There are now an estimated 258 million international migrants worldwide that have moved in search of opportunities, education and a greater quality of life. Depending on who you are and why you’ve migrated, it is likely that at some point you will want to send some of your hard-earned money back home or receive a payment from your friends or family living in another country (in 2017 remittances were estimated to total US$613bn). A cross-border payment might mean something entirely different to each individual, but it’s always something very close to home. For a student or young professional living in an extortionately expensive city, for example, a funds transfer could be a lifeline from mum and dad. For a migrant worker, it can be to cover the all-important housing, education and medical costs for loved ones back home. In 2017, migrants from low and middle income countries sent home an estimated US$466bn in remittances. Remittances constitute a significant source of household income that improves the livelihoods of families and communities through investments in education, health, sanitation, housing and infrastructure.
However, paying across borders via the banks remains slow, costly and opaque. The biggest challenge for the traditional correspondent banking systems arise from the fact that they were originally built for domestic payments and later cobbled together to facilitate cross-border transactions. The whole process was not built with KYC/AML regulations in mind, nor were the standards for messaging and interoperability clearly defined nor designed from the beginning – which has had a massive impact on the risk, cost and speed of processing remittances.
This, of course, has created a dire consumer experience. Ask the average payer how their money is getting from A to B, where it is at any given time, the FX rate applied and the fees they are paying and they will most likely not have a clue. Historically, with no other option, they’d just instruct their bank and hope for the best.
Now, however, FinTechs are hinging their value propositions around transparency and encouraging consumers to make informed decisions. Many of the money transfer FinTechs today (e.g. Currency Cloud, TransferWise, WorldRemit, Xoom, etc.) give users of their platforms a clear breakdown of exchange rate, fees, speed of pay and the total amount that will be received in the local currency. This effectively allows consumers to shop around for the best deal and has prompted the likes of MoneyGram and Western Union to do the same. To help facilitate this decision-making further, comparison sites (such as Moneycloud, iCompareFX and Monito) have started leveraging APIs to allow savvy consumers to compare across FinTech and incumbent providers.
Within this environment of greater transparency and choice, it will be interesting to see how the money transfer services manage to differentiate themselves beyond pricing and speed alone. FinTechs are already offering multiple channels to recipients, including cash pick-up, mobile money or bank deposit; it is likely they will continue to create an experience and service that reduces pain points for the receiver. For example, allowing payers to pay bills, school fees, mortgage repayments and top up mobile phones on behalf of their family back home would remove the cost and pain points for the receiver, who otherwise having received the remittance would have the hassle of taking that money and paying it on (OFX, for instance, is already doing this). Money transfer providers could be wise to build an ecosystem and partner with local merchants (e.g. utilities and telco companies, public sector agencies, healthcare providers, educational institutions, etc.), as well as branchless banking solutions (e.g. M-Pesa) to remove as much friction and hassle as possible.
DLT / Blockchain technology is also ever on the horizon and could provide both a threat and an opportunity for financial institutions in competing against the FinTech entrants. Partnerships such as Ripple and MoneyGram, and AliPay, GCash and Standard Chartered in Asia are currently piloting blockchain remittance solutions and are poised to create remittance experiences with lower transaction fees and greater visibility for consumers. Instead of tweaking or utilising existing infrastructure, it presents an opportunity to implement a whole new infrastructure altogether, one that can be designed with modern needs and pain points in mind from the very beginning. As these initiatives are in their early stages, concrete features and their potential successes are yet to be seen.
Ultimately, FinTech is leading the way in delivering choice and a better payments experience for the world’s global citizens. As consumers are offered services that provide them with greater decision-making power, both incumbents and new entrants need to carefully consider their USPs and how they can continue to remove the pain points from the payer and receiver experience.