www.strategyanalytics.com September 2012

International Remittances:

The Next Big Thing in Mobile Payments?

Summary The World Bank estimates that in 2011 more than USD 483 billion was sent internationally through

official remittance channels with the bulk of that - $351 billion - going to developing countries. It

projects that the total will rise to $593 billion by 2014, with $441 billion going to developing countries.

The amount that flows through informal channels is obviously difficult to quantify, but the IMF

estimates it may be as much as 50% greater than the official amount. So obviously a great deal of money

is moving across borders in relatively small amounts and at a relatively high cost: the average remittance

is probably less than $1,000, and the World Bank estimates that the average person pays almost $12 in

fees to send $200 from the US to Mexico, the largest single remittance corridor in the world. 1

Since the mobile phone is increasingly the dominant means by which workers overseas keep in touch

with their families and friends back home, and since domestic mobile payments are becoming more

common around the world, it is natural to think that the same channel could be used to send

international remittances, and possibly reduce costs and increase convenience at both the sending and

receiving ends.

Unfortunately, the role of mobile payments in international remittances has been modest so far. A total

of 2,121 international services are included in the World Bank’s September 2011 Remittance Prices

Worldwide (RPW)2 database: only 10 of these are mobile services. A study conducted in early 2012 by

CGAP (Consultative Group to Assist the Poor) found only 17 live mobile cash-out international

remittance services, primarily in Asia3. In this white paper we will look at some of the drivers and

inhibitors of mobile payments in the international remittance sector and assess the near to medium

term future for mobile remittances.

International Remittances

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What is driving interest in mobile remittances?

The size of the opportunity

The most obvious source of interest in mobile remittances is the sheer size of the potential opportunity.

As shown in Exhibit 1 below, remittances showed a slight dip in the global financial crisis of 2008-2009,

but have since resumed a strong upward trend. For the period 2008-2014 the World Bank is expecting

total remittances to grow at a compound annual rate of 4.5% to reach $593 billion at the end of the

period. Developing country remittances will grow significantly faster, at 5.3%, to reach $441 billion in

2014.4

Exhibit 1 Global Remittances, 2008-2014

And not only is the dollar volume of transactions high but the fees for handling the transactions

constitute a very attractive potential revenue stream. The World Bank calculates the global average cost

of sending remittances at 9.3% of the value of the transaction: this would equate to a current global

market of just under $50 billion this year. At a time when mobile operators are seeking new revenue

streams to make up for stagnant voice and texting revenues, this is certainly an attention-getting sum.

Exhibit 2 below shows costs for some of the major remittance corridors between the US and Caribbean

and Latin American countries. 5

International Remittances

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Exhibit 2 Typical Remittance Costs: US to Caribbean/Latin American Destinations, Q3 2011

There is academic research to show that if remittance fees are lowered, the volume and frequency of

remittances will increase, as it becomes more cost effective to send smaller amounts of money. Mobile

payments may be able to lower the cost of remittances somewhat by applying the more favorable

volume economics of large agent networks at the receiving end, although the transaction will still

requires a money transfer operator (MTO) or other intermediary between sending and receiving

countries, and those costs are unlikely to be affected greatly by what happens at the receiving end.

Convenience at the receiving end

One of the major problems with international P2P remittances has been at the receiving end. Using a

bank or an MTO typically requires the recipient to travel to a branch location – potentially a significant

journey – and fill out paperwork. As intra-country mobile payment systems become more common, an

obvious next step would seem to be to eliminate this inconvenience by delivering international

remittances directly to recipients’ mobile phones.

To the extent that the remittance remains electronic – that is, the recipient spends the

remittance by using mobile payments, rather than cashing out – the recipient’s personal security

is enhanced and the receiving payment network needs to maintain lower levels of cash at its

agent locations.

