Eric Reguly
It is one of the hottest sectors in the global financial markets but rarely gets much attention: remittances.
Remittances are the small amounts of money that migrants in the rich world send to their families in the poor world – typically $200 (U.S.) a month. Until a few years ago, the remittances flow was either not measured or was measured poorly. That's changing and the numbers associated with the market are astounding.
Last year, the World Bank estimated the value of the global remittances flow was $436-billion. In a new report on released Monday in Rome that concentrated on the remittances sent from Europe, the United Nations' International Fund for Agricultural Development (IFAD) said that migrant workers in Europe sent $109-billion to their home countries (Disclosure: My wife works at IFAD).
Who benefited from this river of cash flowing out of Europe? It wasn't just the 150 million recipients in developing countries ranging from Albania to Zambia. It was the companies that do the transferring. This market is dominated by Western Union International, the old stagecoach company that later went into the telegram business and is now in the money-transfer game, and MoneyGram International Inc.
Sweet business, remittances. Western Union, MoneyGram and their small competitors, among them Sigue, Skrill and Small World, control 70 per cent of the remittances transfer market and their profit margins are fat. According to IFAD, the world average cost of sending remittances is 7.9 per cent. In Europe, it's slightly less, at 7.3 per cent, though the figure masks enormous variations. Russian transfer companies charge only 2.4 per cent to send money to central Asian countries. The Swiss companies charge obscene fees – 14.5 per cent. France is roughly in the middle, at 10.7 per cent.
In 2009, the Group of 20 countries, which includes Canada, pledged to try to reduce the average remittance transfer fee to 5 per cent. That target is still a long way off, since it is really competition, or lack thereof, not regulation that sets the fees. IFAD estimated that at 5-per-cent fee would save $2.5-billion a year in collective transfer costs. That may not sound like a lot, but in the poorest countries, where remittances are one of the main sources of national income, it's a fortune. In Somalia, it has been estimated that remittances are worth as much as 50 per cent of gross domestic product. In Gambia, remittances are worth 14.9 per cent of GDP, according to IFAD. In Tajikistan, its 39 per cent and in Armenia, it's 16.7 per cent.
Why is competition so thin in the money-transfer business? In good part, it's because the mainstream banks can't be bothered. Their interbank transfer systems are designed for money in bulk, not in piddling (to them) amounts. So when they do handle remittances, they charge much higher fees than Western Union and its competitors. Also, banks are generally not equipped to handle cash-to-cash transfers. At Western Union, you walk in with the amount you want to handle in cash. The recipient gets cash at the receiving end; neither the sender nor the recipient needs a bank account.
Since the fees are so high and the margins are so fat, it is inevitable that the competition is just starting to heat up. One recent arrival is Xoom, a Silicon Valley startup that is growing quickly. An online service that allows transfers from the sender's bank account (assuming he or she has one), Xoom charges only $5 or $6 per transfer. Payments made by credit card or debit card are slightly higher. Last year, Xoom's 1.2-million customers used its services to send $6.9-billion. Trading on Nasdaq, the company has a market value of about $844-million. Its shares are up by almost 50 per cent in the last six months, though are down 17 per cent over a year.
But the high margins enjoyed by Western Union and MoneyGram suggest that the international money-transfer market still awaits a disruptive force to shake things up.
The receiving end is where the banks could make a splash. Some banks act as agents for the money-transfer companies. In those countries, the banks might have a remittances counter where the recipient can collect the cash sent by their relatives. What the banks generally don't do is try to turn the recipients into bank customers, however recipients could set up bank accounts to allow them to develop a credit history and use the bank to buy all sorts of services, from crop insurance to dental care. Or they could use their remittances as collateral for a small loan which could be used to start a business. The possibilities are endless.
What is certain is that their seems to be enough room for everyone in the burgeoning remittances market, from new, tech-savvy money-transfer companies to eager banks in the home countries who could create bring in millions of new customers. IFAD said the global remittances market should hit $500-billion within a couple of years. That's an enormous market by any measure.
Eric Reguly