February 10, 2016
Recently, the financial and non-financial worlds have been psyched about the impact of FinTech on our everyday life. There is a FinTech startup somewhere for almost any bank service nowadays, taking away the cash cow little by little from the club of monopolists. We even started to believe that FinTech is making the world a better place to live as it can solve financial issues raised in the face of civil disaster happening in the Middle East.
Nonbank market players in the financial services industry are disrupting almost every segment leaving fewer chances to the major players. The cross-border money transfer industry is one of those segments where traditional institutions have suffered significantly. In the UK, for example, the top 20 nonbank money transfer providers account for over £40 billion of foreign exchange per year, saving customers over £900 million annually.
FinTech players like TransferWise and World First have increased the pressure on banks in terms of fees for the transfer service. Nonbank providers charge an average of 0.9% on £10,000, which is four times less than the average for banks.
However, one edge that banks seem to have so far is the power of their licenses. Strict regulations and licensing can be a common barrier for FinTech startups to enter foreign markets and broaden the list of countries money could be sent to. Banks may also pose competition when it comes to transfers reaching £500,000 and more, both in terms of trust and fees decreasing 65% compared to the fees for £10,000 transfers. Nonetheless, the most important part for us here is the 4x difference in favor of FinTech.
This outstanding achievement of FinTech could have had a significant impact on the situation with global remittance price reported by the World Bank. According to the data of Q4 2015, the average global cost of sending remittances fell to 7.37% as of December 2015, from 7.52% in the previous quarter. It’s possible to send money for the average cost of 10% or less in 80% of the world’s country corridors. For comparison, six years ago, only 50% of the corridors had the cost of 10% or less.
Image source: The World Bank - The Cost of Sending and Receiving Money
The cost to send money to G20 countries has decreased to 7.10%
The interesting part of the data is related to the G20 countries, where the cost of sending money was recorded at 7.46%, remaining substantially stable compared to the previous quarter.
Another curious insight from the data suggests that at 16.59%, South Africa remains the costliest G20 country to send money from. Even though African countries may become the hottest mobile money market in the world by 2020, at this point, FinTech has just started to improve the situation with financial inclusion and affordable remittance prices. Recently, we witnessed the wonderful example of Stellar and Oradian leveraging blockchain to facilitate the financial inclusion on the continent. Certainly, over time, Africa will see a FinTech boom and significant changes in the financial services industry which may lead to decrease in remittance cost.
While the remittance price in Africa remains the highest, Russia is the least expensive country at 1.95%, followed by Saudi Arabia at 5.05%.
The cost to send money to G20 countries that are included in RPW as receiving markets decreased to 7.10%. The most expensive countries to send money to is China (9.72%) and South Africa (8.89%.) Mexico and India are the cheapest receiving markets at 4.75% and 5.95%, respectively.
How did the cost of sending money to different regions change?
One of the most important results of 2015 in the remittance segment was a decline in the cost of sending remittances to the Middle East and North Africa region, which decreased from 8.37% to 7.42%. At 5.43%, South Asia is still the least costly region to send money to while Sub-Saharan Africa remains the most expensive region to send money to at 9.53%. In East Asia & the Pacific, the cost was recorded at 7.97%. Latin America & the Caribbean experienced a slight decrease to 6.04%.
What are the least expensive channels to send money through?
The cost of remittance price is tied to the channels used. Commercial banks remain the most expensive channel while sending money through a post office is the least expensive channel at 5.88% which just saw a slight decline in the cost of remittance. Meanwhile, banks are pricing their services for double 11.12%. Money transfer operators were able to decrease the price of sending money to 6.24%.
Even though cash services remain the most widely available and one of the cheapest ways to send money at 6.54%, online products were able to outpace cash at 5.57%.
As banks remain the most expensive channels, logically, account-to-account services are the most expensive at 10.86%. However, the cost of transfer within the same bank or to a partner bank in the receiving country is significantly cheaper at 5.67%.
Overall, global remittance is going through a positive change. There could be a variety of factors to that. However, with a certain confidence, it is impacted by the technological advancements within FinTech and the blockchain fever recently traversing across industries. An impressive number of banks are involved in relationships with FinTech companies in one way or another. The year 2016 may be the time when the cost of remittance will see a drastic reduction as financial institutions are on their way to adopt the innovative technology to stay relevant.