The future of low value remittances

1
The future of low value remittances

• Worksession
• Regional Conference Istanbul
• March 2006

2
Definition

• Remittances are monies sent from one individual
  or household to another. They include
• International remittances, sent by migrant
  workers who left their home country
• Domestic remittances sent by migrant workers to
  their home village or town
• Collective remittances sent by migrant
  associations (eg. Church groups).
• Remittances are
• typically small and frequent amounts sent from
  rich to poor countries. Seasonal patterns exist
  (e.g. Xmas, Ramadan, etc)
• in significant part routed through informal
  channels

Source  Migrant Remittances to Developing
countries , Prepared for the UK department for
International Development (DFID), by Cerstin
Sander, Bannock Consulting , June 2003
3
The remittance business an attractive
opportunity

• Remittance flows are significant and continue to
  grow
• Informal flows still represent a significant
  share to be captured
• Governments are increasingly looking at
  remittance business and try to regulate it
• Banks could derive significant revenues from
  further penetrating this market

4
Remittance flows are significant and continue to
grow
Remittance flows in USD billion
93
282
33
1991
2003
Source Global Development Finance 2003, formal
channels only
5
Top 20 sources and receiving countries
USD billion
Top 20 developing-country recipients of workers
remittances, 2001
28.4
USD billion
Top 20 countries sources of remittance payments,
2001
15.1
8.2
8.1
8.1
3.9
3.0
2.2
3.1
2.6
1.8
2.3
1.5
1.3
1.3
0.7
0.7
1.5
0.7
0.7
Source IMF, Balance of Payments Yearbook
6
Barriers preventing the use of formal channels

• Excessive regulatory barriers (eg. Anti money
  laundering regulations)
• Weak technological infrastructure to support
  tracking
• Lack of access to financial institutions services
• User lack of trust of financial institutions,
• High cost due to limited competition in the
  provision of remittance services

7
Governments are increasingly looking at
remittances and try to regulate it

• Although small value individually they are huge
  in aggregate and can represent a significant part
  of GDP (eg. Jordan 25)
• Better more transparent - regulations (eg.
  Money Wire Act) would allow to lower the transfer
  costs, and hence increase number of remittances.

In 2002, for every 100 USD sent from the US to
LATAM/Carribeans, 12 USD was retained as charges
by wire transfer companies
8
Recent initiatives aiming at improving remittance
transfer services

• UK Department For International Development
  (DFID)
• Formation of a working group on remittances
• First meeting held on 2nd September
• 3 sub-groups formed to work on 1) Regulation, 2)
  Products and 3) Information sharing
• US Money Wire Act
• Requires companies to disclose service fees,
  commissions, surcharges, prevailing exchange
  rates and the exact amount of money the recipient
  will receive in the foreign currency

9
Does the opportunity justify the engagement of
Banks and SWIFT ?
Banks

• High profit margin business e.g. 12 of value
• Opportunity for cross selling e.g. saving
  products
• Capturing a small market share significant
  volumes for SWIFT (based on a total volume of 1
  billion transfers per year).

SWIFT
Based on an average of 200 USD/transfer
(source Global Development Finance 2003)
10
Remittance processing
Pay-in
Account
Cash
Card
Payer
P.O.S.
Bank A
In-country processing
Cross-border processing
Account
Cash
Card
Recipient
P.O.S.
Bank B
Pay-out
11
Bank issues in-country processing
Payer
Recipient
P.O.S.
P.O.S.
Bank A
Bank B
Pay-in
Pay-out

• Branch/partner network distribution in
  sending/receiving countries?
• Cost of in-country retail infrastructure for
  service providers?
• Can bank provide accounts/cards for senders and
  receivers?
• Is bank able/willing to offer cash to cash
  services?
• KYC compliance?
• Level of brand awareness/acceptance among users?
• Which physical network? WAN, Debit/Credit card
  infrastructure, other?

12
Bank issues cross-border processing
Payer
Recipient
P.O.S.
P.O.S.
Bank A
Bank B
X-border

• Are payments bulk or online?
• Between service providers, are central systems in
  place for
• Processing
• Settlement
• Exception handling
• Call centre
• Track and trace
• What are compliance costs?

13
Potential SWIFT/Correspondent banking solution
for account to account/cash or cash to cash
remittances
In-country
Cross-border

• Correspondent branches
• ATM network
• Other retail partners

• SWIFT
• MT 103?
• Variant required for ID info?
• SWIFTNet FileAct?

Processing

• Upload records to central
• txn d-base

• SWIFT
• Develop central txn d-base?

Tracking

• Bank webservice link
• to central d-base
• Use existing call
• centre infrastructure

• SWIFT
• Adapt SWIFTNet EI solution
• for interbank remittances?

Exception handling

• Local ACH or RTGS if more
• than one in-country service
• provider

• SWIFT
• MT 202 under correspondent
• contract
• Central netting?

Settlement
14
SummaryWhos interested in remittances and why?
Financial Institutions

• High margin business
• Potential new customer base
• Opportunity for cross selling
• Economic development potential
• Channel remittances into savings and investment
• Address money laundering issues
• A small market share significant volumes

Government Non-governmental Organisations
SWIFT
15
Worksession topics

• How would you like to see SWIFT being involved?
• On which areas specifically should SWIFT focus
  on?
• What would/could you help SWIFT?