What Shakespeare said about greatness—some are born great, some achieve greatness, and others have greatness thrust upon them—turns out to also be true about innovation. One need look no further than various responses to the pandemic. Sectors from education to food service, filmmaking to event planning have all scrambled, with varying degrees of success, to innovate their operations for a world in lockdown. One of the most striking examples involves the abrupt shift in remittances—the money that people working abroad send back home to their loved ones—from being mainly cash to, at last, more digital forms. The title of a Forbes article from late May, “How money transfer companies squeezed four years of digital growth into just two months,” sums it up.
The trick now is to make sure that, after the pandemic subsides, the momentum is sustained. The stakes are high: for families, for countries, and for the global economy.
To understand why innovation is so vitally needed in remittances, a bit of background is helpful. As of 2019, an estimated 270 million people, or roughly 3.5 percent of the total global population, live and work outside their home countries. More than 85 percent are economic or voluntary migrants. And contrary to the archetypal image of the migrant who leaves a low-income country in the global South for a rich one in the global North, most migration actually happens south to south.
Wherever their home or host countries, for most migrants, sending money back home is a major priority. Their families may depend on that money to meet basic needs, or they may intend to save it up to build a house, buy land, launch a business, get a degree, or some other longer-term goal. Remittances are thus important to migrant households, many of which are low-income or otherwise vulnerable, and they’re important at the national level, too. In more than 60 developing countries, remittances exceed 5 percent of GDP. In some, that figure is 25 percent or higher.
Despite the importance of remittances, they have remained stuck in a couple of inefficient models. Most formal remittances are over-the-counter, cash-in/cash-out transactions. The migrant earns wages or salary in the local currency of their host country. They take some of that cash to a money transfer outlet, and pays a hefty fee to send it to family back home. The family gets word that the money has been sent, and someone goes to the closest money transfer outlet (which is often not particularly close), pays another hefty fee, and receives the remittance as local-currency cash. It’s all an expensive, inconvenient, inefficient hassle.
Small wonder, then, that so many resort to the unregulated networks that are ubiquitous in many countries. These networks go by different names (hawala, for example, on the Indian subcontinent) but the process is essentially the same: A migrant gives cash to an agent operating in the country where the migrant works. That agent has an associate in the migrant’s home county; the home-country agent delivers an equivalent amount of local-currency cash to the migrant’s intended beneficiary.
The most obvious issue with both of these models is cost. Globally, remittances carry an average 7 percent transaction fee, more than twice the target of 3 percent specified in the Sustainable Development Goals. The unregulated networks have also been linked to money laundering, financing of terrorism, human trafficking, and other abuses. Even where there is no connection to criminal activity, informal remittance flows distort the financial picture in harmful ways for developing countries, making receiving countries’ balance of payments appear less favorable than it actually is, harming their credit ratings and making it harder and more expensive to finance the kinds of large-scale initiatives that their countries need to develop.
All of the challenges around remittances—the inefficiency of over-the-counter models, the persistence of unregulated informal flows, the transaction costs—have been known for years. Moving remittances to digital channels holds the key to driving down costs, increasing access and convenience, and promoting transparency. That, too, has been apparent for years. And then the pandemic hit.
In April, as the scope of the pandemic was becoming clearer, the United Nations Capital Development Fund (UNCDF) collaborated with the International Association of Money Transfer Networks (IAMTN) on a industry-wide survey among remittance providers that collectively serve more than 20 million migrants. More than 75 senior industry executives participated, drawn from 30+ countries. They confirmed that their customers had been profoundly affected by the crisis: out of work, with limited money to send home, and unable in any case to visit money transfer outlets. Nearly half those providers, especially the smaller ones, doubted they could survive a prolonged crisis. And more than 65 percent confirmed that they were stepping up their investment in digitization.
By late May, Forbes was reporting not only on newer, digital-native remittance services providers that had doubled their customer base in one month, but also on incumbents like Western Union, whose share of digital business in April accounted for nearly one-third of its total business. MoneyGram saw its own digital share of business rise from 18 percent for the first quarter to 28 percent for the month of April. In other words, even though transfers were down from before the pandemic, more of them were happening online.
