International remittances are key for many emerging economies, in recent years typically exceeding foreign direct investment (FDI). Remittances are also a stable source of foreign income, as has been vividly illustrated during the pandemic. For low and middle-income countries, the World Bank recently upgraded its estimate of remittance volume growth in 2021 to 7.3%, to reach US$589bn (this time last year it had projected a decline of 7.5%; in the summer it had projected 3.5% growth). It expects 2.6% volume growth in 2022, which would take the total to US$610bn.
For most migrant workers, the cost of sending money home is still well above the United Nations’ 2030 Sustainable Development Goal of 3%. Indeed, the weighted global average for remitting US$200 is 4.7%. For low and middle-income countries the situation is even worse; we estimate an average transaction cost of 5.3%. Even for purely digital channels, the average cost today is 3.4%. In this note, we highlight the biggest fintech disruption opportunities in international remittances and highlight 40 firms working to reduce fee leakages in these markets.
Remittances are a key source of income for some emerging markets
Remittances are a key source of income for many emerging market families. At the country level, these flows can be substantial, in some cases over 30% of GDP. Remittance fees can also be sizeable, over 1% of GDP in several markets, leading some governments to explore the adoption of digital currencies as a way of reducing these sizeable leakages to the economy.
The cost of remittances is falling, but remains high, particularly for the poor
Globally, the weighted average transaction cost for sending US$200 internationally is 4.7%. The unweighted average is 6.3%, reflecting the higher costs typically incurred away from the main remittance corridors; smaller low-income countries suffer disproportionately from this issue, as highlighted in the chart above. To send US$500 costs 4.2% on average; again it is the poorest households and countries, where smaller ticket sizes predominate, that are penalised most.
International remittance costs have been falling, by around 10-15% over the past four years. But they are still well above the United Nationals Sustainable Development Goals target of 3%. Moreover, as we demonstrate later, traditional providers have yet to experience much downward pressure on either fees or volumes.
Around two-thirds of these remittances costs tend to be explicit fees, while the remainder is the FX spread. But the costs vary substantially, both by region and by remittance channel. Within emerging markets, the costs of sending US$200 to South Asia are among the lowest globally, at 4.3%. Costs of remitting to Sub-Saharan Africa tend to be the highest (8.7%).
By channel, digital money transfer organisations tend to be the cheapest, at 3.4%. Banks are most expensive, at 10.6%.
The excess fee pool is largest in India followed by China, Vietnam and Nigeria
Assuming a 3% price point for remittances is reasonable allows us to estimate the level of excess fees existing operators are siphoning off from the market. Note that fees are already below this level for some providers, so we don’t think this benchmark is unreasonable. Applying this excess fee rate to the volume of transactions then allows us to estimate the fee pool that is vulnerable to disruption.
Of the total remittances fee pool of US$31bn (arrived at using a US$200 transaction size assumption), we estimate that US$14bn is excessive (ie above the 3.0% threshold) and therefore open to disruption by low-cost providers. Competition from such operators is growing. For example, the World Bank has noted that the number of operators in the industry has been increasing; in Q2 21 each remittance corridor had on average 15 operators competing for business, up from 14.2 in Q1 20 (ie pre-pandemic). Most of the incremental capacity is coming from digital-only operators; the provision of cash-based services has actually declined as a result of the pandemic.
By country, we calculate the largest fee disruption opportunities as being in India, China, Vietnam and Nigeria. The ten countries highlighted in the chart below account for around half of the estimated global fee disruption opportunity.
Developed market incumbents could experience the heaviest revenue attrition
Our detailed survey of the global remittances industry highlighted that the bulk (over 80%) of the fees generated by remittances transactions are incurred at the beginning of the value chain, at the sender location. Since most remittances are sent from wealthier markets, this is where most of the fees are typically earned.
We highlight below the experience of a selection of emerging market firms with exposure to remittances income. For our limited sample, remittance fees are typically 5.1% of overall fee income, 0.9% of revenues and 3.3% of PBT (2020 median data). Note that banks with more exposure to this income stream are more likely to provide relevant disclosures, hence our sample is upwardly biased.
Somewhat surprisingly, our analysis indicates that banks' remittance fees have, in most cases, yet to feel any significant disruption – despite the onward march of fintechs and the substantially higher costs of sending remittances through banking channels. The key exception to this trend is Mexico, where exposure to remittances fees has roughly halved in the last few years.
Our earlier mini-survey indicated that customers preferred to use banking channels despite their higher cost for reasons including convenience, transparency, security and speed.
Potential fintech winners
Fintechs are already active within the markets we have highlighted. Below, we briefly profile some of the remittance industry disrupters we have come across during our research.
Related reading:
Global remittances: Opportunities and risks in an industry upended by Covid-19
Remittances forecast raised by World Bank but there are downside risks
Chipper Cash's success highlights the global fintech opportunity in remittances
Appendix: Our remittances fees EM banks sample set
