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  • 1. International Remittances: The Next Big Thing in Mobile Payments?SummaryThe World Bank estimates that in 2011 more than USD 483 billion was sent internationally throughofficial remittance channels with the bulk of that - $351 billion - going to developing countries. Itprojects that the total will rise to $593 billion by 2014, with $441 billion going to developing countries.The amount that flows through informal channels is obviously difficult to quantify, but the IMFestimates it may be as much as 50% greater than the official amount. So obviously a great deal of moneyis moving across borders in relatively small amounts and at a relatively high cost: the average remittanceis probably less than $1,000, and the World Bank estimates that the average person pays almost $12 infees to send $200 from the US to Mexico, the largest single remittance corridor in the world. 1Since the mobile phone is increasingly the dominant means by which workers overseas keep in touchwith their families and friends back home, and since domestic mobile payments are becoming morecommon around the world, it is natural to think that the same channel could be used to sendinternational remittances, and possibly reduce costs and increase convenience at both the sending andreceiving ends.Unfortunately, the role of mobile payments in international remittances has been modest so far. A totalof 2,121 international services are included in the World Bank’s September 2011 Remittance PricesWorldwide (RPW)2 database: only 10 of these are mobile services. A study conducted in early 2012 byCGAP (Consultative Group to Assist the Poor) found only 17 live mobile cash-out internationalremittance services, primarily in Asia3. In this white paper we will look at some of the drivers andinhibitors of mobile payments in the international remittance sector and assess the near to mediumterm future for mobile remittances. www.strategyanalytics.com September 2012
  • 2. International RemittancesWhat is driving interest in mobile remittances?The size of the opportunityThe most obvious source of interest in mobile remittances is the sheer size of the potential opportunity.As shown in Exhibit 1 below, remittances showed a slight dip in the global financial crisis of 2008-2009,but have since resumed a strong upward trend. For the period 2008-2014 the World Bank is expectingtotal remittances to grow at a compound annual rate of 4.5% to reach $593 billion at the end of theperiod. Developing country remittances will grow significantly faster, at 5.3%, to reach $441 billion in2014.4 Exhibit 1 Global Remittances, 2008-2014And not only is the dollar volume of transactions high but the fees for handling the transactionsconstitute a very attractive potential revenue stream. The World Bank calculates the global average costof sending remittances at 9.3% of the value of the transaction: this would equate to a current globalmarket of just under $50 billion this year. At a time when mobile operators are seeking new revenuestreams to make up for stagnant voice and texting revenues, this is certainly an attention-getting sum.Exhibit 2 below shows costs for some of the major remittance corridors between the US and Caribbeanand Latin American countries. 5 2
  • 3. International Remittances Exhibit 2 Typical Remittance Costs: US to Caribbean/Latin American Destinations, Q3 2011There is academic research to show that if remittance fees are lowered, the volume and frequency ofremittances will increase, as it becomes more cost effective to send smaller amounts of money. Mobilepayments may be able to lower the cost of remittances somewhat by applying the more favorablevolume economics of large agent networks at the receiving end, although the transaction will stillrequires a money transfer operator (MTO) or other intermediary between sending and receivingcountries, and those costs are unlikely to be affected greatly by what happens at the receiving end.Convenience at the receiving endOne of the major problems with international P2P remittances has been at the receiving end. Using abank or an MTO typically requires the recipient to travel to a branch location – potentially a significantjourney – and fill out paperwork. As intra-country mobile payment systems become more common, anobvious next step would seem to be to eliminate this inconvenience by delivering internationalremittances directly to recipients’ mobile phones.  To the extent that the remittance remains electronic – that is, the recipient spends the remittance by using mobile payments, rather than cashing out – the recipient’s personal security is enhanced and the receiving payment network needs to maintain lower levels of cash at its agent locations. 3
