What are Remittances?
Remittances refers to money or goods that are being sent by migrants to their families and friends in their countries of origin. However, the statistical definition of international remittances only partially reflects this common understanding. Remittances can also be sent within countries and not just across borders. These are called internal remittances.
Insights on Remittances in Africa
Remittance flows in 2020 to low- and middle-income countries (LMICs) are projected to fall by 19.7 per cent to $ 445 billion due to the #COVID19 pandemic. This will mark one of the sharpest declines in recent history according to World Bank.
Africa housing a number of these low and middle income countries(LMICs) will be hugely affected by this. The World Bank projects a decline in remittance flows of -23.1% in Sub-Saharan Africa and -19.6% in North Africa. This decline comes after remittances to LMICs reached a record $ 554 billion in 2019, overtaking Foreign Direct Investments (World Bank, 2020). With Egypt being the top receiver of remittances in Africa.
In North Africa, Egypt received over $26.8 Billion in remittances in 2019. While is Sub-Saharan Africa, Nigeria received over $17.57 billion in direct diaspora remittances in 2019. According to data published by the Central Bank of Nigeria, remittances rose by over 56% in Nigeria after it increased from $11.23 billion within the same period in 2018 to $17.57 billion in 2019.
Problems with Traditional Remittance Methods
1. High cost:
The cost associated with migrants sending remittances through traditional methods like banks and well established Money Transfer Operators(MTOs) are very high and they come with hidden charges of which remittance senders and recipients do not realize.
The World Bank estimates that sending remittances costs an average of 6.79 percent of the amount sent. This is twice the United Nation’s Sustainable Development Goals (SDG) target of 3 percent. If the target cost price of 3% for transfers can be achieved this would help save over $30 Billion annually.
One major reason the costs are so high is because banks consider the remittance sector a high risk sector. Also, cross-border payments require multiple debits and credits across multiple accounts through different banks or intermediaries to help transfer the value of money from the sender’s country to the final beneficiary in another country. The banks also charge fees for processing each of these transactions, while if it’s through money transfer operators(MTOs), their fees are quite competitive compared to banks but they operate a structure that comprises of trusted agent networks. Building and maintaining these agent networks comes with high costs. These cost are unknowingly passed on to the consumers utilizing their services.
Not onlyis this process of receiving remittances from traditional methods expensive, it is also very slow as there are a whole lot of processes involved before the money can get to the recipient. There are large amounts of paperwork to be done, verifications and cross border bank transfers.
3. Focused on the banked population:
Traditional methods of remittances focused primarily on the banked population. It is estimated that 1.7 Billion of the world’s population are unbanked.
Fintech in Remittances
Fintech in Remittances refers to adopting alternative payment methods for sending and receiving money such as internet platforms, blockchain technology and mobile phones. Traditional remittance service providers operate through banks, brick and mortar agents and call centers. What differentiates Fintech from traditional remittance service providers are their access points at which their products and services are made available.
Lets take a look at some Fintech remittance service providers access points:
Online Payment Platforms
This refers to companies that facilitates online remittance services through digital mediums like websites, web applications and mobile applications. Some online payment platforms operate using a peer to peer model where the sender sends directly to the recipient but the transaction still passes through intermediaries for verification purposes before it is sent successfully to the recipient.
Western Union, for instance, is a money transfer operator which provides both online and over-the-counter(OTC) remittance services but because it is not exclusively operating digitally, it is not considered an online platform.
There are a number of online payment platforms that provides remittance services to Africa. These includes WorldRemit, SimbaPay, Ria, Neteller, XpressMoney, TransferWise, Wave, Skrill, etc. With online platforms, payments can be sent directly to recipient’s bank account, debit card, online wallet, mobile wallets or as cash pick up.
As a case study lets look at WorldRemit
WorldRemit is an online payments platform that provides international remittance services. WorldRemit is based in London, United Kingdom and was founded in 2010 by Ismail Ahmed, Catherine Wines, and Richard Igoe. With WorldRemit you can successfully send money to all African countries except Algeria, Djibouti, Equatorial Guinea, Eritrea, Eswatini (formerly Swaziland), Libya, Mauritius, Namibia, Seychelles, South Sudan and Sudan.
