As banks cut lifeline, will remittance alternatives emerge?

The three blog entries on this subject so far:

• The African bank crisis and remittances
• More on Africa, Somalia, remittances, Barclays and
  HSBC
• Banks
  should not be political pawns

has stirred up a lot of interest.  In particular, Mondata, an American
consulting firm on mobile finance, has written a fascinating insight on the
subject including this infographic:

In the spirit of keeping the conversation going, here’s
their analysis.

As Banks Cut
Lifeline, Will Remittance Alternatives Emerge?

In May, Barclays served notice that it would close the
accounts of approximately 250 companies that no longer meet its anti-money
laundering criteria, of which about 80 are active in the remittance sector. As
money transfer firms protested the decision, Barclays issued a statement that
it was concerned that, “some money service businesses do not have the proper
checks in place to spot criminal activity and could therefore unwittingly be
facilitating money-laundering and terrorist financing.”

As this decision gradually goes into effect over the next
few months, affected small- and medium-sized money transfer businesses may be
forced to shut their doors, lay off staff members, and sever essential
remittance lifelines to countries from Nigeria and Somalia to Sri Lanka and
Poland. What are the implications of this decision across the broader
remittance industry, and how might innovative solutions emerge to fill the
resultant gap?

Regulators v. Banks?

While Barclays is at the center of this current controversy,
it is not the only major financial institution to shift away from providing
accounts to international money transfer businesses. In fact, Barclays was one
of the last remaining British banks willing to provide these services. The
move, thus, is perhaps indicative of a broader, sector-wide problem. Facing
hefty Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)
fines from US regulators, banks such as Barclays and HSBC are veering away from
the international money transfer space.

Last year, HSBC was forced into a US $1.9 billion settlement
by US regulators over allegedly poor money-laundering standards. Following the
settlement, HSBC decided to exit the money services business and close all
associated bank accounts, leaving money transfer companies with only 30 days to
find a new banking provider.

According to Dominic Thorncroft, Chairman of the UK Money
Transmitters Association (UKMTA), in a recent interview, there is no evidence
that the affected money transfer businesses do not comply with AML/CFT or other
regulations. However, this fact has not stopped regulators from increasingly
fining banks associated with these entities – forcing banks to withdraw account
services in order to avoid fines.

Cutting an Essential
Lifeline

Putting the reasons behind the Barclays decision aside, one
thing is clear: the move will have a dramatic impact on both money transfer
businesses and the recipients of remittances, many of whom are dependent on
this money as their primary source of livelihood.

Somalia will be particularly hard hit. Remittances comprise
over half of Somalia’s gross national income, with more than US $1.2 billion
remitted to the Somali territories annually. British-Somalis alone send up to
US $154 million (100 million pounds) each year, making up 60 percent of the
annual income of their families back home.

Dahabshiil, the largest money transfer business in the Horn
of Africa, is one of the companies that will be directly impacted by the
decision. According to CEO Abdirashid Duale, cutting off accounts to the
company and other money transfer agencies will be a “recipe for disaster.” His
company alone has nearly 300 branches and thousands of agents across the Somali
territories, providing an essential influx of money that is primarily spent on
food, medicine and school fees.

In Bangladesh, which received nearly US $1 billion in
remittances from the UK last year, the impact of the Barclays decision could be
similarly severe. According to Kamru Miash, managing director of KMB Enterprise
Money Transfer Ltd., about 80 to 90 percent of remittances from the UK to
Bangladesh go through Barclays’ accounts.

Pushing Back

Given the vital importance of remittances globally, the
question remains: how can money transfer stakeholders safeguard society from
money-laundering and the financing of terrorism, while keeping essential
remittance channels open? This is what UK Government officials, money transfer
industry associations, and members of civil society are currently trying to
figure out.

At the end of July, UK members of Parliament convened to discuss
how the Government could address the concerns of remittance companies. Members
of the Somali diaspora have also been particularly vocal in the discussion,
bringing their stories to the media. Further, a letter signed by more than 100
researchers and aid workers states that closing the Barclays Dahabshiil account
would cause a crisis for Somali families that rely on money transfers from
abroad.

