Understanding how digital remittances is challenging cross border payments industry

Imagine standing in a long queue for long hours to send or receive money. This situation was the norm for many years until the advent of digital remittances.

Since then there are far greater options for sending and receiving money across borders. Digital remittances allow a sender to sit in the comfort of their home or office and send money online to a recipient directly to their mobile phones or to their bank account.

Every year millions of people migrate from their home countries, and they inevitably maintain strong ties with these countries, including sending funds back home.

According to the World Bank, even as the world is experiencing severe recession due to the COVID pandemic, remittances to low and middle income are projected to reach $589 billion by the end of 2021, growing by 7.3 percent.

However, the cost of remittances is very high, estimated at 6.4 percent on average over the first quarter of 2021 globally and 8 percent for sending remittances to sub–Saharan Africa (https://tinyurl.com/yc5ymbz9).

Given this high cost, it is inevitable that the sender of remittances is always on the lookout for a mechanism to send funds more cheaply.

Digital remittances are driving many innovations, cost efficiency, convenience and speed. They can be described as the transmission of money across borders using online means by migrants to their home countries.

Historically remittances, relied heavily on technologies to drive the service; for example, Western Union, as the pioneers of money transfer in 1871 made use of technology even then.

An industry association, the International Association of Money Transfer Networks reported that in 2020, 40.2% of remittances which were previously transferred as cash took digital forms, likely because of the radical transformation that new digital technologies offer; increased mobile phone penetration, which is driving the uptake of mobile money wallets and creating an omnichannel for receiving remittances to various financial services platforms including banks, cards, and others.

The acceleration in digital remittances is due to many reasons, including the COVID pandemic, which necessitates the transfer of money digitally since face-to-face means were not possible, mainly due to lockdowns. Therefore, the market for digital remittances is seeing exponential growth, with the global market size of digital remittances expected to reach USD 42.46 billion by 2028 (bwnews).

The remittances market saw a systemic change when thousands of FinTech firms or digital-first Money Transfer Operator (MTO) entered the market place mostly providing digital remittance and radically changing the face of remittances.

This means foremost incumbents such as Western Union and MoneyGram, who dominated the remittances market for many years, raced to change their business model while investing heavily in digital remittances.

Furthermore, emerging technologies such as big data automation, Artificial Intelligence (AI), machine learning, blockchain and Distributed Ledger Technology (DLT) are now being used by some remittances companies to improve service delivery, leading to reduced costs and transfer time, improved security and real-time data needed for clients' onboarding, meeting compliance standards, meeting Know Your Client (KYC) requirements efficiently, and improving clients' satisfaction. Also, the use of these technologies ensures better digital security and risk management, giving clients comfort and ensuring entities meet regulatory requirements in the areas they operate in.

Meta, formally known as Facebook, recently announced the piloting of a digital wallet, Novi, based on a blockchain platform to challenge how remittances work. Novi allows users to send money from USA to Guatemala (pilot basis), facilitated by a stablecoin digital currency (cryptocurrency pegged to a "stable" reserve asset such as a currency or gold) called Pax Dollar. The recipient can hold funds as digital currency or convert them into their local currency.

Digital remittances come with several advantages, including faster funds transfer, ease of transactions, relatively cheap cost of transfers, ability to track and trace the status of remittances, and more secured transactions.

Although the cost of digital remittances is somewhat lower, cost remains a challenge impacting digital remittances' rapid uptake largely because some users expect small transfer fees or no fees meaning they are inclined to use the informal mechanism of transfers.

Other challenges impacting digital remittances negatively are regulatory complexities; especially when it comes to implementing innovations, the preference for informal remittances, clients' low digital literacy level; especially older users, and de-risking where financial service providers terminate or restrict remittances as a risk management or mitigation tool.

In conclusion, although digital remittances ensure access and relatively cheap ways of sending funds across borders, informal and cash means of transfer still hold sway. Therefore, for digital remittances to take over cash, it must ultimately provide innovations in enabling cash-like remittances.