Remittance business enters new frontier

Financial institutions may be drawn to the low-risk, fee-generating nature of remittances, but must change the way they approach the business in order to capture market share.

Never regarded as the most glamorous banking activity, the appeal of the remittance business has grown in the post-Lehman environment, thanks in part to the sector’s resilient capital flows and steady revenues. The resulting heady mix of local banks, postal services, telcos and money transfer operators (MTOs) are jostling for business in Asia-Pacific, sometimes competing, sometimes cooperating. New technology, strategies and alliances are unfolding as companies look for new ways to tap into the large migrant capital flows.

Crucially for banks still smarting from the credit crunch, remittances also generate relatively risk-free fee income, hence the interest from international banks. The stability and size of remittance flows are also attractive, despite the high-volume and low-margin nature of the business.

“Remittances are a volume business with relatively high fixed costs. Even at lower prices, the activity is very appealing,” said Richard Brown, head of Bank of New York Mellon treasury services for Asia Pacific.

The precise scale of the flows involved is hard to calculate since a large proportion flies under the radar. According to the World Bank, recorded remittance flows to developing countries amounted to a sizable $316 billion in 2009. This is down 6% from $336 billion in 2008, though not for long as migrant numbers will likely increase to 280 million worldwide by 2050, from around 200 million today. India, the biggest recipient globally, recorded a whopping $52 billion in 2009, China $42 billion, the Philippines $17 billion, Vietnam $9 billion and Indonesia $8 billion. And even these numbers would be much higher if unofficial transactions were included.

The sector gets more involved when broken down between retail and corporate segments, domestic and cross-border payments, and between urban and rural populations. Though not recession-proof, remittances also tend to be counter-cyclical, growing during economic downturns and following natural disasters, even as private capital flows decrease.

“Inward remittances to Asia continue to grow, and have grown despite the global financial crisis,” added BNY Mellon’s Brown. “The need to support families back home, coupled with the personal financial discipline for which Asians are renowned, seems to have kept flows coming, even from areas hard hit by unemployment.”

Highly mobile and rapidly changing financial needs are best served by a combination of players, said Navinder Duggal, managing director of global transaction services at DBS Bank. “With corporate payments, almost all transactions are still being routed via the banks,” he said. “MTOs have made greater inroads in the foreign worker segment, and while the rate of adoption of remittance services via telcos is presently quite low, this may change in the near future. The traditional Swift route is still the predominant and preferred option for cross-border payments.”

A major local player, the Bank of the Philippine Islands (BPI), has reported growth in its remittance business of 15% to $4.5 billion in 2009, from $4.4 billion in 2008, partly down to its growing variety of consumer loans, life and non-life insurance, mutual funds, trust and non-trust funds, deposit and retirement plans. Additionally, the cost to remitters of domestic electronic transfers has fallen significantly, and more remitters are taking advantage of account-based transfers as their lifestyles improve. Domestic electronic payment systems in the region have also become more efficient with wider participation from banks. Local banks also play a crucial role in providing a wide range of services, including know-your-customer (KYC) checks.

In Malaysia, the largest outbound remitter in Asia Pacific, the industry represents a lucrative market for banks, as Malaysia does not actively transact via telcos, said Cheah Kum Thim, head of cash management at OCBC Bank in Malaysia. Meanwhile, MTOs are focusing largely on foreign workers’ remittances (ie, blue-collar foreign workers remitting salaries back to their home country). “Thus, banks still have the majority market share in the remittance business in Malaysia,” said Cheah. “However in Malaysia, the adoption of mobile technology is moving ahead at a much slower pace, especially in the outskirts. Thus, in this market, where we have wider geographical coverage, we still need to offer multiple channels (both through branch and mobile) to serve the different needs of our customer base.”

But for banks looking to grow market share, getting the basics right is easier said than done. They want remitters’ business, but they don’t want branch networks choked up with large numbers of remitters. They are introducing more sophisticated, account-based remittance services that they are uniquely positioned to provide, but know that basic cash-to-cash transfer services are where the bulk of the business remains.

For instance, remitters typically need to transact at a location and at a time that may not suit banks’ bricks-and-mortar operations. Even internet and mobile technology, though growing, may not be readily available to them. “Innovation is going to be key -- these consumers are looking for a good price and a convenient solution at both ends of the transaction,” said Nick Cunnew, senior regional director Asia Pacific at MTO, MoneyGram International. “Banks that are aggressively looking to raise their overall fee income through this business seem to recognise that they have to change their way of working if they are going to make it successful. It is a volume business and actually counters against some retail banks’ other distribution strategies where they are trying to reduce branch traffic.”

Where bricks and mortar may not be the answer, MTOs offer a different model, often in cooperation. What they lack in bank structures and products, they more than make up for in local presence. Western Union announced only two months ago that it was teaming up with State Bank of India (SBI) to allow the bank’s accountholders to receive cross-border money transfers in their bank accounts using just their mobile phones from early 2011. This will be in addition to the 12,000 SBI branches that already offer the MTOs’ money transfer and payment services.

Western Union’s managing director for Asia Pacific, Drina Yue, says that although emerging remittance technologies such as internet and mobile will open up new channels, simpler cash money transfer still has plenty of room for growth. “Global trends suggest long-term growth in new migrant flows and research, and history tells us that new migrants strongly prefer cash-tocash transactions. Consumers across many parts of the world, largely led by Africa, Asia, the Middle East and Latin America prefer the simplicity of cash when it comes to purchases and payments.” Western Union derives only about 2% of its $5 billion global revenues from electronic channels (including internet and mobile transfers); fully 74% come from basic cash-to-cash services.

The best strategy to crack this market depends on local conditions, and may require a mix of banks, telcos and MTOs. Nick Wilde, managing director, Asia Pacific bank solutions at Fiserv, notes the differences between urban and rural populations. The urban population is more likely to have access to mobile and internet services, increasing the uptake of remittances. In this case, mobile remittance can be looked at as an additional service to traditional banking, he says, though rural (and often unbanked) populations’ remittances are growing more slowly due to lack of access to mobile technology. “However, the rural and unbanked populations offer the largest potential for growth, and mobile remittance can be a substitution for traditional banking services,” he concluded.

How far mobile and internet technology can supplant bank networks remains to be seen. But as the numbers of migrants grow and remittance services deepen and grow in sophistication, nailing down market share in this fluid sector clearly requires the right mix of technology and partners.


This story was first published in the Cash Management supplement of the November 2010 issue of FinanceAsia magazine.

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