etc.) chosen by the remitter         due to various reasons such as incorrect
     6. Revenue sharing arrangement between                 submission of details, account closure by
        the Correspondent Bank and the                      beneficiary, system errors, manual errors by
        Beneficiary Bank                                    operations staff and communication gaps
                                                            between the parties involved- such as failure
Central Banks have constantly endeavored to                 to convey information regarding changed
bring down the costs.                                       procedures -resulting in breach of TATs and
                                                            customer dissatisfaction.
In October 2009, The World Bank Development
Research Group published a paper on factors            d.   Revenue Sharing Arrangement
influencing remittance costs based on data
gathered across 119 country corridors. This report          In the absence of a globally adopted
reveals the following trends which could help               standard model, the revenue-sharing
address the issue.                                          arrangement between the Remitter’s Bank,




                                                                       International Remittances
Correspondent Bank and Beneficiary Bank              Vostro - Local currency account maintained by
    is ad hoc, resulting in disputes and at times,       a local bank for a foreign (correspondent) bank.
    disengagements between the parties.                  For the foreign bank, it is a Nostro account.

Moving Ahead….                                           SWIFT - Society for Worldwide Interbank Financial
                                                         Telecommunication supplies secure messaging
Though the International Remittance industry             services and interface software to wholesale
is out of its infancy, it is still evolving and          financial entities
catching up with the globalization process.              TAT - Turn Around Time
Roadblocks and unaddressed issues continue
to exist. The pace of reform is slow and the             GDP - Gross Domestic Product
business is still commoditized. Several political,       FI - Financial Institution
social and economic factors defining the
business will have to be gradually tackled through       DD - Demand Draft
various initiatives like                                 CRM - Customer Relationship Management
ü
Promoting liberal movement of labor
                                                         KYC - Know Your Customer
ü progressive regulatory changes
Bringing
                                                         Central Bank - The body which regulates the
ü
Delivering services efficiently                          banking industry within a country
ü
Increasing market penetration
                                                         STP - Straight through Processing
ü products appropriately
Pricing
ü
Managing customer relationship                           References

ü
Developing innovations in technology                     Web-based research on many sites including the
ü up a cost-effective operational
Setting                                                  following:
infrastructure
                                                         1. www.worldbank.org
Planned and focused efforts in the above areas           2. www.swift.com
combined with political will and business                3. www.westernunion.com
acumen would help this industry leap forward and
                                                         4. www.moneygram.com
contribute significantly to the globalization process.
                                                         5. www.m2inet.icicibank.co.in
Glossary and Abbreviations                               6. www.remit2home.com
Remitter - Person working abroad who intends             7. www.xoom.com
to send money across the border to his family
members back home

Beneficiary - Person who receives money from              Author
the remitter
                                                          Akhil Nikam
Nostro - A banking term to describe an account            Senior Consultant - Finacle
one bank holds with a bank in a foreign country,          Infosys Limited
usually in the currency of that foreign country




                                                                          International Remittances
International remittances

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International remittances

  • 1. International Remittances Universal Banking Solution System Integration Consulting Business Process Outsourcing
