The challenges of remittances providers
Remittances and payment providers can make a change throughout Africa. Companies like Paga, M-Pesa, Payoneer, and Remitly, among dozen others companies, are trying to make transfer of funds to Africa cheaper than ever before. In 2017, the global remittances reached a record high and the average cost of remittances were still more than 7%. That’s 7% of 613 billion dollars, that could have boosted the economy of many developing and third-world countries, and assist as many as a billion people across the globe who rely on remittances from abroad.
Reducing the costs of remittances has been a high-level goal for the World Bank, as well as these payment providers which are commercial entities. They are obviously aiming for profitability, but often times these companies are founded by immigrants with a genuine desire of solving such a paramount problem that can help mitigate the poverty levels and save many lives. For example, Ismail Ahmed, Chief Executive Officer of World Remit, was a part of the UN’s Remittances Programme prior to starting his company.
So what’s keeping these startups from achieving their goals?
“There two important aspects which are particularly problematic with transfers to developing countries. One being suffocating and tangled regulation relating to money laundering, and the second one is the management of currencies”, say Ali Zaif, an author for InternationalMoneyTransfers, a leading guide about remittances.
“If you want to move money internationally, you need a license. That license costs money and requires you to fill certain functions in your businesses that you would have not have filled, if you were not required to by the regulator. If you want a truly agile and fully international businesses which offers multiple currencies and means of payment, you will need several types of licenses from various regulators. The bigger you grow, the more rules you have to follow. How can you be offering low-fee transfers when your average margin on a transfer is $5 and your overhead costs are close to $5 as well?”, says Ali.
“This license is likely to allow you to onboard clients moving tiny amounts abroad with ease, but what happens when you have an immigrant worker who wants to move his savings from a domestic bank back home? When you pass a certain threshold which varies by local regulators, you are required to follow the Anti Money Laundering rulebook which makes it a lot more complex, slow, and prone to problems. As such, a larger transfer will cost more in overhead costs.” Ali said he believes a revision in AML laws is due, but it’s “too difficult to give any concrete suggestions without a more comprehensive analysis”.
“The second major issue relates to the operative side of a remittances provider. There is a massive exposure to foreign currencies, and foreign currencies of the worst kind a payment provider would never want to be exposed to – volatile ones!”, says Ali and elaborates , “Whereas in most currency routes, there is a bilateral exchange of funds which, in a way, provides a certain cushion for the companies transferring the funds, it’s not as easy with African currencies. Take the ZAR which has been moving in a very volatile fashion for the past year, for example. A company taking ZAR payments needs to liquidate it into a more stable and global currency at instant.”
In spite of these two major hurdles in the way of a payment provider, and in spite of many other hurdles, there is a tangibly positive change taking place over the past 5 years. Whereas in the past Western Union and Moneygram would have been the only alternative, and provided poor exchange rates that represent a 10% markup or more, nowadays there are a lot of far cheaper solutions which are getting cheaper year in and year out.