- Platforms: Android, iOS and Web
- Transfer limit: £50,000 at a time
- Transfer fee: 0.005 – 2.9% which is below UN’s SDG 3% fee for remittances
- Mode of Transfers:
– Cash pick up
– Bank deposit
– Mobile money
– Airtime top-up
Beyond remittance services to Africa, WorldRemit also facilitates payments and transfers within countries in the African continent.
Mobile Money Providers
Mobile money services are provided by mobile network operators and consist of electronic wallets linked directly to the customer’s mobile phone number. With these mobile wallets, individuals are able to send & receive money, pay bills, deposit and withdraw cash through their mobile phones. Here customers do not need to have internet access or own a smartphone but just mobile cellular network connectivity in a regular mobile phone is enough.
The main advantage of mobile money services is that no formal bank account is necessary to open a mobile money account, making it accessible to a greater share of the population which includes the unbanked.
MTN Mobile Money is a good example of a mobile money service provider. A major advantage here is you can send & receive cross borders payments using mobile money but like in the case of MTN mobile money the recipient and sender must be using MTN as their mobile network operator. This is a major limitation using mobile money services for remittance purp
Insights on Mobile Money
Mobile Money narrows the gap between the banked and unbanked, thereby making remittance services available to everyone.
Blockchain Based RSPs
Blockchain based remittance service providers are a new addition to this sector and are still developing. They provide remittance services using blockchain technology and cryptocurrencies. The most commonly used cryptocurrencies are Bitcoin, Ripple, Ethereum and Stablecoins.
Though blockchain technology is mostly decentralized, blockchain based RSPs mode of operations involves utilizing a centralised structure where transactions still needs to be verified by a 3rd party.
Decentralization in Remittances
Another way of sending remittances using blockchain technology is sending directly wallet to wallet. The sender sends directly from his cryptocurrency wallet to the recipient’s wallet. This involves no third party or central authority. The only verification in this case is when the transaction is being validated on the blockchain by miners.
Africa Blockchain Based RSPs
The blockchain payments and remittances sector in Africa is growing rapidly with new blockchain companies joining each day. This is the fastest growing sector of the blockchain space in Africa.
Some blockchain based RSPs in Africa include Bundles which is backed by Binance, Fliqpay, BoundlessPay by Bitfxt, First Kudi backed by Ferrum Network, Bitsika backed by Jack Dorsey(Twitter & Square CEO), BitPesa, etc.
Lets take a look at Bitsika and BitPesa
See also: First Kudi on Africa Blockchain Series
BitSika is a blockchain based remittance service provider that aims to provide quick and affordable cross border money transfers using cryptocurrencies. Founded in 2018 by Atsu Davoh and Samuel Boahen. Created mainly for Africa to help curb the high cost associated with remittances.
Bitsika presently facilitates cross border transfers and payments using cryptocurrencies between Ghana and Nigeria with plans to expand into other West African countries and subsequently more African countries. The platform has over 1,000 active users and recently hit a milestone of more than $1 Million in total transactions.
BitPesa is a cryptocurrency exchange and cross-border payments platform that utilizes blockchain technology for remittance services in Africa. Bitpesa was founded in 2013 by Elizabeth Rossiello. BitPesa was initially focused on facilitating blockchain based remittance services between the U.K. and Kenya. Bitpesa has now expanded their services to eight African countries, these includes Democratic Republic of the Congo, Ghana, Kenya, Morocco, Nigeria, Senegal, Tanzania, and Uganda.
BitPesa process their remittance payments with a blend of traditional and personal insurance such as pooling, as well as using blockchain technology. Their fees are between 1% to 3% which is within the UN SDGs benchmark for remittances.
