By Alix Murphy
For Africans living in the diaspora, sending remittances back home is often a proud obligation, a willing sacrifice made on behalf of loved ones, a gesture of appreciation for those who helped them succeed along the way.
More than $40 billion in remittances is sent every year by Africans abroad. Yet these individuals face the highest transaction costs in the world. The World Bank estimates Africans pay on average 9.5% of the total transfer sum in fees, reaching as high as 20% in some corridors. Such disproportionate costs not only represent a heavy burden on hard-working Africans, they are also a barrier to productive investment by diaspora back into their home countries. An increase in diaspora investments could offer a serious boost to economic development across the continent.
Recognising these challenges, leading African diaspora organisations, together with the IMF, World Bank and the Africa Institute for Remittances, recently launched the Nairobi Action Plan on Remittances. Unveiled at the ADEPT Fifth Diaspora Development Dialogue (DDD5) in Nairobi, the Action Plan lays out ambitious steps to reduce remittance costs to Africa to less than 3% by 2020 – a full ten years sooner than the 2030 global target set by the Sustainable Development Goals.
WorldRemit was invited to participate in the ADEPT Dialogue, representing a money transfer service that aims to reduce costs significantly for Africans and other diaspora communities sending money to their home countries.
Here are the most important steps we think will help to achieve these goals:
1. Move away from cash on the send side
Paying in cash at a money transfer agent leads to high costs. Managing a large network of agent locations – and their commissions – forms a big expense on the balance sheets of big money transfer companies. For years, these costs have been passed directly on to the customer in the form of higher transaction fees.
Cash, by its anonymous nature, is the criminal’s friend. It’s the path of least resistance. Cash-at-agent models are more prone to AML/CFT failings simply because they lack the ability to monitor transactions in real-time (paper forms are typically processed once the transaction has already gone through), thus making it harder to catch fraud before it happens.
Many of these costs can be eliminated when moving to an online model, where cash is removed from the sending-side altogether and transactions can be safely checked in real-time before they go through. Online and mobile money transfer services can have significantly lower overheads than a traditional money transfer firm with an agent network.
2. Pay attention to indirect costs affecting Africans as well as fees
Policymakers often overlook that remittances incur costs beyond the transfer fee and exchange rate margin. Other indirect costs such as the time and money required to travel to an agent location, the opportunity cost of leaving one’s place of employment to go during business hours, and the security risk of carrying large sums of cash, can place a heavy burden on the sender. These are all eliminated when the transaction can be made online. On the receiving side, enabling transfers directly to a Mobile Money account can minimise costs for the recipient, who otherwise may have to travel a long distance to go collect funds in cash.
Digital services like these are driving the future of money transfers. But much remains to be done before these benefits can be seen by the majority of Africans abroad. Even today in 2016, the old cash and agent-based model represents more than 90% of the global remittances market. We must do more to address these indirect costs before the industry can move forward in a meaningful way.
3. Foster a competitive, efficient remittance market
Much has been done in recent years to remove exclusivity agreements from most markets. But even in jurisdictions where such agreements have been outlawed, non-competitive arrangements or ‘penalties’ imposed on local service partners (such as a reduced share in fees or reduction of other benefits if the local partner sets up another partnership with a competitor) serve as quasi-exclusivity agreements which compose a significant barrier to entry for new services in the market.
In other jurisdictions, restrictive licensing requirements and limitations on correspondent banking relationships make it nearly impossible for all but the largest and most well-financed companies to operate. We’re regrettably still at a point today where, in some of the largest and most sophisticated economies on the continent, competition is reduced to just a handful of large, predominantly cash-based money transfer businesses.
Moving to lower remittance costs for Africa
With the support of leading bodies like the World Bank, policymakers now have better information at their disposal to shape regulations that can foster competition and promote the use of cost-saving technologies such as digital money transfer services and Mobile Money. Diaspora organisations have a vital role to play in helping their constituents evaluate the different options for money transfers and build trust in online methods; while money transfer companies have a duty to promote transparency and embrace new technologies that will help to bring the industry into the 21st Century. There’s still a long way to go, but working in collaboration we can make this industry better for the African diaspora and their loved ones.
(Alix Murphy is a Senior Mobile Analyst at WorldRemit).