Mobile remittance channels are among the cheapest in the world and yet account for only a small portion of the total transaction volume. Finder’s Elizabeth Barry explores why this is and the barriers to using a mobile remittance provider.
Despite economic uncertainties and the changing nature of global migration since 2020, remittances remain an important part of life for both individuals and businesses.
People must send money to their families. Digital nomads need to manage expenses. Businesses need to accept payments and pay international invoices, and the list goes on.
So you would think the cost of sending money would be close to, if not at the top of, the list of concerns for people transferring money into another currency. But one of the cheapest ways to send money — through a mobile provider –– isn’t the most popular.
How Important Are Remittances, Anyway?
Remittances mean different things to different people globally and are much more than what they appear at face value. For many people in low- and middle-income countries, for example Nepal or El Salvador, they are also a key driver of financial inclusion.
According to a report by the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS), remittance flows are so important to low- and middle-income countries that they have been greater than official development assistance since the mid-1990s and have surpassed foreign direct investment since 2019.
“Remittances are usually the first financial service used by migrants and their families, thus providing a point of contact with the financial sector that can be leveraged to increase access to other financial services,” the report said.
The digitization of remittances can therefore “further enhance their contribution to financial inclusion.”
The Cost Of Currency
Interestingly, the widely accepted definition of international remittances, provided by the World Bank, includes the fact that they are “typically recurrent.” This, coupled with the fact that low- and middle-income countries and migrants heavily rely on remittances, means it's essential to keep money transfer costs accessible for these groups.
Costs differ depending on provider, payment method and country and can prevent huge barriers to those looking to send money internationally.
Banks continue to be the costliest way to send money globally. A report by the World Bank found that it costs an average of 10.94% to transfer money with a traditional financial institution in the first quarter of 2022. That same report found it cost an average of 5.28% to send money with a money transfer operator during the same period — or 2.87% with a mobile operator.
The report also found cost discrepancies when using different payment methods to send and receive remittances, although not as stark.
However, sending and receiving money through mobile still came out as the cheapest in the first quarter of 2022, with an average cost of 2.77% when used to fund the transaction and 4.22% when disbursing the funds.
So, with mobile money providers being the cheapest way to send money internationally, it must also be the most popular, right? Well, it isn't — not by a long shot.
Mobile money represented less than 3% of all remittances globally as of 2021, and this is well below estimates.
The State of the Industry Report on Mobile Money 2022 found that while total remittance flows to low- and middle-income countries were expected to increase by 7.3% in 2021, mobile money-enabled remittances grew faster by 48% to reach $15.9 billion.
“Despite this impressive growth, the total value of remittances sent through the mobile money channel still represents just 2.7% of total forecasted flows to low- and middle-income countries, estimated at $589 billion in 2021. This indicates that, even after remarkable growth, the mobile money channel still has considerable potential,” the report said.
So, why aren’t more people using mobile for global remittances?
For one, cash is still king in foreign currency. Despite being more expensive to send remittances in cash, many people transferring money in low- and middle-income countries don't have access to traditional financial services and so need cash to complete the transaction.
“Access to cheaper digital remittances requires both senders and receivers to access a transaction account. This is a big challenge for undocumented migrants on the sending side and financially excluded families on the receiving side,” said the BIS report.
The report details that the dominance of cash is also “due to lack of access to transaction accounts, lack of options for receiving transfers using digital channels or lack of knowledge of digital products.”
“[...] there could be a lack of an enabling ecosystem for digital payments: If money received digitally must be withdrawn in cash for use in places where digital payments aren’t widely accepted, cash might be the most convenient option.”
Is There A Way Forward For Mobile Remittances?
The barriers preventing a faster uptake of mobile remittances don’t outweigh the benefits of saving people money for those same remittances. The World Bank report found sending money using cash cost, on average, 6.37% in the first quarter of 2022 compared to 2.77% with mobile money.
It’s also estimated that a 1% cost reduction leads to a 1.6% increase in remittances to low- and middle-income countries, leading to increased financial inclusion outcomes.
And while the growth in mobile remittance uptake has been slow, it’s making progress. Mobile money payments surpassed over $1 trillion in 2021, which was a 31% year-over-year (YOY) increase. And YOY, the cost of remittances has been trending down from 2011 to 2022.
The UN has also identified bringing down remittance costs as one of its 10 strategic goals to reduce inequality. It aims to reduce the transaction costs of migrant remittances to less than 3% and eliminate remittance corridors with costs higher than 5%.
The future looks brighter, cheaper and more mobile.