  • 4. International RemittancesObstacles to mobile remittancesLack of market concentrationOne of the barriers to more mobile participation in the global remittances is the fact that traffic isunconcentrated; most of the total volume flows through a large number of relatively small “corridors,”as pairs of sending and receiving countries are called. Exhibit 3 below shows the 20 highest dollarvolume corridors in the developing world in 2010. Except for a handful of high volume cases, none ofthese corridors accounts for more than 1% of global remittance volume, and collectively the top 20 onlyaccount for a little more than a quarter of global volume. The remaining US$300+ billion flows through alarge number of much smaller corridors, such as Netherlands to Nigeria (US$ 87 million) or South Koreato Bangladesh (US$ 18 million).6 Exhibit3 Top 20 Emerging Market Remittance Corridors, 2010The importance of this lack of concentration is that each corridor represents a unique combination ofbanking regulations, mobile operators, and consumer and retail environments. While there might besome economies of scale in setting up multiple corridors, each one is still going to require a significantamount of unique effort to set up. It is not easy to build up remittance volumes that are high enough tojustify the set-up and management costs  For example, it took Safaricom over a year to create a mobile remittance service just between the UK and Kenya, primarily because of the need to negotiate foreign exchange issues between the Bank of England and the Central Bank of Kenya.Security concernsAnother concern that has been holding back the development of mobile-based cross-border fundstransfer has been the potential for money laundering and terrorist financing. The very characteristics ofmobile payment systems that make them popular – the near-ubiquity of mobile phones, the ability tosend small sums easily and cheaply with minimal banking oversight, the wide networks of mobile 4
  • 5. International Remittancesretailers who can act as money agents – are danger signals to the international counter-terrorismcommunity.  The relatively small size of typical mobile payments means that a cross-border money laundering operation of any scope would have to organize activities across multiple accounts at both the sending and receiving ends. This would not necessarily involve large numbers of people, as some automation might be possible, but it would not be a trivial operation.A 2008 US State Department report on “Money Laundering and Financial Crimes” asserted that “the riskthat criminal and terrorist organizations will co-opt m-payment services is real” and has a frequentlycited chapter entitled “Mobile Payments – A Growing Threat.” 7It is unclear how real this threat actually is. The only examples of m-payment abuse that a 2010 FinancialAction Task Force (FATF) report could cite seem relatively minor, and are strictly domestic: two scams inthe Philippines where the victims were asked to make mobile payments, and a case in the CaymanIslands where stolen credit card information was used to illegally obtain phone credits. 8Nevertheless, in an age of heightened concern about global terrorism, regulators are not likely to ignorethe potential misuse of cross-border mobile funds transfer networks, which will continue to place acompliance burden on mobile operators seeking to launch or expand services.  The consequences of failure to observe money laundering regulations can be severe: Wells Fargo was fined US$ 160 million in 2010 for involvement in laundering Mexican drug money stemming from lax “know your customer” (KYC) procedures, and HSBC has set aside US$ 700 million to cover potential penalties for allegedly similar activities.Established/alternative ways of sending fundsFor typical international senders and receivers of remittances, sending money across internationalborders carries some risks: can the transmitting agency be trusted? Will the disbursing agent apply anunfavorable exchange rate or charge unanticipated cash-out fees? Will the transaction be completed inthe expected amount of time? Since the remittance is likely to be critical to financial well-being at thereceiving end, and a significant part of earnings at the sending end, there is understandably a highdegree of conservatism about the transactions. Switching to a new and untried remittance channel willrequire significant motivation.  Anecdotally, it would appear that unofficial remittance channels like hawala networks may offer lower costs than official channels. Unofficial channels avoid the costs of regulatory compliance, taxes, and other overhead, and in addition some also serve as part of money laundering or counterfeit currency operations. These illegal activities generate revenue that can subsidize a more generous exchange rate on hawala activities, for example.  In addition, to the extent that hawala agents share their language and national background, remittance senders may simply be more comfortable with them than with clerks at official cash- in agencies. 5
