Gaining the edge in the accelerated digitized remittance marketAug 18, 2021
While the financial services industry has been digitalising at a rapid pace, the remittances market was one of the last holdouts.
In 2019, 90% of remittances still left the sender as cash and reached the recipient as cash, mainly because a significant percentage of the global population remain unbanked. This means they do not have access to financial services such as bank accounts as well as other basic infrastructure that makes digital remittances possible.
Then, the COVID-19 pandemic hit and everything changed. The first indication something was happening was a year-on-year fall in remittance volumes at the beginning of the pandemic. This was partly due to the dramatic downturn in the global economy, but also because consumers that relied on cash transactions to send money home simply didn’t have a way to do so once bricks-and-mortar stores closed in accordance with government guidelines.
But with lockdowns and other restrictions on face-to-face interactions still in place, and with senders still needing to send money home, the digital remittance market exploded.
But, while this is great news for those who provide digital money remittance services, it begs an important question. With competition finally heating up, how can they make sure they're in the right position to make the most of the opportunity?
Digitalization in numbers: how COVID-19 changed the remittances landscape
According to the International Association of Money Transfer Networks, in 2020, 40.2% of remittances that were previously made in cash went digital.
At the same time, 34.1% of new remittance customers — including a large swathe of users who are older in age and, so, tend to be late adopters of technology — opted for digital channels. And 25.6% of those who used to send money home through informal channels also switched to digital.
This shift was a direct result of the pandemic.
Where the economies of countries like the US, the UK, France, and Italy fared badly — the US economy, for instance, suffered the worst contraction in 74 years — the economies of developing nations suffered even bigger hits. As a result, migrants rallied, dipped into their savings, and 15% even borrowed money to be able to send something home.
More importantly, many senders strived to overcome the issues that had made them resistant to digital money remittance channels in the past, including being unbanked or their reliance on cash for other reasons, including a general mistrust of digital payment methods. As the UN's Secretary General Antonio Gutierres put it, migrants are 'a lifeline in the developing world.' In extraordinarily tough times, they made huge sacrifices and put their families first.
Easing the way
If the appetite for digital remittances increased throughout 2020, it was only possible to meet the demand because service providers and governments stepped up.
In sub-Saharan Africa, for instance, many companies slashed or waived their fees on mobile money, while regulators raised transaction limits and eased KYC requirements.
Similarly, on the supply side, remittance services providers in developed countries made improving their digital channels a top priority, governments included money remittance businesses in their lists of essential services, and regulators relaxed reporting rules and other requirements to make the transition to digital easier.
But if both customers' and service providers had to adapt out of necessity, it's not a given that the shift to digital will become permanent.
For the change to stick, digital remittance providers have to stay mindful of the practical realities of both those who remit money and those for whom the money is essential to their survival.
Transaction declined: addressing the challenges of digital remittances
So what do the users — on both the sending and the receiving end — want from money remittance services?
Put simply, they want transactions to be completed successfully and at speed, and for fees to be as low as possible.
Because remittances are often the difference between meeting basic needs like food, rent, and utilities or not, being able to trust that a payment will go through and reach the recipient quickly is fundamental.
Many customers were willing to take the leap and use digital channels because the COVID-19 pandemic changed their choice from 'digital or cash' to 'digital or nothing'. But unless payment completion rates are consistently high — and the service is fast and secure — chances are these often-reluctant customers will go back to old, tried and tested remittance methods as soon as they can. For all of its faults (most notably high costs and inconvenience) traditional bricks-and-mortar money transfer businesses that accept cash are reliable; if digital remittances businesses cannot compete on this front by accepting all legitimate transactions then they simply will not win potential new customers.
At the same time, cost is also a factor.
In 2018, migrants were collectively losing around $25 billion a year to remittance fees, at least $1billion of which recipients in developing countries could’ve spent on education. In the tougher economic climate caused by the COVID-19 pandemic, the effect of these transaction fees is even more serious. So much so, that the UN’s Secretary General Antonio Guterres has called for them to be ‘as close to zero as possible’ in order to ‘foster… financial inclusion…’
From a remittance services provider’s perspective, this means partnering with the right acquirer is crucial. An experienced acquirer can help you navigate the regulatory requirements in different countries and give you access to the right tools to ensure payments reach their destination swiftly, without being mistakenly flagged as suspicious and blocked.
Working with a specialist partner also helps lower your overhead, so you can keep your transaction fees competitive.
The need for relevance
Needless to say, a swift, secure, and successful transaction at affordable cost is only one piece of the puzzle. Just as — if not more — important, the transaction must be convenient. And that means giving customers a choice of payment and delivery methods.
According to a joint study by the Bank of Canada and the Central Bank of the Netherlands, two of the biggest factors that influence payment choice in remittances are access and availability.
This stands to reason. As in other situations, customers want to pay using their preferred payment method, whether that's a credit card, a digital wallet, or, in the case of many economic migrants, cash.
More to the point, they want to ensure that the person on the other end of the transaction will receive the money in the medium that makes most sense to them. And that isn't necessarily a bank transfer. In countries like Mexico, the Philippines, and Bangladesh — three of the world's top remittance recipients — access to banking facilities and infrastructure can be limited and economies are predominantly cash-based.
Digital remittance services providers can't build sustainable businesses unless they cater to these preferences. And that means accepting a wide range of payment and delivery methods, including online cash.
For these providers, accepting cash also has two other significant benefits.
It's a dependable alternative should a card or e-wallet payment fail, which boosts conversions. And, because recipients need to go in-store to collect cash, it increases footfall and, in turn, revenue.
Cash still has a key role in a digital world
Will the remittance market continue its march towards full digitalisation after the COVID-19 pandemic ends? Or will customers slide into old habits?
While nobody can say how things will play out with certainty, one thing's for sure. Even if digitalization continues, it doesn't follow that senders will move away from cash. As we have already discussed, much of the global population is still unbanked and so relies heavily on cash transactions, and this disproportionately true for both regular senders and receivers of international remittances. Bringing these consumers into the world of digital remittances permanently simply will not be possible without enabling them to do so using cash as their primary payment method.
For digital remittance services providers, the message is clear.
Maximising conversions, minimising risk, and offering a choice of efficient, secure, and convenient payment methods — including digital cash — will be critical to acquiring and retaining new customers and succeeding long-term.