The digital shift in remittance transfers
Remittances are forms of cross-border payment flows, which typically move from developed economies to emerging markets. As the lifeblood of millions of families worldwide, they are often a central form of support provided by migrants who recurringly send a portion of their finances earned from working abroad back to their home countries. In 2021 alone, the total value of remittances sent from the UK was $10.1 billion, with India being the top recipient country for remittance inflows.
Historically a ‘cash-in-hand’ business involving both cash, cheques, other paper instruments and branch couriers, remittance sending has witnessed a significant digital shift. As financial services digitise, cross-border payments are skipping the desktop altogether and transfers are made more available via third party mobile apps. Not to add, the onset of Open Banking payments, combined with the pandemic, have catalysed a cashless society. This has impacted how remittances are sent: by 2027, the digital money transfer and remittance market is expected to hit $4.4 trillion.
Sending remittances is often an expensive process, involving the maintenance of a complicated distribution network coupled with high foreign exchange (FX) costs. And yet, the process can still be timely, with transfers taking between 3-10 days in some cases.
It is interesting, therefore, to explore how the rise of fintech companies operating in the remittance space bring significant benefits. In the simplest of terms, a digital shift towards app-based remittance transfers brings:
Apps like MoneyGram can support money transfers to over 50 currencies, which invites new geographies to join the global network of cross-border transfers.
Moreover, highlighting the increasing demand for customer transparency in FS, apps beneficially provide a clear overview of their fees, avoiding potentially hidden costs. Take Wise, where users can track exchange rates and pre-calculate the estimated transaction fees which depends on the amount and country they send to. This reduces the possibilities of users sending beyond their limits, and can allow them to make more informed financial decisions.
Confirmed in up to 3-5 seconds, customers can send and receive payments from the palm of their hands. Such ease is also beneficial for businesses, as a simple UX can drive up account usage. Enabling transfers in fewer clicks, other features like contact syncing reduces form filling times.
Supported by the fact that apps do not engage in correspondent fees, low, flat fees can materialise. When banks send money overseas, they may go through the SWIFT banking network, meaning they pass through corresponding banks prior to the recipient bank. As banks themselves set their own exchange rates and typically add a markup, and corresponding banks charge their own additional fees, FX rates can skyrocket without warning. However, non-banks like Wise reduce consumer costs by skipping the SWIFT network and corresponding banks. Meanwhile, Western Union users can set alerts when the FX reaches their desired rate. This further ensures that sending can stay safely within a user’s financial threshold.
The fintechs that are paving the way for cross-border payments have implemented built in features that can authenticate senders prior to any transfer being made. By having an in-house team of security experts, this can minimise fears of the privacy risks concerns that exist around these nascent payment forms. Moreover, reducing unregulated channels can ensure money transfers remain ethical, lawful, and go into the right hands.
What are the issues and barriers to this emerging digital sphere?
While digitalisation brings prominent opportunities, the issues around remittance sending and receiving should not be understated. What remains a current challenge is addressing accessibility. Ultimately, both the digitally illiterate and the millions of people globally who lack access to a bank or card service (often living in rural, low-income areas), cannot adopt these beneficial services and remain ostracised. Engaging in transfer apps is an even greater obstacle to undocumented migrants as identification practices intensify. A changing regulatory landscape has generated more consumer protection yet could trigger unnecessary friction for those who rely on remittances for their social and financial well-being. This includes individuals living on unstable incomes (like the unregulated gig worker population) or those who lack support due to their undocumented status. As KYC practices develop, greater identification means people must be deemed ‘legitimate’ to operate within financial systems.
What does the future hold?
It is clear this digital shift can supercharge cross-border money transfers. Yet, where these initiatives fall short is when a lack of transparency on both fees and privacy regulations deters users from engaging in these mobile apps.
Nevertheless, emerging new features from fintechs reveals there are still many doors to unlock. For example, in partnership with Coinme, MoneyGram users can now buy, sell and hold Bitcoin, Ethereum and Litecoin from their app. This aims to cater for their younger digital-savvy customers, and brings an added benefit of reduced transfer costs at higher speeds. Unleashing the multiple ways these apps can improve everyday life, this fuels greater financial inclusion and personal control over one’s finances, despite the physical distance. For example, Fintech start up Nala introduced a new feature to enable the Kenyan diaspora to directly pay their local bills, such as school fees, in their home country. This resolves a lack control senders face over how, where, when and by whom their money is spent once it reaches new shores.
More often than not, we are witnessing fintechs implementing plentiful new solutions as new use cases emerge. That being said, it is whether fintechs can adapt to new geographic markets – at scale – let alone adjust accordingly to a country’s specific socio-cultural attitudes towards remittance sending. For example, the significant remittance culture in the Philippines means sending money home is deeply engrained into people’s daily lives. The pressure is on money-transfer apps to ensure they can maintain these expectations by providing efficient services that offer fast, safe and reliable payments. Undoubtedly, as the gradual nature of payments changes, digital remittances offer a significant potential to transform livelihoods, now and in the future.