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Obstacles to mobile remittances

Lack of market concentration

One of the barriers to more mobile participation in the global remittances is the fact that traffic is

unconcentrated; most of the total volume flows through a large number of relatively small “corridors,”

as pairs of sending and receiving countries are called. Exhibit 3 below shows the 20 highest dollar

volume corridors in the developing world in 2010. Except for a handful of high volume cases, none of

these corridors accounts for more than 1% of global remittance volume, and collectively the top 20 only

account for a little more than a quarter of global volume. The remaining US$300+ billion flows through a

large number of much smaller corridors, such as Netherlands to Nigeria (US$ 87 million) or South Korea

to Bangladesh (US$ 18 million).6

Exhibit3 Top 20 Emerging Market Remittance Corridors, 2010

The importance of this lack of concentration is that each corridor represents a unique combination of

banking regulations, mobile operators, and consumer and retail environments. While there might be

some economies of scale in setting up multiple corridors, each one is still going to require a significant

amount of unique effort to set up. It is not easy to build up remittance volumes that are high enough to

justify the set-up and management costs

For example, it took Safaricom over a year to create a mobile remittance service just between

the UK and Kenya, primarily because of the need to negotiate foreign exchange issues between

the Bank of England and the Central Bank of Kenya.

Security concerns

Another concern that has been holding back the development of mobile-based cross-border funds

transfer has been the potential for money laundering and terrorist financing. The very characteristics of

mobile payment systems that make them popular – the near-ubiquity of mobile phones, the ability to

send small sums easily and cheaply with minimal banking oversight, the wide networks of mobile

International Remittances

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retailers who can act as money agents – are danger signals to the international counter-terrorism

community.

The relatively small size of typical mobile payments means that a cross-border money

laundering operation of any scope would have to organize activities across multiple accounts at

both the sending and receiving ends. This would not necessarily involve large numbers of

people, as some automation might be possible, but it would not be a trivial operation.

A 2008 US State Department report on “Money Laundering and Financial Crimes” asserted that “the risk

that criminal and terrorist organizations will co-opt m-payment services is real” and has a frequently

cited chapter entitled “Mobile Payments – A Growing Threat.” 7

It is unclear how real this threat actually is. The only examples of m-payment abuse that a 2010 Financial

Action Task Force (FATF) report could cite seem relatively minor, and are strictly domestic: two scams in

the Philippines where the victims were asked to make mobile payments, and a case in the Cayman

Islands where stolen credit card information was used to illegally obtain phone credits. 8

Nevertheless, in an age of heightened concern about global terrorism, regulators are not likely to ignore

the potential misuse of cross-border mobile funds transfer networks, which will continue to place a

compliance burden on mobile operators seeking to launch or expand services.

The consequences of failure to observe money laundering regulations can be severe: Wells

Fargo was fined US$ 160 million in 2010 for involvement in laundering Mexican drug money

stemming from lax “know your customer” (KYC) procedures, and HSBC has set aside US$ 700

million to cover potential penalties for allegedly similar activities.

Established/alternative ways of sending funds

For typical international senders and receivers of remittances, sending money across international

borders carries some risks: can the transmitting agency be trusted? Will the disbursing agent apply an

unfavorable exchange rate or charge unanticipated cash-out fees? Will the transaction be completed in

the expected amount of time? Since the remittance is likely to be critical to financial well-being at the

receiving end, and a significant part of earnings at the sending end, there is understandably a high

degree of conservatism about the transactions. Switching to a new and untried remittance channel will

require significant motivation.

Anecdotally, it would appear that unofficial remittance channels like hawala networks may offer

lower costs than official channels. Unofficial channels avoid the costs of regulatory compliance,

taxes, and other overhead, and in addition some also serve as part of money laundering or

counterfeit currency operations. These illegal activities generate revenue that can subsidize a

more generous exchange rate on hawala activities, for example.

In addition, to the extent that hawala agents share their language and national background,

remittance senders may simply be more comfortable with them than with clerks at official cash-

in agencies.

