What is remittance?
Remittance is a sum of money provided as a payment or a gift. Generally, family members gift this money to their loved ones on special occasions or as a support.
Remittances became extremely popular in the 19th century, with the booming of globalization. Western Union, which started as a telegraph company in 1851, became a pioneer in money transfer services, as banks had difficulty adapting to various legislations and regulations. At the dawn of the 21st century, Paypal was founded. It became a game-changer in digital money transfers. Today, remittance represents a full-fledged industry involving hundreds of thousands of lives worldwide.
A few numbers
By the end of 2022, the global remittance industry is expected to represent $630B. Most cash flows are issued by developed economies to developing ones. According to World Remit, the top 10 countries receiving remittances in 2022 were India, China, Mexico, The Philippines, Egypt, Pakistan, France, Bangladesh, Germany, and Nigeria.
For these countries and several others from developing economies, remittances represent a decent part of the national GDP. Thus, making them essential for the survival of the local population. For instance, in 2021, remittances in Mexico totaled up to $51.4B (mainly coming from the US) which represented 4% of the country’s total GDP. To compare, remittances represented 0.02945% of the USA’s total GDP in 2020.
Although remittances are a key solution to poverty in several countries, the remittance industry is still lacking the proper tools and services to make them accessible. In this article, we will be covering the limits of the remittance industry.
Why is the remittance system broken?
There are 4 main factors demonstrating the remittance system is broken.
The infrastructure itself is neither transparent nor organized enough. Indeed, current remittance services lack full visibility on the transaction costs and the time of delivery. Additionally, it is complicated to compare multiple remittance services. The fix rates can change multiple times a day. Plus, not all the remittance companies offer the same service in terms of funding and disbursing transfers. Regulations on remittance services change so much from one country to another, it is nearly impossible to compare them without trying them. Therefore, most of the time, families try multiple services and end up with the most suitable one.
Furthermore, relying on new, more competitive infrastructures is a challenge as the trust-factor is extremely important. Remittance is a sensitive industry where companies are handling customers’ money. Indeed, customers would rather go to a defective yet trusted system rather than a new, untrusted one. This means that the market is 1. very competitive, and 2. complicated to enter.
Inflation rates in the US and Europe are undeniably high (respectively 9.1 and 8.6% in 2022). However, inflation rates in developing economies are tremendous. Currently, the top 10 countries with the highest inflation rates worldwide are Venezuela (1198.0%), Sudan (340.0%), Lebanon (201.0%), Syria (139.0%), Suriname (63.3%), Zimbabwe (60.7%), Argentina (51.2%), Turkey (36.1%), Iran (35.2%), and Ethiopia (33.0%).
People living in these economies (and others) do not have the means to overcome poverty. Firstly, they do not have access to financial services (1.5B adults remain unbanked worldwide, and most of them live in developing economies). Secondly, their country is generally at war or facing unstable political systems. Last, they lack the financial literacy to build wealth over time. Thus, why they rely on their relatives abroad providing remittances.
Unfortunately, sending remittances is not a lasting solution as it maintains the receiver in a dependent state. While benefiting from remittances can help cover a complicated month, one can never actually learn how to create their own lasting financial stability. Furthermore, saving money is often not part of the local cultures.
In the end, whether they benefit from reduced or large amounts of money, and whether they receive this money daily, weekly or monthly, they come across the same repeated issues: they need to ask for more.
This is why financial literacy is crucial to help these communities step out of poverty. Helping them receive money is not enough, they must also learn how to manage it.
The last obstacle to a practical remittance system is the fact that apps and services are not designed for the local population. Indeed, in Latam, where the unbanked population is still high, cash is still predominant for the disbursement of international remittances. Yet, it is unsafe, and far from being the smartest way to manage money due to lack of visibility on the transactions history.
Furthermore, and covering our previous point, remittance services did not design their apps to introduce financial literacy either. Most apps’ design may be practical to send and receive money through card payments, but have little long-term focus and adaptability to local’s needs.
What has been done to fix it?
As stated, the remittance system is broken, which means companies have tried to fix it to some extent. We can mention a couple like Wise, Remitly, Revolut, Worldremit, etc.
These companies enjoy the benefits of being:
- digital (most adults in developing economies prefer mobile banking over traditional systems), and;
- cost effective in some places (which can be a true asset when one’s country is concerned).
However, as previously mentioned, the market is highly competitive and difficult to enter for a reason of 1. infrastructure which requires a variety of partners and compliances, and 2. trust, as money is a touchy subject, especially in places where it doesn’t flow easily.
Furthermore, due to the multiple actors involved in any transaction (issuing bank, payments processor, network, etc.) sometimes it is challenging to understand the reason behind a failed transaction leaving the customer unsatisfied and the money undelivered.
As a matter of fact, actors within the industry are numerous, and change depending on the continent and the country. Therefore, a deep, complete shift of the remittance industry requires resources companies may not have. In fact, a flawless remittance infrastructure requires the company to focus on finding the right local partners for each country it is willing to cover. This process is time consuming, and, to be fair, a total brainer.
Also, these companies do not solve two major problems:
- the fact that a high proportion of adults do not have access to financial services, and;
- the dependency issue due to financial illiteracy.