Remittance Market: Ready and Waiting for its 'Skype' Moment

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The high cost of global remittance is in the spotlight, with the advent of new online models that may end the domination of the current leaders.

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Remittance Market: Ready and Waiting for its 'Skype' Moment

  1. 1. • Cognizant ReportsRemittance Market: Ready and Waiting forits ‘Skype’ MomentThe high cost of global remittance is in the spotlight, with the advent ofnew online models that may end the domination of the current leaders. Executive Summary G8 nations have resolved to reduce the average The growth of the high-margin global remit- cost of remittance by five percentage points by tance business is outstripping that of even 2014.1 But while government action can provide international migration. The business mainly an incentive, the real drivers for reshaping the consists of cash-to-cash transactions, largely remittance business and reducing costs are com- by under-banked and unbanked population petition and emerging innovative models — such segments. This partially explains the success of as TransferWise — which will challenge the con- money transfer operators (MTO) Western Union ventional agent-led, brick-and-mortar remittance and MoneyGram, both of which leverage their intermediaries. Players aiming to succeed over large networks to offer convenience to this demo- the long term in this business will, therefore, need graphic, as well as inspire trust. to respond by reducing their operational costs. While MTOs offer their customers easy access and Fast-Growing Market the convenience of cash transfers, the agent-led While the international migrant population intermediation at both ends of each transaction increased 1.4 times between 1990 and 2010, from bloats the cost of the transaction. The World Bank 156 million to 210 million, the flow of remittances pegs the average cost of remittance for retail cus- in the corresponding period increased 6.4 times tomers at 9.3%; meanwhile, Western Union and from $68 billion to $440 billion2 (see Figure 1, MoneyGram boast profit margins in the range of next page). This growth is due, in part, to the 25% or higher. advent of MTOs and their ubiquitous presence, which led to a reduction in remittances through At a time when the cost of a long-distance call informal channels. The World Bank estimates the is zero, thanks to players such as Skype, and the global remittance flow to reach $500 billion by costs of transferring data are marginal, courtesy the end of 2012, primarily through MTOs at the of the Internet, why should retail customers pay originating end of the transaction and through 9.3% to move money? The governments of the banks at the receiving end.3 cognizant reports | november 2012
  2. 2. Growth of Migration and Remittances, Worldwide 500 500 400 400 Billions of dollarsMillions of people 300 300 200 200 100 100 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Migrants RemittancesSource: BBVA Research, with United Nations and World Bank figuresFigure 1With their global network of third-party agents, the global average cost of sending $200 is 9.3%,MTOs are able to provide convenience, pay- the average cost for wiring the same amountment assurance and multi-language capabilities through MTOs is 10.16% (see Figure 2).and thus gain customer trust. Today, one in fivedollars remitted globally passes through There is wide variation in the average cost ofWestern Union (which owns 16% of the market) or sending $200 even within the G8 countries. TwoMoneyGram (with 4% market share).4 countries, in particular, stand out: Russia and Japan. The lowest costs are in Russia, whichThe Price of Trust does not allow commercial banks to offer remit-The World Banks remittance price data highlights tance services. The highest are in Japan, wherethe pricing inefficiency in the market. Because commercial banks dominate the market. Onlythe market is highly fragmented, with multiple in 2009 was the Japanese remittance marketplayers and channels of remittance, a wide range opened for nonbank remittance service provid-of price points is available across routes or ers (RSPs), following the Payment Services Act ofcorridors to remit a fixed sum of money. While 2009 (see Figure 3, next page).Average Cost for Sending $200 11% 10% 9% 8% 7% 2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011 Global Average International MTO IndexSource: Remittance Prices Worldwide, The World Bank, November 2011Figure 2 cognizant reports 2
