The Future of Remittances is Digital

 

The remittance industry is being digitally remastered. A growing base of customers comfortable with using mobile devices, increasing competition from new entrants and margin pressures due to a growing global consensus on lowering remittance transaction fees is creating an impetus for the shift. Incumbent service providers are embracing “digital” to complement their existent services network whilst new entrants such as TerraPay are focusing on a pure “mobile” strategy to connect better with users and create greater business value. 

 

Globally, digital financial services have taken off, an important development in the process of transformation. According to Aite Research, 52% of total countries in the world offer mobile money services to consumers. In Asia and Africa digital wallets first launched as an additional touchpoint to retail prepay recharge have made greater inroads into customers’ lives by providing convenient and secure options for loans, micro-insurance and micro-savings. In Bangladesh, for example, B-Kash operates 18M wallet accounts and processes an approximate USD 26M in daily transactions, in Philippines 12M mobile wallet accounts are active, in Africa 300M users perform transactions equalling USD 200B annually. 

The convergence of international peer to peer transactions, a USD 600B market, and mobile wallets can accelerate the pace of the shift. Currently, 2% of total transfers are conducted over the mobile. Many remittance companies are beginning to leverage the advantages offered by digital to cost-efficiently expand access. Largely these efforts can be categorised into: 

 

Expanding first-mile access -- In an on-demand consumption environment; remittance companies have introduced mobile apps into their retail channel mix. Essentially, such initiatives focus on providing a wrapper service to improve the user interface of existing service channel architecture. The underlying instrument remains a bank instrument and at the destination leg recipients need to travel to a bank branch to pick-up cash. 

Improving last-mile distribution--Remittance service providers are beginning to partner with mobile network operators to overcome service supply limitations and broad-scale pay-out networks. To date, the partnership agreements have been forged between the bigger remittance companies and mobile operators. A large number of smaller, local remittance players, with market share ranging between 30% and 50%, remain outside the purview of such arrangements.

For remittance companies adopting digital to provide convenient services access is merely a starting point. Digital transformation goes much further, reshaping remittances from a utility to a strategic, value-added service that can be offered with greater focus on the broader commercial and transactional context within which a payment (or a transfer of value) takes place. 

 

Pathway to digital transformation

There is no single blueprint for adoption of digital, as markets and service providers are at different stages of maturity. TerraPay envisages a progressive approach, beginning with building efficient payment rails to delivering greater customer value by designing contextual products. As service providers advance on their digital transformation journey, each stage would help draw-in customers, deepen engagement and boost revenues. 

 

1. Build “digital rails” for international transfers

Central to an international money transaction is a payment network that collects monies from the payer and delivers the amount to a payee located in a different country. 

Currently payment rails interlinking digital wallet systems to facilitate mobile-mobile transactions are non-existent. At best, initial efforts have taken the form of bilateral arrangements, with wallet service providers forging mutual alliances or partnering with global money transfer companies to facilitate remittances along select corridors. According to the GSMA, currently there are 29 cross-border mobile money remittance corridors connecting 19 countries. The inherently one-to-one nature of these arrangements, however, limits rapid services up-scale. 

A multilateral model interlinking standalone wallet systems and payment networks for cross-border transactions can help service providers rapidly scale presence, reap the benefits of the multiplier impact (as aggregate value would exponentially grow with each new participant on-boarded on the network and lower costs due to shared distribution infrastructure. 

 

2. Create break-away value

A payment network interconnecting mobile wallets opens up new markets for low- denomination transfers among low-income, blue-collar migrant workers as well as customers who want to make impulse transfers. Currently remittances ranging between USD 50 and USD 150 are economically unviable, as senders pay transaction fees ranging between 8% and 15%. In low income remittance receiving households, a couple of dollars have significant value. For instance, USD 50 can enable families to pay school fee as well as rent.  

Mobile wallets have become the instrument of choice among consumers for frequent transactions of relatively small, permissible sizes. A popular use case in remittance dependent

 

Emerging economies is micro-recharge, where the average transaction ticket size is USD1 or lower. Having successfully architected their business for processing low-margin, volume-intensive transactions, telco-led mobile wallet services have the right business and process architecture to roll-out international micro-transfers.

Deliver value-centric propositions.

 

Given the high transaction fee for international transfers, mass seasonal discounts are the primary differentiator for remittance products.  However pricing innovation is easily replicable and the customer’s barrier to switch is very low. Digitalisation of international transfers allows service providers to differentiate on value rather than price. Practical examples include disbursement of merchant vouchers in-line with the regency, frequency and value of customer transactions. In effect, digitalisation ensures a transfer of USD 100 becomes USD 105 on receipt. Relevant service variants can be developed to ensure appeal among multiple consumer segments including new, engaged or dormant customers.

Improved customer intimacy.

 

The inherently always connected nature of digital multiplies opportunities to craft unique and meaningful interactions and strengthen relationship with customers across the transaction lifecycle: 

Pre-transaction: In the pre-transaction stage, self-service apps aid product discovery 

In-transaction: In the transaction stage, service providers benefit by crafting a superior service experience 

Post-transaction: In the post-transaction stage, service providers can deepen engagement via proactive notifications and active feedback loops 

 

3. Micro-target services

Digitalisation allows remittance service providers to exploit adjacent, complementary service value chains to expand their role in the customers’ personal financial ecosystem and increase attractiveness of their service relative to competition. Rather than a mass product orientation, service providers can exploit data related to customers’ demography, transactions, financial habits, relationships and cash-flows to uncover unmet needs, identify relevant cross-sell and up-sell opportunities to promote greater use of financial products, maximizing revenues per customer.

 

 

G-Cash, a leading mobile wallet service provider in Philippines with 47M customers and a 46% share of the mobile telephony market, launched a remittance-linked medical insurance scheme.  G-Cash experimented with a hospitalization assistance insurance product linked to its international remittance service. G-Cash customers, who receive funds from abroad, are automatically entitled to cash assistance for each day of hospitalization, up to a maximum of 10 days, should they require medical treatment within 30 days of receiving the remittance.    

  

In conclusion

The digital wave is reinventing the international remittances marketplace. Mobile wallet service providers have a real opportunity to ride the wave by adopting collaborative models to create a widely available network and achieve service differentiation on the strength of innovative products and superior business models.   

 

Author: Ambar Sur, Founder and Chief Executive Officer, TerraPay