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How FinTech is revolutionizing remittances in emerging markets

Many fintech start-ups focused on remittances are gaining momentum in emerging markets. In doing so, they are breaking into market share, which was previously the protection of established providers.

  • – Remittance-focused FinTech gains market share for legacy lenders
  • – The United Nations and other agencies require that remittance fees be limited to 3%
  • – Emerging markets are at the forefront of mobile-first fintech growth
  • – Cryptocurrencies are also increasingly confusing remittance space

Remittances have become more important in recent decades and are now the largest source of foreign income for many developing countries.

Remittance flows tend to be more stable than broader capital flows. They also tend to be anti-circular, increasing during recessions and catastrophes where the flow of other capital generally declines.

This was an early effect of Covid-19, and in many cases it actually increased the remittance flow, as OBG explains in detail.

This growth has only just accelerated, and remittances are set to become even more important as a source of income for both emerging economies and financial service providers.

Room for cost confusion

A key issue so far has been the high cost associated with international transfers.

Banks have traditionally been the most common and often the only way to send money across national borders.

Similarly, remittances are an important source of income for many banks and usually charge at least 7% of total remittances, but this number can rise to 20% in small immigration corridors. Research firm Tellimmer found that the average transaction cost of remittances is 5.3% for low- and middle-income countries.

Remittance cost is too high

However, there is a growing sense that remittance costs are too high.

For example, the IMF argues that given that the cost of a remittance service does not depend on the size of the remittance amount, it is necessary to charge a fixed fee rather than a percentage. In addition to this, the actual cost of a transaction in terms of labor costs and other overheads can be significantly lower than the cost charged by many banks.

The change is in the air

Meanwhile, more and more international initiatives are focusing on this issue.

One of them is the Remittance Community Task Force (RCTF). Launched by the United Nations International Fund for Agricultural Development in March 2020, the RCTF promotes widespread changes in remittance policies and laws.

Such efforts are contributing to the United Nations’ broader goal of reducing remittance costs to 3% overall by 2030, in line with the Sustainable Development Goal 10. This goal may prove achievable. Percentage of corridors with an average cost of less than 5% According to World Bank data, it increased from 17% in the first quarter of 2009 to 41% in the second quarter of 2021.

Fintech revolution

But more important than policy changes in this regard is the massive expansion of fintech solutions during a pandemic.

This expansion is progressing rapidly, especially in emerging markets, with FinTech funding in the first half of 2021 being approximately 69% higher than in 2020.

Many fintech start-ups are keen to enter the money transfer space, which is seen as having great potential. Terimar estimates that 45% of the world’s toll pool is at risk of confusion as it exceeds 3%. Meanwhile, statistics firm Statista predicts that the digital remittance segment will reach $ 127.3 billion in 2022, which by 2025 will be $ 166.4 billion, with remittances among approximately 15.6 million users. increase.

Fierce competition for prices

The market is increasingly characterized by fierce competition for pricing, and various apps are trying to outperform each other in terms of price cuts.

Some have completely reduced remittance fees. For example, in October last year, major digital bank Revolut announced that US customers would be able to make 10 free international transfers a month. Following this, at the end of January, it was announced that customers would be able to make 10 free transfers to Mexico each month.

Public and private institutions likewise are often working to accelerate the expansion of low-cost remittances by expanding their own digital services or partnering with fintech companies.

For example, this month the Nigerian Post Office launched an electronic debit card and completed an arrangement to launch a microfinance bank that would allow 52 million Nigerians without bank accounts to make financial transactions. ..

In Africa, remittance company Western Union announced in October last year that customers of KCB Bank Kenya, Diamond Trust Bank and Kenya Post Office Savings Bank will be able to send and receive money via the mobile banking app.

Similarly, in December last year, another legacy money transfer service provider, MoneyGram, partnered with urpay for cross-border money transfers. The latter is a digital wallet powered by Saudi Arabia-based startup NeoLeap.

Leading Gulf countries

Indeed, the Gulf region has been ahead of the era of remittances for some time.

Total remittances in the Gulf countries are higher than in the United States, most of them to India, Pakistan, the Philippines, Bangladesh and Indonesia, the world’s fastest growing mobile money markets.

From this perspective, it is not surprising that about 85% of MENA’s fintech companies operate in the payments, remittances and remittance sectors.

The leader in this area is the United Arab Emirates-based company Rise, which was founded exactly to help immigrants make remittances.

Another prominent player is Hubpay. It was the first UAE-licensed start-up in the UAE in 2020 and announced earlier this month that it had raised $ 20 million in a Series A round.

Blockchain-based digital currency turmoil

In parallel with such developments, remittance space is rapidly being disrupted by blockchain-based digital currencies.

Among other advantages, cryptocurrencies do not recognize boundaries and do not require an intermediary to transfer them. If cryptocurrencies expand as fast as the most enthusiastic champions predict, it could challenge legacy providers and fintech companies as well in search of slices of remittance pies.

  • – The United Nations and other agencies require that remittance fees be limited to 3%
  • – Emerging markets are at the forefront of mobile-first fintech growth
  • – Cryptocurrencies are also increasingly confusing remittance space

Many fintech start-ups focused on remittances are gaining momentum in emerging markets. In doing so, they are breaking into market share, which was previously the protection of established providers.

Remittances have become more important in recent decades and are now the largest source of foreign income for many developing countries.

Remittance flows tend to be more stable than broader capital flows

They also tend to be anti-circular, increasing during recessions and catastrophes where the flow of other capital generally declines.

This was an early effect of Covid-19, and in many cases it actually increased the remittance flow, as OBG explains in detail.

This growth has only just accelerated, and remittances are set to become even more important as a source of income for both emerging economies and financial service providers.

A key issue so far has been the high cost associated with international transfers.

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https://www./banking/88830-how-fintechs-are-revolutionising-remittances-in-emerging-markets How FinTech is revolutionizing remittances in emerging markets

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