Data: The massive market for cross-border P2P

The market for cross-border person-to-person (P2P) remittances is massive. It experienced double-digit growth in 2018 as consumers migrated from one country to another in search of better economic opportunities, as well as to escape political and financial upheaval in their home countries.

In many cases, the migration pattern may involve only one member of a family leaving their country for a job on an oil rig in Kuwait, a construction job in the U.S. or as a live-in daycare provider in Singapore while the remaining members stay home. In cases such as these, as well as those who have permanently emigrated yet still want to support an extended family in their home country, remittances play a vital role in the transfer of wealth and represent an economic boon to the receiving country.

The annual volume of remittances grew to almost $689 billion, in 2018 according to a report from the World Bank. For a reference on the scale of this market, as a total value it is larger than the entire GDP produced by the Kingdom of Saudi Arabia ($683.8 billion). Given the large size of the market and the lucrative nature of these payments which tend to be small value (oftentimes $100 to $300) and frequent (typically a weekly or bi-weekly payday) it has attracted the attention of newcomers such as TransferWise, Remitly, and WorldRemit. It has also attracted the attention of larger organizations such as PayPal, which acquired Xoom; as well as Western Union and MoneyGram making further technology investments to maintain their leadership positions.

This opportunity has also led to unique relationships such as payments player Brightwell partnering with the cross-border payout platform, Transpay, to serve a unique market niche of serving cruise line staff that send funds home from a different country every payday.

According to the World Bank, the worldwide volume for cross-border remittances is estimated to have reached almost $689 billion in 2018, up 10 percent from 2017.

A major beneficiary of this increase has been a remittance flow to low- and middle-income countries which grew by almost 11 percent in the year. The remaining volume of remittances are flowing to developed nations such as France and the U.S.A. In 2018, approximately 77 percent of remittances went to low- and middle-income countries, which was up from just under 76 percent in 2015. The overall market for remittances is forecasted to grow to $747 billion in 2020 with developing countries maintaining their share.

Remittances in 2018 to the South Asia region grew the most quickly out of all regions, by rising almost 13 percent from 2017. The two key recipients in the region, India and Bangladesh, grew by double digits for the year. India was the largest global recipient of remittances for both 2017 and 2018. In contrast, Sub-Saharan Africa and the Middle East/North Africa regions were both below the overall market growth rate for the year with each rising by approximately 9 percent.
While countries such as Mexico often grab the global headlines for remittances — making it appear that they represent an inordinate share of remittances — the reality couldn’t be further from the truth. In fact, the flow of remittances is spread out across the globe with the largest beneficiary, India, representing just 12 percent of the total market.

India retained its number one spot in 2018 by adding almost $10 billion in remittances for the year, obtaining $79.45 billion in total inflows. This dramatic growth has led a variety of startups to invest heavily in attracting non-resident Indians to use their services. Seattle-based Remitly increased its daily transfer limits to $30,000 and hired a Bollywood actor, R. Madhavan, as its brand ambassador to capture share from competitors in the U.S. to India remittance corridor. Digital gift card platform Swych acquired GiftCardsIndia in an effort to provide an instant gift card service as an alternative to traditional money transfers.

China holds on to the number two spot by adding over $3.55 billion in remittance inflows to reach over $67.4 billion for 2018. The Philippines added $910 million in volume to retain the number three position with a total of $33.73 billion for the year. Meanwhile, Mexico added over $3 billion in volume to solidify its number four position with $33.68 billion in money sent to its residents. Rounding out the top five was France, with $27.7 billion in remittance inflows.
Remittances sent back to family and friends in a person’s home country can have a major economic impact on the local economy. It can spur housing growth, purchases of large items such as furniture or television sets, or may simply go a long way to paying for everyday expenses such as fuel, food, and utilities. However, one thing that is clear is that remittances can have an outsized impact on certain countries that lack economic growth or have large segments of their population earning money overseas.

In Tajikistan, a former Soviet Union republic sandwiched between China and Afghanistan, the inflow of remittances is so vital to the country that money sent back to family and friends is equivalent to almost one-third (32.2 percent) of the country’s GDP, according to the World Bank.

