International remittances totalled US$714bn in 2019, sent by 272mn migrant workers. We think a further cUS$500mn was sent via informal channels. The largest source markets for remittances are the US, UAE and Saudi Arabia. Key recipient markets include India, China and Mexico. But this industry is changing fast, disrupted by new technologies and the economic impact of Covid-19.
Remittance volumes could decline 20% in 2020, according to the World Bank. Key drivers of this decline include negative GDP growth, lower trade volumes, tighter border restrictions and lower commodity prices.
Remittances will nonetheless top FDI and portfolio inflows in 2020. According to the World Bank, FDI inflows to EMs will decline by 35%, while portfolio debt and equity inflows will decline by 80%.
The most popular corridors are USA-Mexico, USA-China, UAE-India. The most exposed recipient countries include the Philippines, Sri Lanka, Egypt. EMs with large outbound remittances include the GCC, Mauritius, Malaysia.
The average cost of international remittances is 6.8% of the volume sent. This translates to a US$50bn annual fee pool. Costs vary significantly by corridor, mode of transmission and ticket size. Remittance costs are typically highest in Sub-Saharan Africa, and lowest in South Asia.
The bulk of remittance fees are generated at the source rather than en-route or at the destination. Banks with meaningful remittances fee exposure include ALBI AB, RJHI AB, DBS SP.
Technology is disrupting the industry. Banks are typically the highest cost channel, while informal channels are cheapest. We think digital channels are c50% cheaper than using banks. Listed vehicles with exposure to this trend include SAFCOM KN, BRAC BG, EQBNK KN. There are also many payments operators in the unlisted fintech space.
Domestic remittances are likely larger still, as workers in cities send money to their families in rural areas. Globally, there are likely 680mn domestic migrants, with more than 100mn each in both China and India. Alternative channels are already capturing a significant share of these flows in EM (e.g. MPesa in Kenya, bKash in Bangladesh, Easypaisa in Pakistan).
The formal remittance market is estimated by the World Bank at US$714bn in 2019, up 5% yoy. This is equivalent to 0.8% of global GDP.
The informal remittance market could be as large as US$500bn per year. Published studies have estimated this market to be between 35% and 75% of the formal market. Our small international in-house survey points to a range of 10-60%, with greater penetration in South Asia than elsewhere. Due to a lack of data, we have excluded these informal sums from our analysis.
There are an estimated 272mn international migrant workers, of whom 26mn are refugees. They each send home US$2,600pa on average via formal channels.
Domestic migrant workers likely number 680mn, ie 2.5x the international number (Source: World Bank). China and India each have more than 100mn internal migrants. Although these workers each likely remit smaller amounts home, aggregate domestic remittances volume likely exceeds international remittances.
Economic activity is a key driver of global remittance flows, which have historically been closely linked to global GDP growth and trading activity. Structural drivers include income disparities, demographic differences, geographical proximity and political/ social ties.
Additional drivers of small-ticket remittances include poverty, illiteracy and the rigidity of the host country’s labour market.
Covid-19 could result in a 20% decline in remittances in 2020f, according to the World Bank. The Europe and Central Asia region is likely to witness the biggest decline (27.5%) followed by Sub-Saharan Africa (23.1%).
Remittances will likely overtake FDI and portfolio flows in 2020. FDI inflows for low and middle-income countries are expected to decline by 35% (to US$332bn) and portfolio flows by over 80% (to US$59bn). At US$443bn, even after a projected 20% fall, remittances will exceed the sum of these other flows.
India, China and Mexico are the largest remittances recipient countries. These three markets receive over a quarter of all international remittances. Other key recipient countries include the Philippines, Egypt, France and Nigeria.
The US, the UAE and Saudi Arabia are key source countries for remittances. Together with Switzerland, Germany, Russia and China, these seven countries are the source for almost half of global remittances.
Relative to GDP, remittance outflows are most material for Luxembourg, Oman, UAE, Kuwait and Maldives, with values ranging from 10% to 13%. Other notable markets include Mauritius, Saudi Arabia and Malaysia.
Relative to GDP, remittance inflows are most material for Nepal, Honduras, El Salvador, Jamaica and Georgia, with values ranging from 14% to 27%. Other economies in EM and FM dependent on remittance inflows include Zimbabwe, Lebanon, Philippines, Egypt, Pakistan, Sri Lanka.
The largest remittance corridor in the world, by far, is USA-Mexico. In 2017, US$30bn was transmitted through official channels (ie 5% of global remittances volume). The next biggest channel was USA-China, at US$16bn.
The total remittances fee pool likely amounts to US$50bn per annum. This is based on the 2019 global transaction volume of US$714bn and average transaction fees of 6.8%.
The bulk of the value in the remittance chain lies at the source. Remittance sending fees are typically 5x times remittance receiving fees, whether the transaction is conducted via banks or other media.
Banks do not rely much on remittances income. Remittance income is generally a small proportion of banks revenues, therefore a decline in remittances related to Covid-19 is unlikely to be material for most banks. Nonetheless, in Tables 1 and Table 6 we highlight banks that are active in remittances in selected markets.
Banks exposed to remittances in sending and receiving markets. Major banks active in remittances in sending markets include Albilad and Al Rajhi in Saudi Arabia, DBS in Singapore, Societe Generale in France. On the remittances receiving side, UBL in Pakistan, BPI in Philippines, Bank of Rakayat in Indonesia, and Bank of Ceylon and People’s Bank in Sri Lanka are most exposed.
Alternative ways to gain investment exposure to the remittances industry. Digital payments (mobile money) channels are typically 50% cheaper than traditional remittance channels, as well as being more convenient and (to the extent that no physical cash needs to be transported) safer for the customer. They are already popular for domestic remittances in many markets and we think they could also witness strong growth in international remittances. Potential listed investment vehicles include Safaricom and Equity Bank in Kenya, BRAC Bank in Bangladesh. There are also many options in the unlisted fintech start-up space.