Nowadays, a lot of changes are happening in the remittance and money transfer industry. Margins on remittances are declining. Competition is increasing. Pre-funding costs are going up. Consumers are demanding real-time settlements. Cost of acquiring new customers is going up. Bigger, well-funded players are now entering the money transfer arena. Regulators are becoming more strict and vigilant. Fines are being slapped with higher dollar values, etc.
If one has to transfer the money from country A to B, he or she could do so by using the “brick and mortar” model or “digital app” model. But the minimum amount that could be sent through an app is $75 which involves a high cost. The smaller the denomination being transferred, the larger the percentage as far as transfer fees is concerned. Small real-time payments across the world, bearing 2% to 5% fees are still not possible. Currently to send Rs. 2,500, one would need to pay Rs. 2,200 in transfer fees. With the new model of Small Value Remittances (SVR), to send Rs. 2,500, one would need to pay Rs. 125 (at 5%), which is digestible. Sending small amounts like Rs. 500, Rs. 2,000, Rs. 3,000 is sometimes trivial for the sender. They will not think twice even if they are amongst the lowest wage earners. But the ability to send such small amount across the world where they do become a reasonably valued number is missing. This could be the next $1 trillion business opportunity.
When a remitter sends Rs. 100,000 back home for family maintenance (home remittances), they have a very good idea of how the money ought to be used. For example, the spending pattern might be like this:
- Rs. 45,000 for groceries
- Rs. 10,000 for utility bills
- Rs. 15,000 for tuition/school fees
- Rs. 5,000 for fuel
- Rs. 20,000 for allowance
- Rs. 5,000 loan repayment
The reality is when the money arrives back home, there is gross financial mismanagement. Misappropriation of funds, causes more pressure on the sender to send more money. This is where the Small Value Remittances come into play. Instead of waiting for the pay day, the sender could send small amounts during special moments of joy or distress. In countries like Pakistan, India, Nigeria, Nepal, Philippines, Argentina, Kenya, etc. sending across a couple of US dollars means a lot. Small value transfers keep the cogs of small businesses and low-income families going. They are super vital to our economy, yet, when it comes to small value transfers happening across border, there is no easy solution.
Presently, pre-funded wallets and transfers using cryptocurrencies are prevalent but they are not offering complete solution. Companies will have to think out-of-box around the following lines to arrive at a pragmatic solution to real-time, frictionless, cross-border small value payment:
- Real-time credit and transfer
- Credit in local currency
- Low cost for transfer
- Should be able to work with non-smartphones
- Wider acceptance
Another area where remittance companies could make money is by forming alliances with on-ground partners who could provide groceries and other value-added products/services on 12 to 15% cash back basis. With declining margins, this is a great way to make money. There is so much that can be done with this new value transfer in remittance approach. Companies that invest in these value-added services in money transfer today, will take much of the profits from the harvest. What is needed is more on-ground research as to how the money is being spent back home, getting a better persona profile of the family in the beneficiary country, especially their spending/transaction habits and behavior.