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Competition to mobile remittances also comes from other new ways of transmitting value, if not cash,

from country to country. These new alternatives include:

Cross-border bill payment. In this model, instead of sending cash to a recipient who will use it

to pay utility bills, for example, the funds sender simply pays the bill directly on the recipient’s

behalf. One of the potential advantages of this is that the sender controls how the remittance is

spent. Cross-border bill payment requires setting up electronic payment systems with each

target merchant, which is time-consuming and has so far limited the spread of the service. iSend

is an example of a cross-border payments processor; a customer can visit a payment location in

the US and have a utility bill paid directly to Jamaica Public Services, for example.

Airtime top-up. Along the same lines as cross-border bill payment, this model allows someone

in one country to pay directly for airtime for a mobile subscriber in another country. This is

considerably easier to set up than bill payment, since the merchant offering the services simply

buys bulk airtime from the operator in the recipient country and resells it locally. Companies

offering this service include iSend, Vesta, and WorldRemit.

Prospects for mobile remittances The conditions are favorable for long-term growth of international remittances handled at one or both

ends by mobile transactions.9

International remittance traffic is only going to increase. The economies of countries that derive

a high percentage of GDP from remittances – countries like El Salvador (16%), Honduras (15%)

or the Philippines (11%) – would have to be restructured dramatically for this amount of income

to be generated from domestic employment. Moreover, in an increasingly global economy, we

can expect to see more people choosing cross-border employment, not fewer.

Domestic mobile payments systems will continue to grow in most countries that receive

remittances. As more people in the receiving country use mobile money, it will be increasingly

desirable to have international remittances feed directly into their mobile wallets.

That is the long term, however. In the short and medium term two key factors will inhibit the rapid

growth of mobile international remittances:

Regulation. Governments around the world are rightly concerned about the use of existing

cross border funds transfer mechanisms to engage in fraudulent transactions, to launder the

proceeds of criminal enterprises, and to finance terrorism. The fact that in many countries there

is no universal, meaningful registration of SIM cards means that making mobile phones the

receiving agents of cross border remittances only adds a level of uncertainty. In addition,

governments that are concerned about regulating the flow of capital into and out of their

countries have an additional incentive to move cautiously.

Remittance income is very important, but since overseas workers already have ways of sending

cash back home, few banking regulators are likely to “fast track” regulatory reform that would

add mobile options.

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- In an address to the International Banking Summit on Regulation of Cross‐Border Mobile

Payments and Regional Financial Integration at Mumbai on March 29, 2012, Dr. K. C.

Chakrabarty, Deputy Governor of the Reserve Bank of India, neatly summarized one reason

why a dramatic streamlining of regulatory practices is unlikely to occur soon: “To my mind

there cannot be a uniform standard for this. The issue is country specific and each country

has to take its decision based on need, issues and threat perception.”10

Customer awareness and trust. As mentioned above, both senders and receivers, but

particularly senders, are conservative with respect to the remittance transfer systems they

employ. Creating trust in a new system inevitably takes time and effort; word of mouth and the

experience of others in the same community is likely to be more persuasive than advertising,

but takes a great deal longer to build up.

For these reasons, we believe that it will be a matter of several years before mobile-based systems will

start to account for a significant part of the international remittance business. If there is an element of

good news in this for prospective mobile remittance processors it is that there is time to experiment and

get it right, without worrying too much about losing the window of opportunity.

- Tom Elliott

Strategy Analytics

September 2012

1 World Bank, Migration & Remittances Data, , Remittance Prices Worldwide

2World Bank, Remittance Prices Worldwide, No. 3, November 2011

3 CGAP, Landscape Study On International Remittances Through Mobile Money, February 2012

4 World Bank, Remittance Prices Worldwide, No. 3, November 2011

5 World Bank, Remittance Prices Worldwide

6 World Bank, Bilateral Migration and Remittances 2010

7 United States Department of State, Bureau for International Narcotics and Law Enforcement Affairs,

“International Narcotics Control Strategy Report; Volume II, Money Laundering and Financial Crimes” March 2008 8 Financial Action Task Force, “Money Laundering Using New Payment Methods” October 2010

9 Strategy Analytics, “Mobile Money is a Major Opportunity, But Not Without Partners” September 2011

10 Dr K. C. Chakrabarty, “M - Banking in India - Regulations and Rationale” March 2012