Columnists

Time is ripe for disruption in cross-border remittances fee

BANKING-TECH
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Summary

  • Cross-border remittances are a big business.
  • Recent World Bank data shows that global remittances stood at Sh54 trillion in 2020, a paltry 1.6 percent drop from Sh54.8 trillion recorded in 2019.
  • Of that total, Sh4.2 trillion went to sub-Saharan Africa (SSA) which is a drop of 12.5 percent from the previous year.

Cross-border remittances are a big business. Recent World Bank data shows that global remittances - understood as the money or goods that migrants send back to families and friends in origin countries - stood at Sh54 trillion in 2020, a paltry 1.6 percent drop from Sh54.8 trillion recorded in 2019.

Of that total, Sh4.2 trillion went to sub-Saharan Africa (SSA) which is a drop of 12.5 percent from the previous year. The decline was almost entirely due to a 28 percent fall in remittance flows to Nigeria (which accounts for over 40 percent of remittance flows to the region).

Excluding flows to Nigeria, remittances to SSA increased by 2.3 percent, demonstrating resilience. That said, SSA remittance flows suffered an average cost of sending Sh20,000 of 8.2 percent, more than double the Sustainable Development Goal target of three percent and the highest in the world.

It’s unfortunate that even with the explosion of cheap smartphones and growing internet coverage in the continent, remittance costs to SSA remain excessively high.

It is hard to imagine fees are charged on the world’s most vulnerable people who are effectively losing roughly the equivalent of a week’s worth of living expenses every time they receive money from abroad.

Is it a lack of empathy? Do we lack a competitive market environment? Or, do we have an overbearing regulatory regime? Why should it cost close to 20 percent to send money from South Africa to Botswana, Zimbabwe (14 percent) and to Malawi (16 percent)?

While I take note that the average cost of sending has made progress from its mean of 14 percent in 2008, it’s unfathomable that there’s been little movement from the 9–10 percent range since 2015.

New technologies such as virtual accounts and blockchain technology can aid in bringing down the cost of sending remittances.

I believe only tech can deal with the triple challenges of the remittance market; high cost, low volumes of formal flows and penetration challenges. If, for instance, due to regulations, current players are forced to terminate remittances at select traditional banking institutions (leaving beneficiaries at the mercy of high foreign currency exchange rates), why don’t we change the law?

People are more important than profits. Besides, high costs reduce the benefits of migration. This should be a wakeup call for tech companies and most importantly governments.

Clearly, the global remittance market is stuck in the last century. Lowering the outrageous costs of sending money to sub-Saharan Africa should be a priority for well-meaning players.

For enterprising start-ups, the opportunity is huge; remittances are on track to become the largest source of external financing in most developing countries. In the next two years, flows to SSA are projected to rise by 2.6 percent (Sh4.3 trillion) and 1.6 percent (Sh4.4 trillion) in 2021 and 2022, respectively.

Improving growth prospects in the United States (where a quarter of Kenyan migrants live) and other high-income host countries are expected to anchor this growth. It’s also worth noting that the true size of remittances, which includes formal and informal flows, is believed to be larger than officially reported data.

Mr Mwanyasi is managing director at Canaan Capital