Large amounts of money are sent to Africa every year by individuals from all over the world to support friends, spouses, parents and children. The World Bank estimates that in 2013 alone, approximately $32 billion were sent to Sub-Saharan Africa from individuals abroad. Volumes are expected to continue growing over the next few years, with current and projected figures excluding measurement of money moved into countries via undocumented means. For many African economies, these money transfers – formally called remittances – are as important in national development as foreign aid and can make up a significant proportion of GDP. In Uganda, the volume of money transfers is twice as high as the income from their main export coffee. Whilst remittances in Cape Verde, Liberia and Eritrea account for more than 25% of GDP.
Remittances can also be far more impactful than foreign aid. The money comes without strings attached and is sent directly to friends and family, often for a specific cause, like paying medical bills or school fees. For this reason, remittances are less prone to corruption and are also more likely to be used for their intended purpose. Despite the personal and external benefits produced by the remittance industry, it does have a reputation for being unfair, opaque and lacking in innovation. This post aims to shed further light on the industry and present current trends that are providing innovation to the industry.
Challenges facing the remittances industry
In order to better understand the challenges in this space, let’s first paint a better picture of how transfers are conducted. In order to send cash home, those abroad deposit sums at Money Transfers Operators, who manage the transfer of funds between remitters and recipients through a network of agents in both countries. These agents, which can be banks, corner shops or post offices, enable the transferring of sums within minutes so that recipients can access cash from the agents on the ground.
However, whilst sending money through MTOs involves a safe and relatively fast process for those in Sub-Saharan Africa, MTOs are often criticised for being very expensive. The Overseas Development Institute (ODI) released a report in 2014 stating that the average cost for money transfers into Sub-Saharan Africa is 12% of the sent amount compared to the global average of 7-8%. Furthermore and because financial policy in many African countries is designed to make it harder to move money out of the country, intra-African money transfers are even more expensive at around 20% of the sent amount. Taking these percentages into account alongside money inflows to Africa, the ODI concludes that middlemen take home a total of $2bn annually – considering that the World Bank suggests that agents only collect 3% fees, it is easy to see where the challenges in the remittances industry lie.
The most obvious way to bring this industry forward is to find a method for lowering the cost of sending money. This is however easier said than done, especially when considering that entry barriers, in the form of high red tape and agent acquisition, are extremely high for new players. New MTOs need to get licences in order to send and receive international transfers. They must also protect themselves from the ever-high threat of fraud and keep track of all transactions, senders and recipients involved so as to comply with Anti-Money-Laundering laws and regulations established for the combating of terrorism financing. Furthermore, it’s vital for companies to build an agent network or at least form partnerships that leverage existing networks. Inputs, alongside managing floats, efficient settlement between agents spread all over the world and the handling of foreign exchange volatility risk, which only adds to the increasing costliness of operating within this space.
Room for innovation
So, how can innovators, businesses and entrepreneurs produce solutions that overcome these challenges? Below are some interesting trends demonstrating options for innovating the remittance industry:
1. Integration with local payout options
There exists a variety of localized payment systems that cater for the un-banked and those living in the remote areas outside the cities. The most important example is mobile money technology, which turns any feature phone into a bank account; enabling users to deposit and withdraw cash. A more relevant feature of mobile money is the option it provides in sending funds instantly to those within the country and at a low cost. By supporting local payment systems like mobile money, remittance companies reach more people and increase convenience on the recipient’s side.
2. Micro Remittances
The average amount sent with one transaction is about $200. According to Dr Ismail Ahmed, founder of the remittance company WorldRemit, this figure could be much lower. High prices hurt low-income remitters in particular, who have to save much longer so that transactions are worthwhile. Ahmed is convinced that with fees dependent on the value of transactions, transfers that are low in value will increase in frequency as senders become more agile when responding to urgent needs back home.
3. Money to goods remittances
Another interesting trend involves paying directly for specific goods or services such as topping up airtime, buying gift cards or paying utility bills and so allowing senders to better influence how money is spent.
This is where we come in. ‘Beam’ helps Ghanaian diaspora to pay directly for services like medical bills, school fees and internet access for friends and family using their international debit or credit card. By cutting out middlemen, Beam users enjoy an expedited experience and can ensure that loved ones enjoy the full value of these transfers.
Beam is not the only start-up operating in this area. Ghana Provisions allow Diaspora to buy supplies like rice, breakfast drinks and toiletries for friends and family in Ghana. Goods are then collected from one of several central pickup points in Accra and Kumasi. The start-up Afrimarket, who have just raised €2 million in funding to further expand their operations, functions with a very similar business model but focuses on francophone countries: Senegal, Cote d’Ivoire, Benin and Togo.
The remittance industry offers interesting business opportunities due to its market size and the opportunity for huge impact. However, with exceptionally high entry barriers, a lot of responsibility lies with political leaders of both the Western and African nations, who have the power to pass legislation that will help in lowering entry barriers and making the market more competitive, whilst also ensuring that money transfers are not abused for criminal activities. In this interim, there is still a lot of room for smart entrepreneurs to find innovative solutions that leapfrog legislation in solving problems.