Wednesday, September 14, 2016

How mobile telcos could make billions from international money transfer

Workers wait in line
It must be disappointing to find at the end of a month, perhaps spent working under a hot sun in difficult conditions, that you can give away one entire day’s pay in just a few minutes on fees and commissions to send your monthly salary home. If you’re a South Asian expatriate, you could nevertheless count yourself lucky - it can easily cost two days pay to send a month’s wages home to some African countries. The money in your pocket that represents your hard work, handed over to someone in an aircon office who punches a few buttons to send your cash home safely to your parents - does that feel fair? Bill Gates, the G-20, the European Council and the UN don't think so. 

The author's quest for new
routes to market may
involve trying novel paths
Last year I was working in one of the less well-travelled countries of the Middle East. Among other things I was looking for the best return on an investment in some form of mobile financial service. The country in question has some of the world’s most beautiful natural scenery, an exceptionally hospitable population, and much to recommend it.

For anyone interested in international remittance, it also has startlingly attractive demographics, and is a net remitter, mainly to the countries of South Asia; foreign expatriate men outnumber local adult male citizens two to one, and virtually every single one of them sends the bulk of their wages home. Aside from the foreign men, there’s another 10% of foreign women, mostly domestic workers. This is one of those countries of the Middle East that has a wages protection system (WPS), and it pays foreigners better than some other countries in the region; remittance CAGR is 16% over the last 5 years and volumes continue to grow 12.5% a year; outbound payments by expatriates through formal channels is likely to top US$16Bn in 2018.

It ain't half hot mum
From official statistics it's possible to work out how much these workers are sending home; for historical reasons highly educated Egyptians in the education sector and civil service are each sending over $10,000 home a year, while Indian workers, who represent the largest group of expatriates send home about $6k a year each. And these are just the formal remittance figures quoted by the Central Bank and backed up by World Bank’s datasets. While it is not possible to say how much informal remittance occurs, some reliable commentators suggest that you might in general double the formal remittance volume to get the true volume of remittance; if that's the case in this country, workers may send home over 25 billion dollars this year.

In my line of work we commonly deal with people whose income may fall to $1 a day, so it's rare to be dealing with both very large aggregate transaction volumes and individually large transactions. Looking at a business opportunity represented by a transaction share of 25 billion dollars attracted my interest considerably. The most robust data is that for Pakistani expats, whose average monthly remittance is $285 - so the market potential for an international remittance service can be simplistically viewed as a transaction share of $285, repeated 25 billion divided by 285 times. Imagine you could design a service that expat workers would use and trust - could you make Bill Gates et al happy by cutting fees and still make a profit?

The way people send money home has not changed very much in 50 years. In some research I carried out elsewhere, I asked someone why he still used MoneyGram. He replied “Because my father used MoneyGram when he worked here”. Given that remittance has been going on for so long and the numbers are so big, you would think that it's a very competitive business, and indeed it may well be. There are quite a few licensed remittance houses and they offer pretty attractive exchange rates.

But all is not well with remittance from the Middle East - fixed sending fees and the spread on foreign exchange can bump up the cost to send money home, especially if you’re sending a small amount. Complicating this is the effect of the working week. It is common for expat workers to have no choice about when they can send money home. If you’re based at a work site you may have to travel to town on your day off, queue at the remittance house, and accept whatever rate is on offer that day. I wondered if this weekly pattern could be discerned in the FX rates on offer - a rational remittance house might choose to give workers a slightly worse rate on their day off, sit on the risk for a couple of days, then bulk send when the rates moved in their favour. I don’t know if it happens, but the data is very strange; have a look at the chart below, which shows a pronounced weekly move in the FX rates.

One way to look at this data is to say that, if there really is a 3% weekly deviation in the Sri Lankan Rupee (LKR) exchange rate from its mean, then giving Sri Lankans the ability to send money when the exchange rate moves in their favour could allow them to send 3% more money home. Even if I built a service that gave half of this windfall to the Sri Lankan workforce and I kept the rest, it’s still a meaningful amount. But what would such a service look like?

Clearly, it would be a mobile-based service that alerts you when the exchange rate is in your favour. It might be an app that interrupted your game of Candy Crush to say that if you send money now from your linked WPS bank card, your family back home would receive $8.57 more than if you sent money last Saturday.

Traditional bricks-and-mortar exchange house
may be on a long lease
How would the existing bricks-and-mortar remittance houses respond to such a service? An obvious response would be to appeal to the regulator while building a competing service, and hope that the inertia of your customer base meant that there was not too much damage done in the interim. But can the traditional exchange houses actually cope with a big shift in their economics? Their offices in the shopping malls and market places have firm fixed costs and perhaps long leases; the economics of traditional remittance houses are a bit opaque in any case. Then there’s the problem of distribution - how would traditional remittance services roll out such a mobile product to their user base, and how could they drive usage? It seems to me that the best entities to promote mobile international remittance are the mobile phone operators, but to get full coverage of the expat population would require some form of cross-network collaboration in order to launch an assault on the incumbents and their fixed costs - and mobile operators aren’t very good at such collaboration.

How much money are we talking? Well, if my figures above are correct, the transaction share from handling all this remittance would be about a billion dollars a year, a figure which comes from applying the current average cost of remittance from the UAE (which is about the cheapest in the world) to my $25 billion figure. And this is just one relatively small country in the Middle East which has less than 1% of the world’s expat workers.

With such a large transaction share from such an immense volume of money being sent, competing with an industry whose working practices don’t look much different from those of half a century ago, it might be time to consider a collaborative approach - perhaps an independent service provider creating a simple path for multiple mobile operators in a territory to jointly launch a cheap, trustworthy, robust, and regulated international remittance service. Who would risk not investing in the potential?

Malcolm Vernon - 13 Sept 2016

Malcolm runs Social Mobile Ventures Ltd which seeks to identify the next big trends in frontier markets, and design profitable services that can positively impact the communities they serve. You can contact him at


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