  3. 3. G8 Countries: Spreads and Averages50%40%30%20% 10% 0% Canada France Germany Italy Japan Russia UK U.S. Median Price Spread between Lowest and Highest PriceSource: Remittance Prices Worldwide, The World Bank, November 2011Figure 3Within G20 countries, commercial banks turn out bias toward high-value remittances. This is mani-to be the most expensive of all remittance service fested in the pricing spread among commercialproviders, with an average cost of 13.58% to wire banks, MTOs and exchange houses (see Figure 5,$200. Post offices are the cheapest, at 7.16%, next page).while MTOs come in a shade higher, at 7.37%. Of all the global remittance vehicles, cash-to-cashThe World Bank’s analysis also indicates that services are the dominant product and are pricedcommercial banks are the least transparent when competitively (with an average price of 7.6%)it comes to disclosing exchange rates applied to when compared with other products. Account-transactions, while MTOs are the most transpar- to-account services are the most expensive, withent in disclosing information to their customers an average cost of 14.10%. Though not widely(see Figure 4). available, prepaid cards and account-to-cash services were the cheapest products, at 4.2%According to MasterCard, banks in the United and 4.91%, respectively (see Figure 6, next page).Arab Emirates to India corridor exhibit a positiveAverage Cost of Remittance by Service Provider16% 12% 8% 4% 0% 2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011 Bank MTO Post Office Global AverageSource: Remittance Prices Worldwide, The World Bank, November 2011Figure 4 cognizant reports 3
  4. 4. Low-Value Remittances Have Wider Pricing Disparities 14% Fees and Foreign Exchange % 12% 10% 8% 6% 4% 2% 0% 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Money Remitted (in Dirham) Leading Bank Leading MTO Leading Exchange HouseSource: MasterCardFigure 5Economics of Moving Money that has earned the trust of their franchisees.With an operating margin of over 25%, MTOs However, the agent-led intermediation at eachcommand hefty pricing power, to the envy end of the transaction results in higher costs forof many service utilities. Cash-to-cash prod- the retail customer (see Figure 7, next page).ucts account for 80% of global remittances,mostly due to the under-banked and unbanked MTOs derive their revenues primarily throughsegments of the global immigrant population. fees (70% to 75%), exchange rate arbitrageMTOs, with their ubiquitous presence through (20% to 25%) and other value-added servicesexclusive relationships with third-party agents, (0% to 5%). They have a high fixed cost (35% tohave built a brick-and-mortar business model 45%), which largely comprises expenses to coverAverage Cost by Product Type18%16%14% 12%10% 8% 6% 4% 2% 0% account (all) account (other bank) Account-to- account (same bank) Account- to-cash Cash-to- account Cash-to- cash Credit/debit card serviece Door-to- door Mobile service Online service Pre-paid card service Account-to- Account-to-Source: Remittance Prices Worldwide, The World Bank, November 2011Figure 6 cognizant reports 4
  5. 5. salaries, rent, compliance, IT and marketing. The intermediation. Customers need to be nudgedvariable cost (55% to 65%) is mostly attributable toward cheaper online channels. The newerto agent commissions.5 entrants will need to shape consumer behavior over time and proactively rewire their remittanceMTOs spend approximately 3% of their revenue operating models.on regulatory compliance. Market leader WesternUnion reportedly employs 600 full-time compli- Forces Supporting Low-Cost Remittanceance staff and spends $60 million annually to Banks, public sector initiatives, mobility and newmonitor its money transfer operations.6 emerging online channels look set to dilute MTOs’ pricing power, rewire the business of movingLow-Cost Remittance: Triumph of Hope money and lower the cost of intermediation.Over ExperienceThe current remittance business model looks • Banks: Commercial banks, which have a 5%dated, particularly when compared with the cost share of the remittance market, have tradi-of wiring money using ever-lower voice and data tionally not considered remittance to be a corecommunications costs, courtesy of Skype and the banking business. However, in today’s “AA”Internet. Why should retail customers have to pay world, where conventional revenue streamstransaction fees that are 9.3% of the amount are drying up and their revenues and profit-they are wiring? The business model is clearly ability are under pressure, banks must and willripe for change. take a fresh look at the remittance business.We see the green shoots of change in various Banks are not the preferred choice for retailpayment corridors. For example, 80% of remit- customers to remit money, due to hefty transac-tances to the Philippines today are sent electroni- tion costs resulting from steep fixed costs andcally compared with just 20% 10 years ago. Seg- compliance needs (know your customer, or KYC,ments of the African market have created a 100% anti-money laundering and fraud detection).mobile payment infrastructure in a short span of Also, MasterCard’s research shows that bankstime.7 Another growing trend is that of disruptive tend to