According to Thorncroft, the UKMTA is meeting with
government officials, banks and other stakeholders to try to find a viable
solution. One proposed idea is to establish a code of conduct for money
transfer companies which would create an auditable set of standards for
mitigating AML/CFT threats.

What Are the
Alternatives?

With the Barclays decision primarily targeting small-scale,
local money transfer firms, industry heavyweights such as Western Union and
MoneyGram have seemingly escaped unscathed (even though they are responsible
for a large share of regulatory fines, according to Thorncroft). Thus, in some
contexts, diasporans may be able to use these services as an alternative.
However, using these platforms are often not a viable alternative, as they
charge far higher fees than local firms such as Dahabshiil. A simple comparison
of sending GBP 50 from the UK to Somaliland showed that Western Union fees (GBP
4.90) were nearly two times those of Dahabshiil (GBP 2.50).

In addition to offering less competitive exchange rates,
these companies may have less extensive branch networks, particularly in countries
such as Somalia. According to Duale, Western Union only has one branch in the
entire territory, located in Hargeisa, Somaliland – limiting accessibility to
the majority of the population. In Somalia, he says, “there is really no
alternative to using money transfer businesses."

Cutting off formal remittance channels, therefore, may
result in individuals seeking underground, unregulated alternatives. This in
turn could foster more money laundering, more terrorist financing, and more
crime, according to Thorncroft. UKMTA has estimated that as much as 50 percent
of existing cash-transfer business will divert to unregulated money transfer
providers, where supervision is near impossible.

Going Digital –
Mobile & Bitcoin

With a gap now emerging in the remittance market, perhaps an
innovative solution will arise to fill it. In a recent blog post on the
Barclays decision, co-founder of Project Diaspora and Hive Colab Teddy Ruge
asked, “is this an opportunity Africa’s mobile money revolution can exploit to
fill the gap?” According to Mike Laven, CEO of Currency Cloud, innovative “pay
out” solutions such as mobile money could make remittances more transparent,
assuring regulators that they are reaching the proper destination.

But, as Ruge asserts, “migrants can only send money home if
the regulatory environment in their host country allows it.” In practice, this
may also prevent any international mobile money transfer platforms from being
able to take off. One solution, according to Laven, might be for money transfer
firms to engage with intermediaries, who can conduct due diligence on smaller
firms – cutting down on AML and terrorist financing risks.

Perhaps Bitcoin, the decentralized, digital currency that we
wrote about here, could provide a solution. Kipochi, a Nairobi-based startup,
offers a Bitcoin wallet that enables users to easily send and receive funds via
the Bitcoin network. According to co-founder Pelle Braendgaard in a recent
interview, "we want to be the primary way to access Bitcoin for users in
the developing world." He said that he expects early adopters of the
wallet to include Africans and members of the diaspora who seek an affordable
and safe way to send and receive remittances.

 Unlike traditional
money transfer firms, leveraging Bitcoin networks enables Kipochi to avoid AML
or other regulatory risks, as the risk liability falls on the third-party
Bitcoin exchange. This means that Kipochi can operate even in high-risk areas
such as Somalia, where many other companies either cannot or do not want to
offer services.

 While pressure from
US regulators and international banks may be formidable, perhaps new players
such as Kipochi can break through the stalemate and offer a product that can
keep remittance channels open, while maintaining necessary checks against money
laundering and other threats. With many livelihoods dependent on these
remittances, it is essential that a solution be found, and soon.

Enhancing
Humanitarian Aid with Mobile Money

Beyond P2P remittances, international money transfers also
face limitations in the humanitarian aid space, where money often flows across
borders to provide support in conflict zones, areas with limited rule of law,
or to rebuild communities following natural disasters. For aid organizations,
sending money in these contexts can run into formidable operational and
regulatory barriers – and mobile money transfer has emerged as a potential
solution.

