1. There is a blatant customer pain-point: exorbitant feesIt costs $40 to send $200 from South Africa...Africa’s second largest economy has a 20% fee on remittances! The World Bank called these exorbitant fees “wrong”; we call them ridiculous. The global average cost of remittances has come down over time: 9% in 2008 and now, six years later, it is just over 8%. However, this is too slow for millions of blue-collar migrant workers whose families rely on their remittances. Furthermore, the World Bank’s calculations do not include fees to the recipient (“back-end” fees). The World Bank estimates 11% - 21% of money transfer providers are also charging the recipient.
2. Market leader complacencyIt would be hard to fault Western Union, the global leader in remittances, for complacency. They have a trusted brand and 15% market share, 3x that of its closest competitor, MoneyGram. Digital seems like the obvious disruption source but in developing countries cash is still king, which means physical payout locations. Western Union’s 500 thousand plus agents in 200 countries offer economies of scale that would be time-consuming and costly to replicate. However, their size and global focus limit their ability to, and interest in, responding to focused entrants. Smaller players can carve out niches by targeting certain corridors and catering to the needs of those customers.
3. Lack of transparency in remittance pricingMoney transfer operators (MTOs) are cheaper than banks but they still earn “mouth-watering margins” thanks to a lack of transparency in pricing. As the World Bank explains, the total cost of a remittance is not always clear to customers as there are several variables: the transaction fee, the exchange rate, and the margin, amongst others. In principle, all of this information should be available to the customer; in practice, it is not. The World Bank’s database of remittance prices is a start; more advanced aggregators and real-time price comparison tools will shed more light for customers.
4. Many remittance services do not cater to the low-endMany remittance fees are per transaction and not limited to the amount, so customers are incentivized to send money in bulk. However, in the event of emergencies, like medical issues or crop failures, remittances are urgent. Moreover, half of the world’s adult population is unbanked so bulk transfers can cause cash flow concerns. Even for those with bank accounts, banks do not want to deal with small transfers as the “interbank transfer systems were built to move money in big lumps rather than by the spoonful.” Similarly, a former executive at Western Union told us that low dollar remittances are a “nuisance” to MTOs. New technologies, like bitcoins and online transfers, may eventually disrupt the remittance market but they currently rely on infrastructure that is not available in many developing nations.
5. Increasing costs of running the traditional remittance modelMore strictly enforced anti-money laundering (AML) regulations are increasing the costs to banks and MTOs of handling money transfers. This has already caused some players to exit the market, particularly banks. Those who do not exit will see their margins shrink unless they raise prices, which they could do considering their will be less supply and demand is only increasing. Western Union has confirmed they are capturing business from exiting banks, only making them bigger (see #2 above). Physical locations are often necessary for remittances but the agents who act as intermediaries collect commissions, bloating transaction fees. New business models that are not subject to the intensity of AML regulations and that disintermediate agents will give clear cost advantages. There are several companies entering the remittance space with innovative offerings. Here is the story of Monami's disruptive solution to sending money home.
In our last post we explored the meaning of disruptive innovation. Now we take a closer look at why the remittance industry is ripe for