lag MTOs on a host of other parame-and cheaper online models of money transfer, ters, such as speed, customer service and easesuch as the approach pioneered by TransferWise. of sending and receiving money, which clients value highly. However, banks are in the busi-Change, however, will not be dramatic. Online ness of intermediating payments globally,channels of remittance are currently more a even if they cater to a different franchise andsupplement than a substitute for agent-led operate on a different scale. There are threeRevenues and Costs in the Cash Transfer Business Model Pays Cash MTO Deposits FX Foreign Bank Credits Foreign Agent to MTO branch Cash in Bank Exchange Foreign Agent’s Account Pays Recipient Revenue Fee + FX spread Variable Agent fee Bank charges Agent fee costs (approximately 30% (approximately 10% (approximately 20% of of fee plus FX spread) of fee plus FX spread) fee plus FX spread) Fixed costs MTOs’ administrative, regulation, processing and staffing costsSource: “Supply Side Constraints for Remittance Service Providers,” Developing Markets Associates, March 2010Figure 7 cognizant reports 5
  6. 6. distinct advantages on which banks can capi- transfer service for Safaricom, Kenyas larg- talize to become a preferred choice for both est mobile network operator. With this facility, banked and unbanked customers: unbanked, low-income Kenyans can use their mobile phones for person-to-person money 1. Reduce remittance time and cost by transfers. For remittances from outside the leveraging their superior payment capa- country, Safaricom partners with an MTO, add- bilities, such as direct access to payment ing a layer to the remittance intermediation systems, forex rates and access to multi- process and, therefore, increasing the cost. currency reserves. 2. Become more accessible to customers MTOs have partnered with mobile wallet by using online and mobile capabilities. providers and GSM, a mobile networks trade 3. Extend the bank’s reach through association that represents 750 mobile phone prepaid cards. operators, and have thus bolstered their competitive advantage. However, if regula-• Public sector initiatives: The Federal Reserve tors allow mobile phone operators to handle banks of the U.S., in partnership with Banco de foreign exchange in order to drive down México, Banco Rendimento and Microfinance remittance cost, MTOs’ current partners will International Corp. (MFIC), began offering an very likely turn into serious competitors. “account to receiver” service in 2010. This service helps customers in the U.S. send • Online channels: TransferWise, founded by money to their unbanked relatives in Mexico an ex-Skype employee, uses a crowdsourced and 10 other Latin American countries. model to remit money from customers in the UK to any EU country, at a fraction of the Initiatives such as these, while improving cost charged by the high-street banks.8 Trans- the efficiency and effectiveness of payments ferWise uses the daily interbank rate to fix systems, also reduce the cost of global exchange rates and keeps the service charge remittance and help attract new customers to low — five euros for a GBP 1,000 transfer, in the mainstream. contrast with the roughly 40 to 50 euros charged by banks for a similar transfer.• Mobile money: The mobile phone as a payment device is a game changer, especially The Road Ahead in the emerging economies, where banking Remittance business players are today at inclusivity is still evolving. Case in point is the the cusp of change that can potentially redraw fabled M-PESA, a mobile phone-based money the business landscape. They must, therefore, Quick TakeICICI StoryICICI, an India-based bank, rose to a leadership position in inward remittances to India in a short time,offering lessons for banks with remittance aspirations. Over the past decade, ICICI Bank has built acompetitive, low-cost and accessible remittance platform. Today, one in four dollars remitted to Indiapasses through the bank. The bank’s core value proposition lies in its easy access, simpler processes(registration, transaction requests and follow-ups), quicker transfer and low cost of remittance.ICICI caters to both white-collar, highly banked Indian knowledge workers in the U.S., UK and MiddleEast, as well as under-banked, blue-collar workers in the Middle East. By striking alliances with MTOsand other banks, ICICI ensured reach and last-mile connectivity, and with a custom-made, cutting-edgeremittance technology platform, it ensured instant access to remitters — both banked and unbanked.While the automation of payments, foreign exchange and centralized payment processing increasedspeed and reduced transaction costs, the bank’s focus on customer service, with a dedicated call centerand online tracking of payments, helped it gain customer trust. cognizant reports 6
