As banks cut cross-border transfer services to emerging markets because of perceived risk, the market for remittance services opens up for digital payments startups.
Some newer entrants are using decentralized cryptocurrencies, which enable more efficient, low cost transfer. Even though the regulatory environment for cryptocurrencies is unclear, the upstart companies are making headway in building a network of global payment services which allow for the transfer of money across borders.
Recently, alternative payments provider, ZipZap added new Latin American nationsChile, Mexico, Colombia, Argentina, Peru and Uruguayto its network of locations that allow users to deposit cash for Bitcoin. The company is expanding its cash-in/cash-out feature to create a global money transfer and bill payment network at a lower cost than legacy remitters such as Western Union, says Alan Safahi, CEO of ZipZap. In the future, consumers "may not know they're using Bitcoin or any digital currency behind the scenes," he says.
ZipZap has also partnered with several institutions in the U.K. to offer its services. But Latin America is an important market for the provider. "There's a large percentage of unbanked people there and there's a lot of distrust of governments and financial institutions," Safahi says. "The market is right for the rise of digital currency; people are looking for alternative options to their local currency that's maybe less volatile."
ZipZap goes where it's easy to do business, where the regulations put on Bitcoin money transfer services are not overly burdensome, says Safahi.
Ripple Labs, which manages the Ripple protocol, is another digital currency startup that's trying to hide the cryptocurrency on the back end, while allowing users to send money across borders quickly and without expense.
The Ripple network is designed to handle payments any local currency, cryptocurrency or good that users want to trade. As a multi-currency exchange, Ripple pathways allow users to send money in one currency and receive it in another.
Recently AstroPay, a licensed money services business launched Ripple LatAm, connecting the Latin America market with Ripple Labs' network partners and gateways in North America, Europe and Asia.
Other emerging challengers in the remittance market include WorldRemit, which in March received a $40 million investment. The London-based payments company enables migrants and expatriates to send money to 100 countries through an online or mobile platform only. Azimo is another digital remittance company that received investment earlier this year.
Even though some banks are fleeing the market, the demand for remittance services is increasing. Since 2009, "cross border remittance in the Philippines has grown 40%," says Ron Shevlin, a senior analyst at Aite Group. In Southeast Asia in general, cross border remittance has rose 48%, he says.
There's an opportunity in the remittance market because banks have cooled on the product. "The threats of fines and penalties outweigh the potential benefits of [servicing] those markets," Shevlin says, adding banks have many other profitable lines of business which makes remittance less important.
Migrant workers from Latin American countries tend to be highly educated people, says Shevlin, and they'll be looking for alternatives. "These more educated and younger and tech-savvy consumers are looking for a more technology-based alternative to the services of large institutions,' he says.
Latin America and Africa are most affected by the banks' retreat. In 2013 London-based Barclays ended its relationship with four money transmitters working in Somalia. And Mexico, which received half of the total $51.1 billion remittances in 2012 sent from the U.S., is likely the most affected country, according to a report by the NY Times.
Remittances to these regions are considered high risk because of the instances of money laundering by drug lords and terrorist activities.
While compliance can be expensive, the startups can leverage technology to offset other business costs, Shevlin says.
"The shift to a mobile payment model [for remittance] is going to pay off; from that perspective they may be better able to deal with regulatory and compliance costs, because their cost structure tends to be lower since they aren't as reliant on physical structures," Shevlin says.
But there are some headwinds for the startups, including investing in branding to build recognition and credibility in local markets, as well as competition from remaining incumbentsnot all banks have left the business. In April 2013, U.S. Bancorp began a trial relationship with Dahabshiil, one of the Somali remitters Barclays dropped in the latter part of the year. And on July 10, Wells Fargo established a relationship with Philippine National Bank (PNB) to allow customers to send money to more than 600 PNB branches.
The Wells/PNB partnership "may have something to do with Wells Fargo being a more established West Coast presence, where there's a large Asian American contingency," Shevlin says. Plus Wells Fargo probably sees that there isn't much competition for them in the remittance business since other large banks are backing out, he says.
Established money transfer providers such as Western Union and Moneygram have also stepped up to capture some of the remittance business banks are dropping.
"Large institutions and large money transmitters like Western Union and Moneygram have done well in this business for years not because they're the low cost providers but because they have many locations and have established credibility," Shevlin says.