  • 2. “Remittance is the act of transmitting money to a Migrant-receiving country: distant location to fulfill an obligation” • Availability of employment This Knowledge Paper makes an effort to elucidate the concept of remittances in the • Friendly migration policies international context and is focused on the • Shortage of skilled resources remittances sent by emigrants to their families • Financial liberalization back home, for domestic consumption and investment. The paper highlights the significance • Abundance of natural resources of International Remittances to the global A few examples of such corridors (sender economy, details existing business models, and country-receiving country) are Mexico-US, examines emerging trends as well as challenges South Asia-UAE and India-US. faced by an industry which is to poised to play a bigger role in the globalization process. Impact on Global Economy Remittances Overview This section highlights the magnitude and impact In this globalizing world, migration of people of increased migration on the world economy. from one country to another for employment opportunities has become a common The World Bank estimates that remittances phenomenon. Dominant migration corridors have in 2009 totaled $420 billion - out of which been formed between various countries/regions. $317 billion went to developing countries - and This is primarily due to the socio-economic involved some 192 million migrants or 3.0% of conditions prevailing in the migrants’ countries the world population. of origin and destination. A few examples: Figures 1 and 2 respectively depict the remittances Migrant-sending country: of top remittance sending and receiving countries • Lack of job opportunity for 3 consecutive years. • Lower wage rates Figure 3 expresses the quantum of this incoming • Social insecurity money as a percentage of GDP thereby indicating • Political instability its significance to the destination country’s overall • Extreme geographical conditions development. (Source: World Bank website) Figure 1 Top Remittance-Sending Countries (figures in US $ million) International Remittances
  • 3. Figure 2 Top Remittance-Receiving Countries (figures in US $ million) Figure 3 Remittances as a Percentage of GDP Operating Models in the Remittance Business banks globally, through which remittance transactions are routed An International Remittance business may follow the conventional banking model or any of the Figure 4 illustrates the Nostro-based setup, non-banking models. wherein the Beneficiary Bank has an account with the Correspondent Bank, while Figure 5 Conventional Banking Model shows the generic process involved in a remittance In this model, an end-to-end remittance transaction transaction based on a Nostro account model. involves the following parties: • Remitter’s Bank - the bank where the remitter has an account that is debited for transferring money to the beneficiary • Beneficiary’s Bank - the bank where the beneficiary of the remittance has an account that is credited for the remittance money received • Correspondent Bank (only in cases where the above-mentioned entities do not have a direct business tie-up) - an intermediary bank which has associated with various Figure 4 Nostro-based setup International Remittances
  • 4. Non-Banking Channels Non-banking players play a vital role in the remittance space and have a larger share in the Global Remittance business than conventional banks. These entities operate in various forms: Money Transfer Operators MTOs (Money transfer Operators) like Western Union and Money Gram have a network of agents across the globe and serve as non-bank remittance channels. The remitter can visit an MTO outlet and pay cash Figure 5 Remittance Transaction Process in a in foreign currency to send money to any part of Nostro-based Setup the globe where the MTO’s agent is present. The Modes of Remittance receiver can visit the MTO agent at his location and collect the money in local currency. There are various Origination Modes, which are Figure 6 depicts the process for an International used by the remitter to transfer money. Remittance transaction effected through an MTO. The remitter can issue a remittance request to his bank either a. by visiting the branch and furnishing a Remittance Instruction Form prescribed by the Remitting Bank, bearing all details necessary for effecting the remittance along with an account debit mandate or b. by dropping a cheque from an account with the Remitting Bank along with the Remittance Instruction Form Based on the details in the form, the Remitter’s Bank debits his bank account and sends a SWIFT message to transfer the money to the Beneficiary’s Bank. Figure 6 Listed below are the various Disbursement Modes of remittance using which the money can be tendered to the beneficiary. The settlement between the MTOs in the two countries takes place through their partner 1. Direct Credit to the beneficiary’s account banks. On receiving the remittance amount in with the Beneficiary Bank cash from the remitter, MTOs deposit those 2. Disbursement of Cash to the beneficiary on funds in their local bank accounts. MTOs furnishing appropriate photo - identification/ request their bank to transfer the consolidated address proof in the event of his not having amount to the bank account of the MTO agent a bank account in the receiving country. In order to minimize 3. Transfer of Money by the Beneficiary costs, only the net amount (total amount to be Bank to the beneficiary’s account with sent to the recipient country minus total amount some other local bank using the local to be received from that country) is sent. payment mechanism Please note that the beneficiary receives the money much 4. DD issuance in the name of the beneficiary before the settlement between the MTOs International Remittances
