Remittances and the need for financial inclusion

I chaired a dinner last night on remittances and it was pretty interesting.

The
term ‘remittances’ is generally used to refer to foreign
workers sending money home and represents major GDP for many
countries. For example, Tonga’s remittances represent 40% of the country’s GDP, Samoa’s is 25%, Jamaica’s is over 20% and the Philippines 10%.

This is a big market and a mature one.

Equally, it is not just about migrant workers as the appetite for transferring money internationally has  extended far beyond itinerant workers to a vast and diverse cross-section of senders and receivers.

Some senders are using lo-tech systems like Hawala, whilst others are heavily linked via hi-tech mobiles ... meanwhile receivers are the same, with everyone assuming they receive through human interfaces and yet, if you study this area closely, more and more is being enabled via mobile.

For example, in the Philippines, SMART and Globe Telecom have been running riot in the remittances space for years:

• SMART is the leading mobile operator in the Philippines with over 25 million subscribers, and has been offering an SMS-based remittance service known as “SMART Padala” since 2004. This service allows expatriates to deposit money with partnering banks in areas where high concentrations of Filipinos live, such as Hong Kong, Yokohama, and Abu Dhabi, and to specify the SMART subscriber in the Philippines who is to receive the money. The service sends a text message to both the sender and the recipient, notifying them that the money has been transferred. The recipient can then use his/her mobile account to specify the desired withdrawal amount and pick it up at a partnering institution in the Philippines.

• The Philippines’ second mobile operator, Globe Telecom, offers a similar service known as G-Cash. At participating remittance companies in the US, the UK, Australia, and Taiwan, Filipino workers can send money via an SMS message to Globe subscribers in the Philippines. The recipient can pick up the cash from any Globe Telecom store by showing his mobile phone (with the SMS message) and a form of personal identification.

And if you wonder whether low-income folks want mobile money, then this is the place to look. For example, a study by the microfinance and remittance focused organisation CGAP found that targeting low income users could succeed.

“Philippines is known as the texting capital of the world but we were working in provinces that were poorer and where literacy levels were lower than the national norm. What we found is true in most markets globally: younger people whose social lives involve being connected via cell phones and people with exposure to using computers are more comfortable using cell phones to begin with.”

The result is that 80% of money movements in the Philippines is now made electronically. A decade ago, 80% would have been physical movements of cash. That’s transformational and is why one of the folks at the table said that: “if you don’t know what is happening with technology these days, then you’ve lost the plot”.

This increase in access to electronic and formal channels for money transfer, rather than physical and informal channels, is rapidly changing the dynamics of connectivity and funding.

For example, microfinance is now becoming a major focal point, as is financial inclusion, and it amazed me that everyone talked about mobile for money transfer during our discussion but no-one talked about social networks. And when I did raise the subject of Kiva as a social lending microfinance service, one of the bankers asked me: “what’s Kiva?”  Surely, being in this space, banks should know about these developments?

Another said the lack of commentary on social media and microfinance was more of a reflection of the fact that young people use social networks and the average age of a remittance sender and receiver is around 37.

I then added that the average age of a Facebook user is 42 and Twitter users are generally over 35s.

Silence.

“if you don’t know what is happening with technology these days, then you’ve lost the plot”

The nature of networks, mobile internet and social finance is changing all of our lives fundamentally and is as true in the remittances space as any other.

Ignoring such fundamental changes is likely to leave the existing money transfer firms dead in the wake of dynamic societal change.

For example, the likelihood of a divide between informal networks using human carriers of money versus formal networks using mobile internet is the clear path of the future. This inevitably raises critical questions for existing providers of Money Transfer such as Western Union, Travelex and the banks.

And these are the themes we explored in depth last night.

It was interesting that one theme that kept cropping up regularly was ‘trust’.

I always hear trust in the context of banking and payments, so challenged what it is that is trusted.

For example, the Philippine GCASH Service is delivered in partnership with financial institutions and banks. Why? Because, according to the banks, customers trust the service if a bank is involved.

Sure. They trust the service, not because they trust the bank but because they trust the banking infrastructure to guarantee movement of funds.

So the trust is in the system, not the individual bank or financial partner involved.

That’s one critical point.

Another is that this market – especially if we talk more about financial inclusion – involves so many players. It cannot be led by a bank or mobile operator, but needs to be led by a collaborative effort of banks, mobile carriers, governments agencies, regulators and more.

It may even need involvement of security services and police, as half the dialogue about money transfer is focused upon terrorism.

“9/11 was funded by hundreds of sub-$1,000 transactions through the money transfer markets”, was one of the comments made last night.

Sure, but is the role of a money transfer service to allow simplicity of money transfer or to monitor the pulse of terrorism?

I would argue that it is both, which is why so many organisations need a hand in these markets: global regulatory authorities, national governments, police and security forces, banks and infrastructure providers, mobile and electronic service organisations, software and technology firms ... and money transfer agents of course.

This led to an interesting debate at the end of the evening about the role of banks in money transfer markets and their interest, or lack of interest, in remittances.

One banker said that: “any dramatic change in the past will not have been noticed by the bank and any dramatic change in the future will not be noticed because these changes happen locally, not globally”.

Another reckoned it was because banks are not able to make money out of money transfers, but can lose money: “on a $1,000 transaction, we make about $10 if we’re lucky but, if you mess up, the costs are anything up to $100 million in fines and over $1 billion in lost business due to reputational damage.”

I disagreed with that view as, if banks felt that way, you wouldn’t be performing any payments processing for anyone.

In fact, a point came up that surely this was a corporate and social responsibility and that if banks are not interested in remittances today, and the market continues to grow, then at what point will banks start to wonder why they are disintermediated from these markets and wish they had been involved?

We concluded that, in order for remittances to really rock and roll in the future, it needed three things:

1. A goal: there must be some collaborative objective and mission to be reached;
2. A reason: there needs to be some skin in the game and value returned for all players;  and
3. A cause: there needs to be a common enemy to cause the players to do this, such as the threat of regulatory change.

With the above, then a multi-industry group could potentially be created to burst the bubble of financial exclusion and move us to a completely connected global society of commerce.