Steps to make Fintech the Viable Tool for Remittances in Africa
- Availability: If you build it they will come. Are there Fintech based remittance service providers in Africa? If there are no companies or start-ups offering these services in Africa then there’s no point talking about it. We have to first identify if there are companies and start-ups in this field offering remittance services. This is the first step in making Fintech a viable tool for payments and remittance services in Africa.
- Accessibility: If there are companies offering Fintech based remittance services in Africa, how accessible are their services to consumers? Are there any constraints limiting consumers access to their services? Online payment platforms and blockchain based RSPs require internet connection and a device that browses the internet. This can be a limitation for people in rural areas with no internet connection or with no device to access the internet. While on the other hand mobile money remittance services are readily available to everyone. To access mobile money services you just need a phone(may not be a smart phone), sim card and regular cellular network. Overall online payment platforms have some constraints limiting access to remittance services but utilizing mobile money removes these limitations as mobile money remittance services can be access with a normal phone, sim card and regular cellular network.
- Awareness: Fintech based RSPs may be available and accessible in Africa but unless people are aware of these services they will continue to use traditional remittance services. A whole lot of awareness needs to be created around the products and services offered by these fintech based RSPs.
- Literacy: Educating people about Fintech based RSPs must be a priority by these companies and start-ups. People need to be aware these services are available, accessible and know how exactly it can be used. Firstly individuals must see the advantages of using these services like low fees, higher security and speed. Secondly improving the levels of literacy also implies deconstructing misconceptions held by people about fintech services. Having the wrong idea of how these services operate might keep potential customers away. Like most people hold the misconception in Africa that cryptocurrencies are used for illegal purposes such as ponzi schemes and internet scams.Financial educational campaigns can be a good vehicle to promote the general understanding of fintech services. This can be aimed at both children and adults. It will help clear any misconceptions people hold.
- Trust: This is the ultimate step in making fintech a viable tool for remittance services. Availability, accessibility, understanding how a service works and recognising its advantages are not sufficient enough to convince people to start patronizing fintech-based remittance service providers. It is essential that potential customers know the service is trust worthy and they won’t lose their money in the process. With the best form of marketing being mouth to mouth, one happy customer that uses the service and is satisfied with the service will definitely tell a potential customer about the service and the cycle goes on and on.
In Africa there are few fintech based remittance service providers due to the laws and regulatory frameworks put in place by governments, central banks and policy makers not favouring innovation and use of certain technologies in the financial sector. Government needs to make Fintech friendly laws and regulations that will speed up creation of fintech firms and start-ups. The emergence of this business model could be supported by governments and policy makers in Africa through implementing tax incentives to companies and start-ups looking to enter the remittances sector.
Lastly, governments and private organizations in Africa need to set up innovation hubs. Like in Rwanda where the government have been setting up innovation hubs while in Senegal the government partnered with Akon to build a blockchain powered city. Recently, Kenyan President due to #COVID19 told Kenyans to embrace alternative methods of payments, things like this should be backed up with regulations and action plans that will see creation of companies and start-ups offering fintech based payments and remittance services.
The Bigger Picture of Financial Technology
According to a report by McKinsey Global Institute(MGI) in 2016, Digital finance for all: Powering inclusive growth in emerging economies. The report ascertains that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6 percent, or a total of $3.7 trillion, by 2025 which is larger than all the economies of Africa. Lower-income countries like Ethiopia and Nigeria have the opportunity to add 10 to 12 percent to their GDP, given low levels of financial inclusion and digital payments today.
Financial technology could provide access to 1.7 billion unbanked people in the world with a majority in Africa. Mobile phones are the game changer that make all these possible. Financial technology will bring about financial inclusion capturing the unbanked population(70% are women) which would result in gender equality for access to banking and financial services.
To capture the opportunity of utilizing financial technology for remittance services; businesses, central banks and government leaders will need to make concerted and coordinated efforts towards creating:
- A dynamic business environment that favors financial technology services.
- Financial technology products that meet the needs of individuals and small businesses in ways that are superior to the traditional financial tools they use today.
- Tax incentives for operators and service providers.
- Widespread mobile and digital infrastructure.
- Technology innovation hubs.