While remittance has greatly contributed to faster and more efficient cross-border money transfer, the high costs of remittance services is an issue that many people still struggle with. Statistics from World Bank show that the cost of remittance has almost doubled to 7.1 percent from the targeted three percent set under the UN Sustainable Development Goals.
Finding sustainable solutions to the high cost of remittances is imperative since it is one of the major and most essential external sources of finance for the developing world. There are several measures that can be put in place to help combat the high cost of remittance.
Why Is Remittance Cost on the Rise?
Before embarking on finding the solutions, it is important to begin by understanding the source of the problem. One of the major causes of the high remittance costs is the rising cost of compliance and the fact that banks, as a strategy of de-risking their operations, are restricting the access of remittance service providers to their bank accounts.
This not only causes delays in the remittance processes but also raises the overall operation cost, ergo, increased remittance charges. Fixing the rising costs of compliance and establishing better banking services for remittance service providers is, therefore, one of the most effective ways of reducing remittance charges.
Here are a few ways of fighting the high cost of remittances:
Reducing the Cost of Compliance
Compliance is cited my many operators as the number one cause of high remittances. In a world post-HSBC/Standard Chartered fines by the NY Department of Financial Services, there is a blanket of fear in the industry that a wrong transaction can result in tens or hundreds of millions of dollars in fine. This is a fallacy. Implementing robust compliance programs and using automation can not only drastically reduce the risk of the transaction, but also bring its costs down. Companies are complacent in their yesteryear systems and are in many cases afraid to take the leap of faith as they see in adopting new cutting edge technologies than air in risk reduction.
Adopting Online Money Transfers
The high operation costs encountered by remittance service providers is largely responsible for the high cost of these services. In simple words: Cash involved in cash based remittances makes them expensive. To reduce costs, therefore, adopting new cross-border money transfer technologies can be quite efficient.
Over the recent past, considerable success has been made on the online money transfer process. Online money transfer is not only fast and efficient but is also cheaper than the traditional money transfer method i.e. through a remittance service provider.
To fight the high cost of remittance, the senders need to be enlightened about the existence of online money transfer services and its benefits. The process of money transfer using the online platform should also be simplified to an extent that no complicated training is needed to be able to make these online transactions.
This is no easy challenge. How does one make the bulk of the customers (who make their transfer by cash) adopt online money transfer services? It is a monumental shift of behavior amongst these consumers.
When an increased number of immigrants turn to online money transfer platforms, remittance service providers are highly likely to reduce their charges to keep up with the competition.
Embracing Mobile Money
The advent of mobile money technology has completely revolutionized the money transfer platform. Leveraging mobile money to help in the fight against high remittance cost is therefore most likely to contribute to the success of the fight.
This is considering the fact that mobile money is faster, flexible and a lot more convenient than the services of most remittance service providers. The average cost of sending $200 through mobile money platforms stands at 1.7 percent of the transaction, a 40 percent reduction in the cost as compared to 2017.
Faster Connect & Settlement Times
Today, each licensed MTO must go through months of due diligence, contracts and integration before a corridor comes online. Aggregators have now taken the role to reduce these time frames from months to weeks, but still majority of the industry still uses antiquated methods to establish correspondent relationships. What is needed is a more nimble and efficient manner of establishing network relationships based on tokenized due diligence that can be accepted by various other parties for instant connect.
Not only is the instant connect important, the ability to settle financial transactions amongst partners without parking money in Nostro/Vostro and other types of pre-funded accounts, MTOs need to look at the newer blockchain related technologies that can enable global settlement of payment on pre-defined tokens.
Setting and Enforcing Global Standards
One of the major causes of the high cost of remittance is the lack of well-defined global standards. Therefore, the service providers are at liberty to set their own service fees. Setting and enforcing well-defined global standards can be a huge step towards minimizing the cost of remittance. Besides addressing the issue of cost, these standards should also address the quality and speed of rendered services. This way, users can receive quality services at affordable rates.
Following the steps listed above can help reduce the cost of sending remittances thus helping foreign workers and other remittance senders to better assist their friends and families back home with their hard-earned money.
As a pioneer in connecting and facilitating mobile money to send cross border payments and remittances, TerraPay makes it possible for the customers of our partners to transact anytime from anywhere by using their mobile phones. Want to learn more? Get in touch!
About TerraPay: TerraPay is the world’s first mobile payments switch – a B2B transaction processing, clearing and settlement service for mobile wallets. Our best-in-class technology serves as the interoperability engine that enables our partners’ customers to send and receive real-time transactions across diverse payment instruments, platforms and regions.