  7. 7. proactively rewire their business model to meet • Reduce the cost of remittance intermedia-evolving consumer needs and aspirations. tion and compliance through automation of payments, foreign exchange and centralizedWe expect MTOs, the current market leaders, to payment and compliance management.do the following: • Market themselves as the preferred choice for customers by offering lower remittance• Embrace emerging technology platforms, time and costs by leveraging their superior such as mobile devices and online platforms, payment capabilities, as well as becoming to reach customers directly and reduce the more accessible to customers through online cost of remittance intermediation. and mobile capabilities.• Move to a variable cost structure to bring down the cost of remittance. For example, Mobile and online operators, hoping to radically compliance costs can be reduced by partner- change the marketplace, will likely seek to do the ing with players that can offer compliance as a following: service at a reduced cost. • Disrupt remittance supply chains with inno-Meanwhile, banks — looking to leverage their core vative models aimed at convenience, ubiquityproven strengths in financial transactions — will and simplicity.likely take the following actions: • Gain market share through aggressive pricing.• Take a long-term view of the remittance • Keep the cost of operations and compliance business given its secular growth rate and low in order to stay profitable. potential for steady revenue generation.Footnotes The 2009 G8 meeting in Aquila, Italy, agreed to reduce the global average remittance cost from 10%1 to 5% within five years through enhanced information, transparency, competition and cooperation.2 BBVA Research, with United Nations and World Bank figures.3 MasterCard Global Insights.4 International Investor Presentation, MoneyGram, Goldman Sachs Conference, September 2011.5 “Supply Side Constraints for Remittance Service Providers in the UK,” Developing Markets Associates, March 2010.6 Investor Day Presentations, Western Union, 2012 .7 “International Money Transfer: The New And The Constant,” Money Transfer International, 2010.8 Parmy Olson, “Investors Bet $1.3 Million on The Money-Transfer Guys Undercutting Banks,” Forbes, April 19, 2012. cognizant reports 7
  8. 8. References"Cloud Start-up: The Currency Cloud Targets Global FX," CloudTweaks, March 20, 2012. http://www.cloudtweaks.com/2012/03/cloud-start-up-the-currency-cloud-targets-global-fx/Erik Lueth and Marta Ruiz-Arranz, "A Gravity Model of Workers’ Remittances," IMF Working Paper, InternationalMonetary Fund, 2006. http://www.imf.org/external/pubs/ft/wp/2006/wp06290.pdf"A Technical Guide to Remittances," World Council of Credit Unions. http://www.microfinancegateway.org/gm/document-1.9.29426/26599_file_8.pdf"An Analysis of Trends in the Average Total Cost of Migrant Remittance Services," Remittance Prices Worldwide,World Bank, Issue 3, November 2011. http://remittanceprices.worldbank.org/~/media/FPDKM/Remittances/Documents/RemittancePriceWorldwide-Analysis-Dec2011.pdfManuel Orozco, "Attracting Remittances: Market, Money and Reduced Costs," Multilateral Investment Fund of theInter-American Development Bank, Jan. 28, 2002. http://www.rrojasdatabank.info/iadbremit/orozco02.pdfAlphina Jos and Graham A. N. White, "Beyond Remittances - How To Expand Your Mobile Money Product Suite,"Briefing Note 113, MicroSave, November 2011. http://microsave.org/briefing_notes/briefing-note-113-beyond-remittances-how-to-expand-your-mobile-money-product-suite?goback=%2Egde_1795011_member_82491307Manuel Orozco, Katy Jacob and Jennifer Tescher, "Business-to-Business Electronic Payments: Straight ThroughProcessing," Implementation Guide, Electronics Payment Network, Issue 2.4, February 2008. http://www.epaynet-work.com/cms/documents/001762.pdf"Card Based Remittances: A Closer Look at Supply and Demand," The Center for Financial Services Innovation,February 2007. http://www.aecf.org/upload/publicationfiles/IM3622H5010.pdf"CGAP Landscape Study on International Remittances through Mobile Money," GSMA, February 2012. http://mmublog.org/wp-content/files_mf/2012landscapestudyoninternationalremittancesthroughmobilemoney53.pdfMuhammad Sayeedul Haque and M. A. Bashar, "Channel of Remittances – A Micro Level Study." http://www.scribd.com/doc/16152588/Channel-of-Remittances-A-Micro-Level-StudyKangni Kpodar and Maelan Le Goff, "Do Remittances Reduce Aid Dependency?" IMF Working Paper, October 2011.http://www.imf.org/external/pubs/ft/wp/2011/wp11246.pdfAdolfo Albo, Juan Luis Ordaz Diaz and Juan Jose Li Ng, "Evolution of Sending Remittance Mechanism Has FavoredMore Resources Sent at Lower Costs," BBVA Bancomer, Jan. 17, 2012. http://www.bbvaresearch.com/KETD/fbin/mult/120117_MigracionMexico_32_eng_tcm348-284556.pdf?ts=2262012"General Principles for International Remittance Services," Committee on Payment and Settlement Systems,The World Bank, January 2007. http://www.bis.org/publ/cpss76.pdfDilip Ratha, "Global Prospects for Migration and Remittances in 2012: Implications for Asia," The World Bank,ADBI-OECD Roundtable on Labor Migration in Asia, Jan. 18-20, 2012. http://www.adbi.org/files/2012.01.18.cpp.day1.sess2.2.ratha.migration.remittances.asia.pdf"ICICI International Remittances Case Study, http://www.cash-tech.com/newcashtech/CT_Remittance_CaseStudy.pdf"Implementation of Mobile Money Transfer: ICT Report," BizClim, Restitution Workshop, June 2009. http://www.acpbusinessclimate.org/PSEEF/Documents/Final/Mobile%20Banking%20-%20technical%20report.pdf cognizant reports 8