  • 5. Figure 7 Fund Movement for an MTO Costs have started spending on advertising and brand building. The fixed costs incurred by an MTO are listed below: 4. Compliance and Regulatory Costs Various mandatory compliance/regulatory 1. Origination and Disbursement Agent procedures in the remittance business are Network Costs listed below. Expenses involved in following Setting up agency networks/outlets in the them form a sizeable part of the total cost. country of origination and disbursement • KYC of Remitter / Beneficiary forms a significant portion of an MTO’s To prevent practices like transfer of costs. Though traditionally, MTOs have had money between anti-social elements, proprietary agents, of late, third party agents the “Know Your Customer” checks are have also been appointed by Western done by the Remitter’s and the Union and Money Gram. While these agents Beneficiary’s Bank. KYC would typically receive a fixed minimum compensation, involve obtaining documents such as major incentives are linked to the number photo-ID, address proof, passport and value of transactions. The MTOs thus details, driving license details etc. share the risk of expanding their network with these partners. • Regular Reporting of Transaction Details to the Central Bank 2. Processing and Money Transfer Costs Central Banks place limits on the value of an individual’s remittances within a These are the fees to be paid to the certain time frame. local bank which buys and sells various Additionally, institutions are also international currencies, on behalf of the supposed to comply with Anti-Money remittance service provider. These costs are Laundering requirements and report linked to the aggregate transaction value any suspicious/fraudulent transactions and MTOs with large volume transactions to the Central Bank. could negotiate lower fees. 5. Administrative and IT costs 3. Marketing Costs The MTO will also have to bear office This simple transaction processing business maintenance expenses as well as system has now become commoditized and players development and maintenance costs. International Remittances
  • 6. Risks Exchange Houses Exchange Houses are extensively used for Currency Hedging remittances from the Middle East. Unlike the When there is an International Remittance banking channel, this channel is based on transaction through an MTO, there is a time lag Vostro accounts i.e. the accounts maintained between fund availability to the recipients by exchange houses with various banks in (money is generally received the same day) the beneficiary countries. These accounts are and actual international transfer by the MTO’s pre-funded by the exchange houses. partner bank through its Correspondent Bank The Remittance Transaction Process (generally takes 3 business days). This implies a currency rate risk which is borne by the MTO. Step 1 The remitter deposits the remittance money in the overseas currency in cash Salient Features of the MTO model at the Exchange House counter. 1. It is the fastest mode of transfer since the Step 2 The exchange rate and the transaction beneficiary can receive the money within fee are communicated and confirmed seconds after it is sent. over the counter. 2. People without bank accounts can also Step 3 The beneficiary account details are transact in this model. provided by the remitter. 3. The cost per transaction is lower compared Step 4 The exchange house instructs the to other models. Beneficiary Bank with whom it has a 4. MTOs have the biggest market share in the tie-up for transferring the requisite remittance business. amount in the beneficiary country’s 5. Setup costs are high, acting as a barrier for local currency using one of the new entrants. following modes: Figure 8 depicts the Vostro-based setup wherein the Correspondent Bank has an account with the Beneficiary Bank a. E-mail: The exchange house sends Costs: The costs involved are similar to that of e-mail to the Beneficiary Bank the MTO channel. instructing it to transfer the amount to the furnished beneficiary account. Salient Features of the Exchange House Channel b. Integration of exchange house and Beneficiary Bank systems 1. Since the Vostro accounts are pre-funded, the beneficiary amount is paid based c. Beneficiary Bank’s proprietary on the funding in this account. Hence, remittance platform on receiving the Exchange House’s International Remittances
  • 7. instruction, the beneficiary receives the costs amount almost instantaneously. 1. Creating a network of banks in the countries of origination and disbursement would be 2. The Exchange House has to fund its a major cost. account with the Beneficiary Bank; hence the latter enjoys the float. 