Did you know that an equivalent of $100 million is remitted every hour of every day between people across the world?
Facilitated by banks, money exchanges, post offices, mobile apps and blockchain, over $860 billion changed hands between individuals in 2023. Unsurprisingly the three countries that received the most of the money were India, Mexico and China.
And where did the money come from? The top three remitting countries were the US, UAE and Saudi Arabia.
After a slight drop during the Covid years, the global industry of remittances has seen a steady uptick in the past 3 years. As far back in the 19th century, migrants sent money to their home countries of Ireland, Italy and Spain. Today, about 280 million migrants send money home to about a billion family members every month, thereby contributing to the GDP of the recipient countries.
In Tonga, for example, the impact on GDP is 49 per cent whereas in Lebanon it is 38 per cent and in India 3 per cent.
Achieving SDG objectives
Why do people send money? Well, mostly to provide for expenses of family and friends in their home country. Three-fourths of remittances are used for food, housing and medical expenses.
The rest pay for goods and services in another country and increasingly for overseas investments. According to the UN, remittances help to achieve 7 of the 17 Sustainable Development Goals that countries strive for - zero poverty, no hunger, health education, clean water, decent work and reduced inequality.
But sending money costs money. The average cost of remittances stood at a whopping 6.2 per cent in 2022. Though it is down from 9 per cent in 2011, this cost has a long way to drop to the UN target of 3 per cent.
Of course, the cost depends on the corridor: while the UAE-Philippines corridor is one of the cheapest at 2.6 per cent, while the US-South Africa corridor is one of the priciest at 7.4 per cent.
Enter the challengers
With such high costs, it is clear that the industry is ripe for disruption, and we have seen a number of ‘remtechs’ attack the dominance of banks and exchange companies in recent years.
With Wise, you can send money online or from your card to 70 countries at the Google exchange rate plus a small fee. Remitly enables you to receive transfers via mobile money or do cash pick up at banks and post offices, and even receive home delivery.
In UAE, the Now Money app is available in multiple vernacular languages and Boundlesspay is using crypto to expand financial inclusion. All these new age companies charge much lesser for remittances that are much faster.
So does the Visa Direct product and Mastercard Send platform, both designed for real time global personal payments.
Talking of speed, the traditional rails for money transfers via banks were provided by SWIFT since the sunset of the age-old telex transfer system in the 1970s. SWIFT is the acronym for Society for Worldwide Interbank Financial Telecommunications which is a 11,000 member-owned co-operative that enables banks to securely transmit funds transfer instructions trough a standardised code system, and clocked about 45 million messages daily in 2022.
However, SWIFT-enabled transfers are not exactly swift, and typically take 24 to 72 hours to reach the beneficiary.
In the last decade, banks have moved a bulk of remittances on direct rails which connect Bank A to Bank B. Called ‘host to host’ transfers, examples of these are Emirates NBD’s Direct Remit or Mashreq’s Quick Remit that allow you to transfer money in seconds from your mobile app to certain destinations 24 hours a day.
These instant transfers, typically free of charge, are more efficient than traditional transfers through SWIFT rails since they obviate the need for correspondent banks.
Given the rapid penetration of online and mobile banking, digital remittances are definitely the way forward for peer to peer money transfers. In a recent Visa survey, 53 per cent of customers said that they are turning to digital apps to send and receive money while 34 per cent still go to a physical branch.
Blockchain-enabled money transfers are also gaining ground, given the low costs and high security, but challenges remain with user adoption and regulatory compliance.
In summary, these are exciting times for the funds transfer industry. While the new generation providers have been innovative, their overall volumes and corridors are still too limited to disrupt the incumbents substantially.
According to an IMF study, remtechs move less than 15 per cent of global funds annually. And traditional players like SWIFT are fighting back with new products like Go that provide near-time international payments and GPI that provides transparency to all stages of a remittance transaction.
This ongoing competition of old vs. new can only benefit customers, both in terms of costs and turnaround times.