The net result is that some countries are heavily reliant on their citizens leaving for jobs in more developed countries and sending money home. The Philippines, number three in receiving remittances globally, and Egypt, which ranks number six, are dependent on remittances to the tune of just over 10 percent of each country’s GDP. In comparison, Mexico, which ranks fourth in global remittances received, has a much more robust economy such that remittances add only up to 2.8 percent of GDP, based on World Bank data.
In 2014, leaders of the G20, who represent 19 of the world’s leading economies plus the European Union's members, agreed to the G20 Plan to Facilitate Remittance Flows whereby individual country initiatives would be implemented to reduce the cost of sending remittances.

Specifically, the plan calls for the reduction remittance fees to three percent of the principal by 2030, and the overall elimination of remittance corridors with costs higher than five percent. So, in addition to heavy competitive pressures, the remittance market is faced with governmental initiatives to reduce the overall price of sending funds cross-border to friends and family.

In the World Bank’s quarterly remittance prices worldwide (RPW) report, it noted that the global average cost to send $200 cross-border was 6.94 percent in Q3 2018, down from 7.21 percent in Q3 2017 and 7.52 percent in Q3 2015. The U.S. average cost to send $200 overseas was 5.42 percent in Q3 2018, down from 5.71 percent in Q3 2017. Meanwhile the average cost to send the same amount of money overseas in Q3 2018 from Canada was 8.02 percent, from the U.K. it was 7.08 percent and from Japan it was 9.58 percent.
Traditional money transmitter organizations (MTOs) such as Western Union and MoneyGram have relied on extensive agent networks to take in money from the sending country and disburse it on the receiving end, and oftentimes they are all cash-based transactions.

In such arrangements, MTOs generally need to pay agents at both ends of the transaction in addition to taking their own fee. The net result is that cash-based transactions using an agent network can have some of the highest overall costs to send money.

In the World Bank’s quarterly remittance prices worldwide (RPW) report, it noted that using cash to send money overseas had an average cost of 7.02 percent, which is more than 50 percent higher than using money stored in a mobile wallet. While the World Bank price tracker combines debit and credit cards as a single funding instrument, many MTOs charge lower fees for using debit because of the lower interchange costs. The fintech industry has largely eschewed the use of expensive agent networks, attempting to focus on the convenience of online and mobile payments, since most remitters may make multiple payments during a single month.
One of the biggest impediments to lowering remittance costs is the low global rates of bank account ownership. Those lacking a bank account pay higher costs due to their need to rely on agent networks.

According to the Global Findex Database, which tracks how adults globally save, borrow and make payments, only 69 percent of consumers over the age of 15 had a bank account in 2017, up from 62 percent in 2014.

While account ownership remains a challenge, it also represents an opportunity for fintechs seeking to capitalize on this issue. One example of creating a niche solution is the partnership Brightwell Payments announced with Transpay, the cross-border payments company, to help global cruise industry workers send money safely and easily worldwide via a mobile app. Traditionally, cruise workers would have to wait until the ship docks at a foreign location and use a money agent to send funds back to family or use onboard connectivity, which can be costly and time consuming. The partnership’s initial focus is on the Philippines due to the fact that over one-third of the crew members Brightwell serves are from the Philippines.

“We provide two services to Brightwell remittance recipients," said Peter Shore, general manager of Transpay, in an interview. "The first is the ability to pick up cash in their country, which is preferred in the Philippines due to low bank account ownership levels; and the second is to have the funds sent directly to their bank account.”
The stocks of the two leading MTOs, Western Union and MoneyGram, faced challenges in the past 12 months due to competition and skeptical investors.

MoneyGram has fared much worse in the market, no doubt in relation to its failed bid to be acquired by Ant Financial, the operator of Alipay. When the acquisition was first announced in 2017 it was met with great fanfare by MoneyGram shareholders, especially since the final bid was $1.2 billion, up from the original $880 million offer. However, one year later, Ant Financial was forced to abandon the acquisition due to opposition by the Committee on Foreign Investment in the U.S. and President Trump – leading to the stock losing 80 percent of its value in the last 12 months.

Western Union, on the other hand, has only lost about 10 percent of its share value over the same period of time. However, it faces multiple challenges that threaten its profitability and overall business model. Beginning with governmental initiatives to lower remittance costs and drive global financial inclusion, these threaten its ability to charge high fees for using its agent network. Unique fintech solutions such as the Brightwell Payments/Transpay partnership, Swych/GiftcardsIndia and even Xoom/PayPal represent a major digital threat to its agent-based network. The National Bank of Kuwait’s recent announcement that it is using Ripple’s blockchain technology for a new cross-border remittance service makes it clear that the threats to its business model are palpable.