‘What is Fintech’ Series: Remittance

Remittance refers to the transfer of money by a foreign worker/expatriate to an individual in his/her country of origin.

Those living in developed markets and those less familiar with remittance may have the false impression that this service acts as a supplementary tool for foreign workers to transfer funds back home. In fact, this is how their families feed themselves, it plays a significant macroeconomic role.

 

Global View

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World Bank expects $605 billion worth of transactions to be conducted by foreign workers through remittances. Most of the transactions in remittance flow into Asia and they originate from developed markets such as the US and Europe. 70% of this amount goes into food, living expenses, education, healthcare and micro-small businesses in developing countries.

 

Remittance in Asia

According to the World Bank, the top 3 remittance receivers among all developing countries globally comes from Asia – India ($70 billion), China ($60 billion), Philippines ($25.4 billion).

 

Philippines

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There are over 10 million Filipinos working abroad out of their 100 million population. In 2015, total volume of remittance from Filipinos abroad back home were worth $24.3 billion. This figure contributes to 10% of the country’s GDP and is an important segment of economic growth in the Philippines.

 

Indonesia

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There are about 6.5 million Indonesians working abroad, according to the NGO Migrant Care statistics in Jakarta. This contributes about 1% to the total GDP of Indonesia, making it the third-largest remittance recipient in the Southeast Asia region at $7.2 billion.

 

Pre-fintech era

Existing solutions in fintech were costly, inefficient and not easily accessible. Western Union, international remittance company, has been dominating and monopolising the space since 30 years ago. However, the problems with conventional remittance centres were:

 

1) Slow

Due to the lack of connections between financial institutions and systems, and the lack of a sound and efficient transfer mechanism, it often takes up to weeks or even months for money to reach the worker’s families. And this can be extremely tough for the majority of families as their livelihood depends on remittance. A delay in the transfer may lead to several days without enough money to carry out their daily activities.

 

2) High transaction fees

According to Forbes, $44 billion was spent on just remittance fees alone in 2014.

As remittance involve the movement of money across countries, currencies and financial institutions, this can rack up a significant amount of fees, which is eventually passed on to the sender. On top of this, conventional remittance companies will also charge administrative fees for transactions, which may often cost senders a significant proportion of their wages just to get their money sent home.

 

3) Highly inaccessible

Workers will first need to carry hordes of cash and travel to brick and mortar branches to get their money sent back home. Those are some of the inconveniences on top of having to complete piles of paperwork before transfers can be made. After the transfer is completed, their family members back home will have to go through some form of hassle to receive the money too. As receivers usually originate from poorer areas, it may take them many hours and  just to travel to branches in the city to receive the money.

 

Fintech revolution

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We see fintech startups partnering with traditional remittance companies like Western Union, MoneyGram and Transfast. Remittance companies see the trend and are on board with working alongside fintech startups.

Online remittance, as compared to conventional money transfers, is highly cost-effective, simple and flexible. The costs saved from not having to operate a physical branch means that fintech startups can pass the savings onto senders.  The increase in usage of mobile phones and technology by low-income workers is also providing an avenue for fintech developments in remittance.

Besides that, the use of bitcoin and other virtual currencies have also been explored in the realm of remittance. While there are still many doubts floating around for cryptocurrency and the system is not stable as of yet, it can potentially be a powerful tool for remittance.

The features of a cheaper, faster and more accessible remittance option may help bitcoins thrive in the space. The peer-to-peer transfer technology through digital currencies offers a much safer and cost-efficient approach to money transfers which happens real-time.

 

Challenges?

Nonetheless, 90% of remittance still happens offline although we do see a growing online remittance presence. Which means that there is actually still a large untapped potential in the remittance services. Fintech startups should look into innovation in terms of either building an offline technology layer to cater to the offline market or find a way to bring the 90% offline population online.

 

Future

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Fintech startups can consider working alongside existing financial institutions or conventional remittance businesses to instill their technology to their systems. This also helps boost public confidence in adopting technology in their transfers. Besides that, the widespread use of social networking or communication applications among foreign workers may also be a good opportunity to tap into.

For instance, Fastacash, a Singapore-based technology company is looking to provide mobile payments/remittances via communication channels such as WhatsApp and WeChat.

Philippines-based Bitcoin-powered remittance fintech startup, Coins.ph, allows for money movements without the need to deal with a bank. Through their digital wallet, Coins.ph, users can remit Bitcoins to their family members and this can be cashed out through cardless ATM withdrawals, door-to-door delivery by their partner logistics firms or conventional cash pickup from remittance centres or their cash pick-up partners.

 

We hope to see fintech startups cater to the needs of the large unbanked population which are the main target market under the remittance segment.

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