2. The cost involved in creating and maintaining a robust and scalable IT platform would also 3. The Exchange House can draw a DD on its be significant. Vostro account in favor of the beneficiary and hand it over to the remitter over the Salient Features of the Online Model counter, which can then be dispatched by 1. Transaction is effected from the convenience courier or even sent along with a friend of one’s home. travelling back home. Alternatively, the DD can also be drawn in favor of the 2. The transaction can be effectively tracked. remitter, who can then carry it back to his 3. TATs are on the higher side (3 to 5 home country on his return and get it working days). cleared there. This is a secure option for 4. The remitter has to undergo a one-time blue collar workers who would otherwise registration process which has a TAT of 4 to have to travel with hard cash. 5 working days. Emerging Non-Banking Channels White Label Platform Providers Online Channels A White Label Platform provider is a variant of the online platform channel, wherein a third Online Players, which provide platforms party enables banks and FIs operating in the encompassing the entire remittance process, remittance corridors to launch remittance are a recent development. They have created services by providing the following: global networks with banks/FIs in origination • A gamut of innovative products based and destination countries. From the comfort of on the latest demand, which could be his home, the remitter can initiate a remittance further customized to meet specific request by registering himself on the online requirements of banks and end customers entity’s website and furnishing his and the in various geographies beneficiary’s bank account details. • Best-in-class technology for new age business The Remittance Transaction Process • Marketing and sales support for promoting the product range Step 1: Select the recipient country and enter the amount to be remitted • 24*7 operations support in case the client proposes to outsource transaction processing Step 2: Choose the mode in which the recipient • Round the clock customer service through would receive funds toll-free numbers, email support and online • Cash pickup live chats • Direct deposit into bank account • Built-in international compliance and regulatory practices • Cash delivery to the recipient's home • Adherence to the best practices in IT security Step 3: Choose a payment method to confirm Costs: the money transfer 1. The major cost involved is in hosting and Through a card or by debiting his account maintaining the platform. with the local bank in the remitting country 2. Marketing expenses form a significant part of Step 4: Notify the recipient about the transaction the total cost. International Remittances
  • 8. Salient Features of a White Label Platform b. Offer high-level reach and scalability Provider c. Bring about efficiency in operations 1. The provider need not be part of the d. Ensure more consistent and faster banking/financial domain. delivery of remittance services 2. Without investing in technology and This system is currently being evaluated by operations, banks and FIs can use this leading banks and institutions, which provide plug-and-play offering to provide world-class remittance services. remittance services. 3. It provides all the advantages of an online 6. Online offerings on the originating side are platform channel to the end customer. expected to increase in importance, in line with the growing education levels and 4. The platform provider’s economies of scale computer proficiency of immigrants. reduce the per-transaction cost. 7. Increasing Role of Software and Analytical Emerging Trends in the Remittance Business Tools 1. MTOs are leaders in the remittance space, In addition to SWIFT and the local payments but are being challenged by other channels. system in destination countries, which form the IT backbone for the remittance 2. The following are turning out to be decisive business, in-house systems are also being factors while choosing a remittance provider: used to streamline various processing stages a. Transaction cost involved in a remittance transaction. Also, b. Exchange Rates several CRM and web analytics software c. User-friendly procedures are being used by the service providers d. TAT of the transaction to analyze the transaction data for the e. Transaction tracking mechanism following purposes: f. Reach in the destination country a. Understanding customer behavior b. Understanding business cycles 3. Agent exclusivity, one of the strong competitive advantages of MTOs on both c. Segmenting customers the remitting and receiving side of money d. Launching products targeted at specific transfers, is eroding and agents are customer segments increasingly shifting away from the exclusivity e. Designing marketing campaigns and arrangement. incentive schemes for specific customer segments 4. To increase their market share, conventional banks are leveraging their existing client f. Aligning sales force and customer support relationships and are coming up with channels for better customer service innovative offerings such as prepaid g. Effective customer due diligence through cards for the beneficiary. This enables them i. Transaction monitoring to provide account-to-cash and cash-to- cash offerings to the customer, allowing the ii. Customer screening against published beneficiary to withdraw cash in tranches. black lists iii. Identification of risks and suspicious 5. SWIFT has come up with a Workers’ transactions Remittances solution for banks and FIs for settlement of cross-border person-to- 8. Role of Central Banks in Recipient person payments. It aims at providing a Countries standardized, off-the-shelf operational and technical framework to Central Banks in recipient countries are a. Connect new entities playing the role of facilitator and promoter International Remittances
