There was an interesting piece in the Economist last week about remittances. Exciting, right? Anyway, it’s an important enough topic and (because of this importance) relevant, in my opinion. As the article states, the World Bank estimates that in the past year alone, cross-border remittances totaled to $483 billion. Because this is mostly made of small amounts sent by migrants to their families at home, banks have been reluctant to participate, albeit an ever-growing trend, mainly because existing interbank transfer systems were made to move money in large sums. It’s surprising to think that the potential 10% charge by money-transfer agents, not to mention the hassle and long lines inherent in the process with some, is still preferable to the even more expensive and inconvenient service offered by banks (according to the article, “a World Bank study in 2009 found that banks charged an average of 12% for small remittances, whereas money-transfer agents such as Western Union averaged 9%.”)
The main actors in the international remittance market are Western Union – which handles almost $1 out of every $5 that is wired – and MoneyGram. The “mouth-watering margins” these companies make are attributed, at least in part, to the industry’s far-from-transparent pricing structure. However, new startups are entering the market, thereby challenging certain structured business models. Some of these companies highlighted in the article include:
- Xoom – an online international money transfer service offering a less expensive way to send money to family and friends from the Xoom website
- CurrencyFair – a peer-to-peer marketplace where users are able to trade currencies without the exorbitant, and often opaque fees of other currency trading platforms
- M-Via – allows Americans to top up their phones at local shops, such as 7-Eleven, and send money to other members
- Currency Cloud – an automated foreign exchange system which helps businesses send and receive money in different currencies
(Side note: I personally tried out CurrencyFair and, although I just played around, I can attest to its intuitive interface and simple, yet streamlined, design – preferable for your average internet user and currency-exchanging novice, such as yours truly. I will definitely play around with that a bit more…)
These companies still face natural challenges of scale – both financially and in terms of agents who handle the entry and exit of the asset that matters most – cash – compared with their bigger-name competitors. They also face a handicap in regard to the perception of safety which is associated with brand familiarity, not to mention the very real issue of fraud detection which some newer players can be unprepared for.
It’s encouraging to read not only that more people are creating new ways to send and receive money which enhances options and lowers prices for those who use it, and often, need it most, but also that communities outside the ICT arena (like the Economist) are paying it more, warranted attention.