Reaping the benefits of lowering money-transfer fees

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Competition is heating up in the low-cost international money transfer business, with new fintechs putting pressure on the traditional MTOs and incumbent banks.

It’s the 31st of the month. A migrant worker working in the Gulf waits in his employer’s office to receive his monthly wages. With cash in hand, Step 2 is the dash to a local branch of a money transfer service to send some funds home to put food on the table for his extended family. Unfortunately, 10% or even more can be lost due to high transfer fees, depending on the destination, currency, and how many stops the amount makes on the way.

Foreign workers are a significant player in the global business of cross-border money transfers, with remittances valued at $553 billion in 2021 and expected to grow by 2.2 percent to $565 billion in 2022, according to World Bank estimates. The top five remittance recipient countries are India ($83 billion), China ($60 billion), Mexico ($43 billion), the Philippines ($35 billion), and Egypt ($30 billion). The top sources for the outflows are the United States, the UAE and Saudi Arabia.

Today, the remittance transfer market is dominated by money transfer operators (MTOs), such as Western Union, as well as banks. Costs for low-value amounts remain high, compounded by the price of implementing rules to Know Your Customer (KYC) as part of global anti money-laundering (AML) and anti-terror financing efforts.

While at an all-time low average of 6.5%, the United Nations has set a target of 3% to reduce inequality within and among countries.

Banks remain the most expensive type of service provider, with an average cost of 10.66 percent.

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Market disruption triggered by low-cost digital payment platforms

Today, the incumbents in the money transfer business are under pressure from the rapid development of alternative payment platforms that are democratizing the consumer-to-consumer (C2C) payments industry.

This competition has done more for reducing for the cost of low-value transfers than what the leaders of the G8, G20 and international organizations combined have managed in years of efforts to reform the sector.

App-based cross-border solutions designed with foreign remittances in mind are disrupting the market. Fintech startups such as US-based Remitly and UK-based Wise were launched to solve the pain point of migrant workers paying exorbitant fees on small money transfers.

Digital platforms have fees that are consistently below the international average for MTOs. In Q1 2021, the digital-only MTO Index was recorded at 3.43 percentage points.

Traditional money platforms fighting back

In the face of competition from the digital payment providers, incumbent banks are making moves to maintain their share of the high-growth global cross-border business and even expand business with new revenue corridors to smaller banks and PSPs.

This summer, SWIFT launched a new service to compete in the fast-growing low-value  payment market. SWIFT Go is a service for consumers and small businesses to send low-value payments across borders directly from their bank accounts.

The service offers fast payments, even within seconds, securely with upfront transparency on fees.

The move by SWIFT members is indicative of how firmly the playing field has been opened by digital payment platforms.

Leveling the playing field

When considering the recipient and source countries for remittances, it’s easy to see how costs can be incurred along the path of correspondent bank networks handling the currency transfers. Banks face sizeable expenses to meet regulatory requirements and manage risk when engaging with PSPs and respondent banks in the network.

With the playing field leveling in low-value cross border transfers due to the rise of the digital payment service providers, the rules of the game will also inevitably be enforced on all players.

Indeed, payment service providers (PSPs) have caught the radar of regulators monitoring standards for anti-money laundering (AML).

To adapt to the rise in online financial services, global regulators are updating Anti-Money Laundering to impose a uniform AML regime that will apply to all financial entities. All players will be required to identify and verify customers, report activities, monitor risks and more.

Adjusting to a new payments market reality

As the global payment network increases in complexity, the market as a whole can expect increased costs of compliance and risk management. In this environment with a growing volume of transactions and the complexity of added players, automating manual processes and reducing steps in the process of managing global transfers will become more essential.

AI-based, machine-learning solutions have the advantage of delivering a risk-based approach that can illuminate the cases in a payment network that need to be highlighted for investigation. By focusing on cases that matter and filtering out the insignificant clutter, financial service providers can boost operational efficiency, reducing manpower and saving costs. In this way, risk and revenue don’t have to be a trade-off.

Taking this approach, correspondent banks will be able to maintain traffic and valuable revenue streams and PSP will be able to stay in business with large financial entities and ensure long-term growth potential. And customers will benefit from the continued competition that is driving down costs.

The case of the high costs of low-value money transfers for migrant workers illuminates a pain point where new players are willing to come in a digital age where costs are lower to maintain a global money transfer service.

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