  • 9. to extract maximum benefit from the • The number of migrants is inversely opportunities provided by International proportional to the remittance costs across Remittances. They are: different regions and service providers. This seems to suggest an important volume a. Allowing migrant workers to open foreign effect that works either through scale currency accounts so that economies and/or higher competition in a large market. - their earnings could be retained in foreign currency and can be exempted from • Corridors with higher income per capita in foreign exchange regulations both the sending and receiving countries, exhibit on an average, higher costs, which - better interest rates could be offered and could reflect higher prices of non-tradable the interest income could be made tax free. goods, such as services, in general. b. Facilitating securitization of the future • Competition and market structure matter. flow of remittances, which will result Corridors with a larger number of providers in a better sovereign rating enabling and countries with more competitive local banks to raise cheaper and banking sectors exhibit lower costs. On the long term finance needed for the other hand, costs are greater in corridors country’s development. where banks have a higher share in the remittance business. Challenges Faced by the Industry b. Grey Channel a. Transaction Cost The Grey Channel eats into a significant The cost that the remitter has to bear varies share of the remittance business. Apart from 2% of the remittance amount and from the threat it presents to the established may go as high as 10%, depending on the players, it also poses a security threat following factors: since the money remitted could be used for anti-social purposes. Since this channel 1. Exchange rate margin of the service does not have to comply with any regulatory provider procedures, it offers lower transaction costs 2. Fixed fee being charged by the service and faster TATs to the remitter. provider 3. Tax incurred c. Reconciliation of Remittance Transactions 4. Origination mode (Online, branch etc.) Since a remittance transaction flow involves chosen by the remitter processing by multiple parties, a significant 5. Disbursement mode (Cash, DD, other percentage of transactions are non-STP banks’ account etc.) chosen by the remitter due to various reasons such as incorrect 6. Revenue sharing arrangement between submission of details, account closure by the Correspondent Bank and the beneficiary, system errors, manual errors by Beneficiary Bank operations staff and communication gaps between the parties involved- such as failure Central Banks have constantly endeavored to to convey information regarding changed bring down the costs. procedures -resulting in breach of TATs and customer dissatisfaction. In October 2009, The World Bank Development Research Group published a paper on factors d. Revenue Sharing Arrangement influencing remittance costs based on data gathered across 119 country corridors. This report In the absence of a globally adopted reveals the following trends which could help standard model, the revenue-sharing address the issue. arrangement between the Remitter’s Bank, International Remittances
  • 10. Correspondent Bank and Beneficiary Bank Vostro - Local currency account maintained by is ad hoc, resulting in disputes and at times, a local bank for a foreign (correspondent) bank. disengagements between the parties. For the foreign bank, it is a Nostro account. Moving Ahead…. SWIFT - Society for Worldwide Interbank Financial Telecommunication supplies secure messaging Though the International Remittance industry services and interface software to wholesale is out of its infancy, it is still evolving and financial entities catching up with the globalization process. TAT - Turn Around Time Roadblocks and unaddressed issues continue to exist. The pace of reform is slow and the GDP - Gross Domestic Product business is still commoditized. Several political, FI - Financial Institution social and economic factors defining the business will have to be gradually tackled through DD - Demand Draft various initiatives like CRM - Customer Relationship Management ü Promoting liberal movement of labor KYC - Know Your Customer ü progressive regulatory changes Bringing Central Bank - The body which regulates the ü Delivering services efficiently banking industry within a country ü Increasing market penetration STP - Straight through Processing ü products appropriately Pricing ü Managing customer relationship References ü Developing innovations in technology Web-based research on many sites including the ü up a cost-effective operational Setting following: infrastructure 1. www.worldbank.org Planned and focused efforts in the above areas 2. www.swift.com combined with political will and business 3. www.westernunion.com acumen would help this industry leap forward and 4. www.moneygram.com contribute significantly to the globalization process. 5. www.m2inet.icicibank.co.in Glossary and Abbreviations 6. www.remit2home.com Remitter - Person working abroad who intends 7. www.xoom.com to send money across the border to his family members back home Beneficiary - Person who receives money from Author the remitter Akhil Nikam Nostro - A banking term to describe an account Senior Consultant - Finacle one bank holds with a bank in a foreign country, Infosys Limited usually in the currency of that foreign country International Remittances