The lesson at first glance seems clear enough, a real-world example of the adapt-or-die principle. And it applies to customers no less than to providers. After all, despite the risks and inconvenience of physical cash, there is also something undeniably reassuring about it: crisp new bills in a bank envelope, shiny coins in a pocket, gold bangles around the wrist. When the choice was between staying in their comfort zone versus leaping into the unknown, customers stuck with what they knew. Only once the choice changed from “digital vs. cash” to “digital vs. nothing” did we see a sudden large-scale shift in remittance customers’ behavior.
The real test will come when the worst of the crisis has passed. Whether the changes stick will depend on the user experience that digital remittance services deliver right to their new and perhaps in some cases reluctant customers. For working people without much margin for error, asking them to embrace something new—where their family’s money is at stake—is not trivial. One way to earn and keep their trust is to deliver a broader and better financial experience, one that starts with remittances but does not end there, that is only possible through digitization.
Like everyone else, migrants and their families need a full suite of responsive financial services: savings, credit, insurance, investment, pensions, and more. Remittances could and should be the gateway product for those other uses, both because remittances are such a universal feature of the migrant experience and due to their extensive last-mile distribution networks. But the idea of piggy-backing additional financial services onto remittances remains impossible as long as remittances themselves remained cash-based. If they are ever to become more than just a way to move money from point A to point B, remittances will require end-to-end digitization.
Migrants could be paid their wages digitally. Then they could send a portion back home via digital means. Their families could keep those remitted funds in digital form, also, transferring a portion to a digital savings account, for example, and using a portion to make—digitally—necessary utility payments, or perhaps moving a portion to longer-term investments. The important first step is for the remittances to be digitized. If the beneficiary has to convert the remitted funds into cash, the likelihood is negligible that any of that cash will be put to savings or otherwise redirected. For governments, too, the benefits of digitized remittances are significant. They can see, in near-real time, the true inbound and outbound flow of money, and those responsible for combatting money laundering and the financing of terrorism can make greater use of technology to spot suspicious patterns.
End-to-end digitization will be challenging to implement. To begin with, the necessary digital infrastructure must be in place. As the rich countries prepare for wide-scale 5G roll-out, it’s useful to remember that almost half the world’s people still lack internet access. A greater share, 61 percent, have a smart or at least a feature phone, but those without, like those without internet access, live mostly in low-income countries. Women, especially, are disproportionately left behind in the digital era.
Along with infrastructure, end-to-end digitization of remittances requires collaboration between sending and receiving countries to create inter-operable systems. At the country level, it requires a thorough review of all the relevant policies (which don’t all sit in the same regulatory authority or line ministry) to remove bottlenecks and create incentives. Both national and international frameworks must be in place to guard against illicit financial flows but also to permit law-abiding people to send each other low-value cross-border transfers digitally. Most importantly, migrants themselves must see the value (assuming providers deliver that value) of digital remittances and linked financial services, and be willing to use them.
The inherent complexity in all this is perhaps why most previous remittance innovations have only involved one link in the chain: providers innovating better remittance products, regulators innovating better policy regimes, and so forth. But the limited success of such measures shows that a breakthrough can only come via the holistic, end-to-end approach. Together with Sida (the Swedish International Development Cooperation Agency) the institutions we are part of—UNCDF and the Swiss Agency for Development and Cooperation (SDC)—are working to spark innovation at every link in the value chain—policy, products, channels, user experience—to exploit remittances’ full potential.
With national governments, through a consultative process, we’re reviewing remittance policy frameworks. With regional economic communities, we’re exploring ways to increase capacity towards cross-border cooperation. For financial services providers, we’re delivering funding and technical assistance so they can better understand what migrants really need and value, and then design and deliver gender-responsive products accordingly. For migrants themselves, we’re working with an array of providers who can deliver financial and digital literacy skills-building for migrants, ideally pre-departure. All of the work in this area is informed by UNCDF’s overarching mandate: the financial inclusion and health of low-income people worldwide
The whole world has had months to think about what life will be like when the pandemic has passed. While it is difficult to imagine a world where we decide that small children should be in front of a laptop instead of in classrooms and playgrounds, it is also unlikely that everyone will go back to the office every day.
It remains to be seen where remittances will ultimately land. Money is a uniquely powerful force, and the duty of governments to regulate it prudently is real. But today someone travelling to a foreign country can purchase a SIM card, often from a vending machine in the airport, and immediately have access to voice, text, and data. We imagine digital financial services working the same way. Why should it be harder for people abroad to use their payments or savings account than it is to stream a movie?
It is their money, after all.
