Leading with remittances – a new retail banking segment
The remit of the World Bank and the Gates Foundation is to focus on flows of money to developing economies, so much of the publicity is about those and as a result, much of what we understand about remittances is about those markets. And they are not to be underestimated, writes Neil Burton, director of product service strategy at Earthport.
Last year migrant communities generated huge transaction volumes – over two billion payment transactions a year. In context, that is more payments than many countries generate. Indeed, in non-cash terms, it would rank in the top 25 markets in the world and is the equivalent to the total non-cash payments for the entire Russian population.
Remittance flows to developing countries are estimated to have reached $372 billion in 2011, and are expected to grow at 7-8% annually to reach $467 billion by 2014. As these figures clearly show, dismissing remittance sums as loose change can result in missed revenue opportunities for banks.
Perhaps surprisingly, there are considerable flows into developed countries as well. Remittance flows to high-income countries, such as Poland and Canada, reached $129 billion in 2011 and are expected to increase to $148 billion by 2014. The UK receives about double the amount it sends. In Belgium, the home of the European Commission, the figure is closer to two-and-a-half times, and in France it is three times.
In the case of the latter countries, one might argue that SEPA, the Single Euro Payments Area, will increase that figure as it makes Europe a single market with no border banking. In fact, this is likely to happen sooner than we expect. By removing the barriers, it should encourage more payments to be made.
Some initiatives are advocating change to boost services to the ‘lightly-banked’ on a global scale. One suggestion has been how central banks could create the right environment to allow postal service providers to offer more financial products in partnership with banks. The UN Postal Union has over 660,000 outlets throughout the world and in many developing countries, larger networks than banks. More than one billion people in 50 countries already use postal banking services, adding up to $1.6 billion in savings and deposit accounts.
With central banks offering the right regulatory environment, the use of ‘light’ banking licences could allow postal operators or others, such as telcos – M-Pesa in Kenya being the oft-quoted poster child – the ability to operate retail accounts. To quote the report authors: “If only 50 posts … can bank a billion people, then the remaining operators in UPU’s 192 member countries, such as Nigeria, Russia, Mexico … could easily provide a gateway to financially include at least 500 million unbanked people directly or through bank partnerships.”
That’s a lot of potential new bank customers.
The profile of a ‘typical’ remittance sender has changed. Economic emigrants, especially those in OECD countries, are becoming new citizens. Where their needs once were low-margin money transfers, today they have become fully-banked. This isn’t a new phenomenon; in fact it’s always been this way.
The population of the US is based on exactly that principle. Consider the US-India remittance corridor, for example. The median household income of an Indian-born resident in the USA is almost double that of native US residents. Indians are one of the fastest growing ethnic communities in the United States.
According to the 2000 US census, 64% of Indian-born residents have a bachelor degree, compared with 28% of US-born nationals, and are five times more likely to have a master’s degree or above.
Remittances have accounted for 3-4% of India’s GDP since 2000. The Reserve Bank of India reports that workers’ remittances to India reached $46.4 billion for the fiscal year 2008/09, up from $2.1 billion in 1990/91. Although more than half of these remittances are used for family maintenance, the rest are either deposited in bank accounts (20%) or invested in land, property, and securities (7%).
The size of this market is such that it even has recognised segments – NRI & PIO. NRIs – Non-resident Indians – and PIO – People of Indian Origin – both of whom have requirements to send money back to India. These range from the simple sending money to family, or organising accommodation for trips home, to quite complex, such as investing in India. With restrictions placed on foreign investment, much of the inward investment is actually by NRIs.
Looked at from the perspective of the recipient nations, remittances account for more than 5% of Gross National Income in 28 countries. Since the average fee paid by a sender is up to 9%, for most of these countries, fees amounting to around 0.5% of GDP are ‘left on the table’. To put that into context, it is roughly equal to the foreign aid received in those countries.
Consequently, in a communiqué in July 2009, G8 development ministers called for the commission charged on making remittances to be halved, from the 2009 average 10% to 5%, within five years. The communiqué indicated that the measure would free up $12 to $15 billion for immigrants’ home countries.
These statistics suggest that the G8 countries can have the greatest effect by reducing fees charged in their own backyards. The G8 countries are popular destinations for emigrants. At least four of the G8 countries are amongst the top 10 destination countries for people emigrating from 19 of the 28 countries. Halving the fees for these 19 countries would generate over $4 billion per annum. It is noteworthy that both banking and payments are amongst the largest and most mature markets in many of those G8 countries.
Part of the issue has been looking at the value of the customer today and not longer term. Although remittances are usually viewed in the context of financial inclusion of unbanked customers, an increasing proportion of P2P transactions come from payments between accounts. With expat professionals and high skilled migrants comprising a huge proportion of immigrant communities in developed countries, the traditional profile of the remittance customer has dramatically changed.
As emigrants become established in their new countries, they gradually become more affluent, going up a scale from financially included to having broader financial needs. Money sent to their home country changes from funds for sustenance, towards funds used for inward investment, property or businesses.
These customers increasingly look like traditional new retail banking clients. The annuity value of a new retail client is much greater than transaction and FX fees which can be earned from remittances. At the same time, research often shows that these customers are often more sophisticated in their use of FX in particular, than the bank realises. By underestimating the needs of this group, banks are underestimating the size of the opportunity.
Typically and traditionally most banks worldwide are domestic in their focus – they concentrate on payments between bank accounts in their own country.
Some banks service cross-border payments and are au fait with the in’s and out’s of correspondent banking and Swift messaging standards. But the correspondent banking model isn’t ideally suited to P2P payments and remittances.
If a new provider were to move into the market and treat the high end segment of remittances as a lead entry product to acquire more retail customers, the value of doing so is actually much larger. A bank would benefit from more than just the fees, but from the total relationship with the new customer, who has broad and long term requirements. Whilst it’s often said that the buyers of remittance services are amongst the most sophisticated followers of FX rates in the world, the convenience and control of being able to transact through their bank account for a lower cost, could attract those individuals as new bank customers.
Remittances should not be looked at in isolation. To a service provider, account-to-account remittances ‘will often be indistinguishable from any other low value, cross-border transfers, including small payments to and from businesses’. Furthermore, like the checking account, remittance services are a ‘lead-with’ banking product – a way to earn the right to cross-sell a portfolio of services.
To capture the growing segment of migrant professionals, banks need to view remittances in the context of the long-term relationship with the customer, not just in terms of transaction fees for low value payments. By effectively addressing the changing needs of these communities, banks could establish an ongoing relationship across a wider portfolio of services that cater to the needs of fully banked customers.
This is a great opportunity that shouldn’t be missed. The question is how can banks bring down the costs of cross-border remittance payments, while delivering a fast, reliable and convenient service?
Just as we have seen in mobile payments, launching a new service and hoping that customers will come rarely works. Therefore banks need to carefully plan their approach and consider how best to serve this new client segment. Partnering with an established payment provider will enable banks to leverage domestic payment schemes for international transfers to deliver fast, reliable and low cost remittance payments. This will enable banks to cater to the needs of the growing number of migrant customers, while innovating with new products and services to stay ahead of their competitors.
Neil Burton is director of product service strategy at Earthport