  • 6. International RemittancesCompetition to mobile remittances also comes from other new ways of transmitting value, if not cash,from country to country. These new alternatives include:  Cross-border bill payment. In this model, instead of sending cash to a recipient who will use it to pay utility bills, for example, the funds sender simply pays the bill directly on the recipient’s behalf. One of the potential advantages of this is that the sender controls how the remittance is spent. Cross-border bill payment requires setting up electronic payment systems with each target merchant, which is time-consuming and has so far limited the spread of the service. iSend is an example of a cross-border payments processor; a customer can visit a payment location in the US and have a utility bill paid directly to Jamaica Public Services, for example.  Airtime top-up. Along the same lines as cross-border bill payment, this model allows someone in one country to pay directly for airtime for a mobile subscriber in another country. This is considerably easier to set up than bill payment, since the merchant offering the services simply buys bulk airtime from the operator in the recipient country and resells it locally. Companies offering this service include iSend, Vesta, and WorldRemit.Prospects for mobile remittancesThe conditions are favorable for long-term growth of international remittances handled at one or bothends by mobile transactions.9  International remittance traffic is only going to increase. The economies of countries that derive a high percentage of GDP from remittances – countries like El Salvador (16%), Honduras (15%) or the Philippines (11%) – would have to be restructured dramatically for this amount of income to be generated from domestic employment. Moreover, in an increasingly global economy, we can expect to see more people choosing cross-border employment, not fewer.  Domestic mobile payments systems will continue to grow in most countries that receive remittances. As more people in the receiving country use mobile money, it will be increasingly desirable to have international remittances feed directly into their mobile wallets.That is the long term, however. In the short and medium term two key factors will inhibit the rapidgrowth of mobile international remittances:  Regulation. Governments around the world are rightly concerned about the use of existing cross border funds transfer mechanisms to engage in fraudulent transactions, to launder the proceeds of criminal enterprises, and to finance terrorism. The fact that in many countries there is no universal, meaningful registration of SIM cards means that making mobile phones the receiving agents of cross border remittances only adds a level of uncertainty. In addition, governments that are concerned about regulating the flow of capital into and out of their countries have an additional incentive to move cautiously. Remittance income is very important, but since overseas workers already have ways of sending cash back home, few banking regulators are likely to “fast track” regulatory reform that would add mobile options. 6
  • 7. International Remittances - In an address to the International Banking Summit on Regulation of Cross‐Border Mobile Payments and Regional Financial Integration at Mumbai on March 29, 2012, Dr. K. C. Chakrabarty, Deputy Governor of the Reserve Bank of India, neatly summarized one reason why a dramatic streamlining of regulatory practices is unlikely to occur soon: “To my mind there cannot be a uniform standard for this. The issue is country specific and each country has to take its decision based on need, issues and threat perception.”10  Customer awareness and trust. As mentioned above, both senders and receivers, but particularly senders, are conservative with respect to the remittance transfer systems they employ. Creating trust in a new system inevitably takes time and effort; word of mouth and the experience of others in the same community is likely to be more persuasive than advertising, but takes a great deal longer to build up.For these reasons, we believe that it will be a matter of several years before mobile-based systems willstart to account for a significant part of the international remittance business. If there is an element ofgood news in this for prospective mobile remittance processors it is that there is time to experiment andget it right, without worrying too much about losing the window of opportunity. - Tom Elliott Strategy Analytics September 20121 World Bank, Migration & Remittances Data, , Remittance Prices Worldwide2 World Bank, Remittance Prices Worldwide, No. 3, November 20113 CGAP, Landscape Study On International Remittances Through Mobile Money, February 20124 World Bank, Remittance Prices Worldwide, No. 3, November 20115 World Bank, Remittance Prices Worldwide6 World Bank, Bilateral Migration and Remittances 20107 United States Department of State, Bureau for International Narcotics and Law Enforcement Affairs,“International Narcotics Control Strategy Report; Volume II, Money Laundering and Financial Crimes” March 20088 Financial Action Task Force, “Money Laundering Using New Payment Methods” October 20109 Strategy Analytics, “Mobile Money is a Major Opportunity, But Not Without Partners” September 201110 Dr K. C. Chakrabarty, “M - Banking in India - Regulations and Rationale” March 2012 7