The Limits of the Remittance Industry

remittance

What is remittance?

Remittance is a sum of money provided as a payment or a gift. Generally, this money is gifted by family members, relatives or close friends 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 and became a game-changer in digital money transfers. Today, remittance represents a full-fledged industry involving hundreds of thousands of lives worldwide.

By the end of 2022, it is expected that the global remittance industry will 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?

As pinpointed in our vision article, there are 4 main factors demonstrating the remittance system is broken.

  1. Infrastructure

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 because the fx rates can change multiple times a day and not all the remittance companies offer the same service in terms of the method chosen to fund and disburse a transfer. Indeed, 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.

“Although there are companies offering great fees comparison tools to compare the fees between remittances, it’s difficult to ensure that they are comparing “apples to apples” in all the characteristics of the remittance service. At the same time, it doesn’t guarantee the money to reach its destination in the promised time lapse. From a customer experience sometimes it is not ideal as third party banks or financial institutions may have additional unexpected fees and require additional time to complete the transfer.”

Paula Vasco, Operations Manager at Finnt

Read more about Paula’s experience with the remittance industry. 

Furthermore, relying on new, more competitive infrastructures is a challenge as the trust-factor is extremely important in such a sensitive industry where you are handling customers’ money. Indeed, people would rather go to a defective yet trusted system rather than a new one, which hasn’t proven its ability. Meaning, the market is 1. very competitive, and 2. complicated to enter.

  1. Inflation

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. The first reason is that they do not have access to financial services (1.5B adults remain unbanked worldwide, and most of them live in developing economies). The second reason is that their country is generally at war or facing unstable political systems. The third reason is that they lack the financial literacy to build wealth over time. Thus, why they rely on remittances provided by their relatives abroad.

  1. Dependency

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.

“If I send $200, they will spend 200. If I send $1,000, they will spend 1,000. Saving money is not part of the local culture. Remittance is not designed for building saving habits but rather to encourage spending. Remittance companies know it, that’s why they promote ways to send quickly and frequently. However, this is not in the interest of both people sending and receiving.”

Anji Ismail, CEO at Finnt

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.

  1. Designless

The last obstacle to a practical remittance system is the fact that apps and services have not been 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 apps are not designed 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 where lots of partners and compliances are required, and 2. trust, as money is a touchy subject, especially in places where it doesn’t flow easily. 

Furthermore, due to the multiple actors that are 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, for a remittance infrastructure to be flawless, the company must 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.

What is Finnt building?

As you have probably envisioned by now, Finnt is building an app which has the ambition to mend these problematics we saw earlier.

The Finnt app is family-focused with educational tools designed to bring financial literacy to its users. The concept of Finnt is to have the financially literate member of the family help his or her relatives building wealth for themselves. Concretely, the account and sub-account owners will have access to debit cards and various money management tools, including visibility on spending transactions.

To solve the inflation problem, we are looking to provide savings plans powered by both DeFi and TradFi. DeFi (Decentralized Finance) uses blockchain technology and enables higher yields than those offered by traditional banking institutions. TradFi (Traditional Finance), on the other hand, provides regular yields and compliance requirements to make wealth gain and withdrawal easier for the user.

Last, and this is probably the most ambitious part of our project, we are looking to provide the most affordable and convenient remittance service possible thanks to blockchain technology.

Our strength is our empathy and personal struggles with these exact issues, and we hope we accurately grasped our future customers’ needs to help them build wealth for themselves and their loved ones, regardless of the part of the world they live in.

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