Money Transfer in
Challenging Contexts

It is in areas of conflict or natural disasters that people
are often most in need of outside assistance, whether from family members or
international aid organizations. These streams of income can cover the costs of
basic needs or help to rebuild essential infrastructure. However, money
transfer infrastructure is understandably weak in these contexts. Banks may be
far away from those in need, or even destroyed. Transactions can face a variety
of regulatory hurdles, and thus take a long time to be completed. In some
cases, aid organizations opt to deal with cash, which can bring risks and
inefficiencies for both senders and receivers, and can limit the accountability
of funds.

Opening Access with
Mobile

Facing these complex challenges, many aid organizations have
turned to mobile channels to enhance recipient access to funding sources.
Mobile disbursement of aid can enable cheaper, faster and more transparent
transactions.

In an interesting case study from Bangladesh, Oxfam and
bKash entered into an agreement to transfer cash to 3,371 households via mobile
channels, ensuring timely and secure payments to households most affected by
flooding in the Northwestern districts. According to a press release on the
program, “using bKash as a delivery agent will result in possible reduced
corruption and security risks, reduced workload of agency staff, and greater
flexibility for recipients.” Further, the document notes that the method is
particularly valuable during emergency situations, given the limited time it
takes to disburse money through the platform once it is up and running.

Haiti provides the classic example of the use of mobile
money in an emergency situation, where mobile money was used to distribute aid
following the 2010 earthquake – a project which highlighted both the advantages
and disadvantages of mobile aid disbursement  (see this past Mondato article). While NGOs in
Haiti used four electronic money distribution platforms – mobile money,
electronic vouchers, prepaid cards and smart cards – mobile emerged as the
preferred option.

The recent partnership between Visa and NetHope provides
another example of how mobile money can be used in the humanitarian aid sector.
The companies have partnered to create the Visa Innovation Grants Program,
which provides five grantee organizations with funding to modernize their
payments systems.

One grant recipient, MercyCorps, is using the funding to
develop mobile money services for farmers or other actors in agricultural value
chains. Pathfinder International, another recipient, is implementing a mobile
money platform to distribute salaries to community health workers in Kenya.
Though these programs are not directly in emergency or conflict contexts, they
show how mobile money can be used to transfer aid funding directly to
beneficiaries in a transparent fashion.

Assessing Mobile
Money for Aid

Pilot projects that use mobile money for aid distribution
both highlight the benefits of using mobile money in emergency contexts, and
serve as cautionary tales for NGOs thinking of going this route. According to a
CGAP blog post from last year, early-stage mobile money ecosystems, such as
those that emerge for aid disbursement, may have inefficiencies that need to be
ironed out before the platform can function smoothly: “NGOs should take pains
to appraise all the costs of starting up a program based on mobile money,
including the possibility that they will have to help other actors build the
infrastructure of the industry.”

The Dalberg and Gates Foundation report that was produced to
assess the impact of mobile aid disbursement in Haiti offers key lessons for
other NGOs planning to integrate mobile money into their programs, particularly
in post-disaster situations. One challenge cited in the report was fulfilling
know-your-customer (KYC) requirements for new beneficiaries in areas where many
did not have official forms of identification. The workaround solution was
using mini-wallets with lower KYC requirements or agreements with MNOs to
accept NGO-issued ID cards.

Another challenge in some contexts is that, despite the
near-ubiquity of mobile devices globally, not everyone has a mobile phone, “let
alone an account linked to their phone which can accept fund transfers.” And
even if everyone did have a personal mobile device, it is likely that they are
not all operating on the same network. According to the CGAP post, therefore,
“until cell phones are truly ubiquitous, mobile transfers need to be weighed
against other options that may be cheaper or more practical for distributing
cash transfers.”

The Verdict?

Using mobile money in the aid sector holds promising
benefits over cash and other methods of transferring funds, particularly in
post-disaster areas or emergency contexts where funds need to travel quickly
and safely. Cross-sectoral actors, such as those involved in the Better Than
Cash Alliance, have endeavored to usher in the transition to digital payments,
but much more still needs to be done. However, as aid actors look to integrate
mobile, they will need to move cautiously and consider how this will fit into
the contexts in which they work – lest mobile money become part of the problem,
not the solution.