This year, migrants around the world will send a record $610 billion across borders, according to World Bank projections. And although that would be a 25% surge from 2010, some things haven't evolved: namely, the high fees associated with the service and the long waits for the money to go through.
A handful of startups in the burgeoning fintech space are trying to change that. Some of these companies, including TransferWise, Zenbanx, Ripple, WorldRemit and Currency Cloud, are gaining customers and payment volumes. But hurdles remain, including a lack of interoperability among countries’ payment systems and the hodgepodge of correspondent banks that funnel money between countries.
In 2015, 244 million people, or 3.3% of the world's population, lived outside their country of origin, according to the United Nations. According to the World Bank’s latest numbers, migrants to the U.S. sent $56 billion to their home countries in 2014.
The average cross-border payment is around $200, according to the World Bank, and the average cost per transaction is 5% to 10%. (Sending money from the U.S. cost an average 6.3% at the end of last year.) A cross-border payment sent from a bank or money transfer operator today takes two to five days.
“Anything that can reduce friction, cost and time is something that as a financial institution is a worthwhile contributor to moving society along,” said Arkadi Kuhlmann, founder and CEO of Zenbanx.
His company and TransferWise, among others, are addressing the market with mobile apps. International remittances sent via mobile technology accounted for less than 2% of remittance flows in 2013, according to the World Bank's latest data.
A study released last month by Juniper Research shows demand for mobile remittances. Among nearly 3,000 users of international money transfer service users from migrant communities in the U.S., U.K., and Germany, 82% of those who sent money across borders using money transfer operators and banks said they are dissatisfied with their current options; 83% said they are willing to use mobile payments for these transactions, provided they are offered a service that is more secure, more convenient, faster, and competitively priced.
Kuhlmann’s Zenbanx account and mobile app, which officially launched in the U.S. in December 2015, lets people store money in multiple currencies in an FDIC-insured account (held by Delaware bank partner WSFS) and send mobile payments in those currencies to users in other countries for a set fee of $4.95, regardless of the size of the payment. A few thousand U.S. users have signed up so far. (In Canada, where Zenbanx launched first, more than 20,000 customers have joined.)
“The differentiators with Zenbanx are the ease with which a person can send money internationally from their mobile device versus a brick-and-mortar location and the flat fee for sending,” said Kuhlmann, who previously pioneered direct banking as the founder of ING Direct.
Money sent internationally with Zenbanx is available in the recipient’s bank within two days. The person sending the money is notified when the recipient receives it.
“It takes the guess work out as both parties get notifications,” Kuhlmann said. The sender is also notified if the recipient doesn’t pick up the money she’s been sent, so the sender can check in with the recipient to make certain everything is OK.
Zenbanx users can send messages and photos along with their payments. While this feature brings to mind Venmo, the payment app and social network popular among U.S. millennials, Kuhlmann said his customer base is mainly immigrant communities.
“When they travel, they don’t travel for pleasure, they travel because they’re seeing family, they’re working, they’re importing and exporting, the children are going to school,” Kuhlmann said. “So they’re very industrious, they work very hard for their money, and they support family members and investments back in their native countries. There are 35 million first and second generation Chinese Americans. This is not for the American Express gold card member.”
Another provider of a cross-border mobile payment app, London-based TransferWise, says its users move $750 million a month over its service. It launched in the U.S. market in February 2015 and hit $1 billion in U.S. dollar transfers within eight months.
”I've often heard people describe us as international Venmo and I use that description myself sometimes,” said Joe Cross, U.S. general manager at TransferWise.
The company started when its founders, Taavet Hinrikus (Skype’s first employee) and Kristo Käärmann (a former management consultant with PriceWaterhouseCoopers), realized how much it cost to transfer money between the U.K. and Estonia. Hinrikus was based in London but was paid in euros; Käärmann worked in London but paid a mortgage in Estonia in euros. They figured out a way to exchange money between themselves, without the mark-up rate and fees charged by banks. They saved thousands of pounds and realized there might be a market for such a product.
“The founding principle of our company is fairness – otherwise you’d be screwing over your friend and no one wants to do that,” Cross said.
TransferWise uses a peer-to-peer platform that matches payments with one or more people making an opposite exchange. If there is no one to swap a payment with, the company buys the needed currency.
TransferWise says it always uses “the real exchange rate” and charges a flat fee that varies depending on the route. From the U.K. and Eurozone, for example, it charges 0.5%. From Australia it's 0.7%. From the U.S. the price is 1% up to $5,000 and then 0.7%.
Transfers are typically complete within one or two working days – “up to five times faster than a bank,” Cross said. “We are now able to offer instant transfers on a number of our bigger routes.”
But due to fundamental payment infrastructure issues, mobile apps can only do so much.
“The fanciest mobile payment application might look nice and attractive, but it’s still weighed down by this antiquated infrastructure” of older payment systems and correspondent banking networks, said Chris Larsen, CEO of Ripple, which proposes to solve this with distributed ledger technology.
“Things might work well within a country or payment system – some countries are very real-time and super-efficient, others are trying to catch up,” Larsen noted. “But even for the ones that are real-time cutting edge, there’s still the problem of no interoperability between even the best systems.”
For instance, the U.K. and Mexico both have fast payment networks, but no interoperability between them.
“The rails between those countries [are] still based on 1970s technology and correspondent banking, and that’s the problem with any cross-border payment, whether it’s a corporation or an immigrant trying to help his family back home,” Larsen said. “Because of that correspondent banking, you’re facing very long delays, very high cost, and kind of a lack of access -- only a handful of global money center banks can do this directly.”
Ripple has signed 90 banks to use its shared-ledger technology, which works similarly to a blockchain; 30 of those banks are in pilots and four have gone into production. Last year it introduced Interledger, a protocol for payments across different systems.
Larsen envisions cross-border payments eventually looking a lot like the Internet itself.
“The Internet was not formed around a single Oracle database. It’s millions of databases all connected through a common internet protocol,” he said. “We think there will be millions of ledgers, mostly core systems of banks, all connected through a common value exchange protocol or interoperability protocol.”
Editor at Large Penny Crosman welcomes feedback at firstname.lastname@example.org.