Friday, January 22, 2010

Transaction banks vye for a slice of the remittances market

One aspect of the cross-border payments business that global transaction banks have failed to monopolise is remittances. Estimates from the World Bank suggest that the global remittance market increased 63% in the five years leading up to 2009 with more than $550 billion worth of funds remitted by immigrants living abroad in 2008.

Any bank can see the huge revenue potential if they are able to capture a substantial share of the global remittances market. However, the global remittances business is still dominated by non-bank money transfer providers such as Western Union and MoneyGram. One of the reasons for that is that remittances tend to touch the "unbanked" in emerging markets - people that don't have a bank account or ready access to one.

Banks, also being risk averse, have hesitated to enter this space particularly given the onerous regulatory requirements it entails for them in terms of compliance with Know Your Customer (KYC) and Anti-Money Laundering legislation. That perhaps explains why figures suggest that, in the US market at least, there are only about 100 banks that offer consumer remittance services with any meaninful volumes.

Yet, some banks like Citi and Bank of America have made forays into the remittances space, either alone or in conjunction with partner banks to offer consumer remittances at a lower cost than the traditional money transfer agencies.

Deutsche Bank is the latest entrant to this space. While it has no interest in selling remittance services to consumers directly, as part of its growth strategy for its Global Transaction Banking business, this week the German bank announced a strengthening of ties with payments network Eurogiro, which connects postal organisations globally.

Deutsche has taken an 8% equity stake in Eurogiro and plans to expand its offering to Eurogiro's network of postal organisations, post banks and othe financial institutions beyond US settlement services to encompass multicurency services. In return Deutsche gains access to Eurogiro's enviable global footprint across emerging markets without having to build a bricks and mortar presence itself.

Paul Camp, head, cash management, financial institutions at Deutsche Bank says the strategic investment in Eurogiro is part of Deutsche's Global Remittance initiative which combines Eurogiro's reach with the bank's existing capabilities as well as its plans to leverage mobile and SMS.

Camp was coy about Deutsche and banks' overall share of the global remittances space, but said its overall share was quite small  (Deutsche's share of total cross-border payments globally is 5% based on SWIFT traffic volumes) but that it was looking to grow its presence. "However it is not a risk free market," he says, "given the AML and KYC issues."

Deutsche will be relying on the partner banks and postal organisations within Eurogiro to have the right risk controls in place while it will provide them with multicurrency settlement capabilities. It is also working with mobile technology provider Luup to expand its mobile payments capabilities particularly in the B2B space. Mobile is deemed to be a useful technology in the remittances space because it allows people without bank accounts to receive money.

On the whole whoever, both banks and the money transfer agencies have been slow to leverage mobile technologies in the remittances space. They have been pipped to the post by telecom companies like Vodafone which partnered with in Kenya to launch M-PESA, a mobile money transfer system which has more than 7 million subscribers.

The banks have yet to clearly demonstrate what additional value they can bring to the remittances space, however, the gloves are off, and Western Union and MoneyGram can expect increased competition from banks, telcos and pre-paid card providers.

1 comment:

Colin Day - Vice President - Compliance and Financial Crime Solutions - SunGard said...

While the big banks have traditionally been slow on the uptake, there are of course many regional banks that offer remittance services to expatriate communities around the world. It is not only the specialised companies such as Western Union and MoneyGram that have a significant slice of the action.

If big banks start to move into this area, I would see the principal fight as being between smaller universal banks keeping their market share against the big global operators. As in other areas the larger banks will only move into a niche product once the profitability of that market has been demonstrated by the smaller, more agile players.

The Anti-Money Laundering and Know Your Customer challenges around remittances for banks, both large and small, are significant of course. I'd predict that the necessity to scale up flexibly will prompt many to turn to Software-as-a-Service (SaaS) Anti-Money Laundering and Customer Due Diligence solutions. This helps eliminate the need for infrastructure and the ongoing costs of software installation and maintenance.