  9. 9. Mohammed El Qorchi, Samuel Munzele Maimbo and John F. Wilson, "Informal Funds Transfer Systems:An Analysis of the Informal Hawala System," The International Monetary Fund and The World Bank,March 24, 2003. http://www.johnfwilson.net/resources/Hawala+Occasional+Paper+_3.24.03_.pdf"International Money Transfer — The New and the Constant: A Roundtable Discussion Report by Money TransferInternational," Money Transfer International, 2010. http://thefinanser.co.uk/files/remittances-white-paper.pdfManuel Oroczo, "International Money Transfers: Issues and Development on IT Models." http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=1216924Neil Daly, "International Remittance Service Providers: An Overview of Mobile International RemittanceService Provider Service Offerings," GSMA, May 2010. http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/03/gsmaremittanceserviceproviderwhitepaper182.pdfParmy Olson, "Investors Bet $1.3 Million on the Money-Transfer Guys Undercutting Banks," Forbes, April 19, 2012.http://www.forbes.com/sites/parmyolson/2012/04/19/investors-bet-1-3-million-on-the-money-transfer-guys-under-cutting-banks/"IOM and Remittances," IOM International Organization for Migration. http://publications.iom.int/bookstore/free/iom_and_remittances.pdfManuel Orozco, Elisabeth Burgess and Netta Ascoli, "Is There a Match Among Migrants, Remittances andTechnology?" Inter-American Dialogue, Sept. 30, 2010. http://www.thedialogue.org/PublicationFiles/a%20match%20in%20migrants%20remittances%20and%20technology%20MO_FINAL_11.4.101.pdfRoss Peat, "Klickex: Currency Exchange for Everyone," July 2011. http://www.microfinance-pasifika.org/assets/newsitefiles/Ross%20Peat.pdfPeter Cohan, "m-Via to Disrupt Moneygram, Western Union," Forbes, June 12, 2012. http://www.forbes.com/sites/petercohan/2012/06/21/m-via-to-disrupt-moneygram-western-union/2/"Payments Systems Worldwide: A Snapshot," The World Bank, 2011. http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/282044-1323805522895/121534_text_corrections_5-7.pdfJennifer Windh, "Peer-to-Peer Payments: Surveying a Rapidly Changing Landscape," Federal Reserve Bank ofAtlanta, Aug. 15, 2011. http://www.frbatlanta.org/documents/rprf/rprf_pubs/110815_wp.pdf"Its No Accident," Security Alert, Western Union. https://wumt.westernunion.com/pdf/NoAccident.pdfStanton R. Koppel, "The Dodd-Frank Act: Remittance Transfers," StayCurrent, Oct. 8, 2010. http://www.paulhast-ings.com/assets/publications/1671.pdf"The UK Remittance Market," UK Remittance Working Group. http://webarchive.nationalarchives.gov.uk/+/http:/www.dfid.gov.uk/Documents/publications/uk-remittances-report.pdf"Tipping Point for Outsourcing of Remittance Processing," First Data, 2008. http://www.firstdata.com/downloads/thought-leadership/fd_tipping_point_outsourcing_remittance_processing_whitepaper.pdfMick Weinstein, "TransferWise Closes $1.3M Seed Funding to Streamline Forex Payments," PandoDaily, April 17,2012. http://pandodaily.com/2012/04/17/transferwise-closes-1-3m-seed-funding-to-streamline-forex-payments/ cognizant reports 9
  10. 10. CreditsAuthorAnand Chandramouli, Director, Cognizant Research CenterSubject Matter ExpertRahul Kapur, Senior Director, Cognizant Business Consulting, Banking, Cards and Payments PracticeAnalystsDivya Sekar, Cognizant Research CenterPriyam Dutta, Cognizant Research CenterDesignHarleen Bhatia, Creative DirectorSuresh Sambandhan, DesignerAbout CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business processoutsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquarteredin Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep in-dustry and business process expertise, and a global, collaborative workforce that embodies the future of work. Withover 50 delivery centers worldwide and approximately 150,400 employees as of September 30, 2012, Cognizant is amember of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among thetop performing and fastest growing companies in the world.Visit us online at www.cognizant.com for more information. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 207 297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 207 121 0102 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com©­­ Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

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