Remittances Offer Promise of New Revenue and New Markets to Banks

Banks finally are developing standards and collaboration to capitalize on the $15 billion revenue opportunity presented by workers' remittances.

It's a $430 billion market, and banks have finally decided they want a real part of it. About 40 percent of the global funds transmitted annually by migrant workers to their home countries emanate from the U.S., yet banks here process only about 3 percent of world remittances, according to SWIFT estimates. That's poor even compared with banks' overall poor share (30 percent or less) of the global remittance pie.

And the pie is growing -- by various estimates ranging from 8 percent to 30 percent a year -- as business goes ever more global. Today's 200 million migrant workers represent $15 billion in annual remittance revenue, SWIFT estimates.

That's an opportunity largely conceded to money transfer operators (MTOs), such as Englewood, Colo.-based Western Union (whose business actually is facilitated by banks, which allow their branches to be used as a distribution network for Western Union's profits). Telcos, credit card companies and PayPal are also said to be eyeing the remittance opportunity.

The Whole Is Greater Than the Parts

One-third of funds remitted today are sent as cash. Besides coming to a newfound appreciation of the collective worth of individuals' small payments, banks -- which previously focused cross-border efforts on large, corporate transfers -- have recently come to value the remittance business as a hook both for unbanked customers and for mobile banking.

"Remittances will be a major topic at SIBOS," David Pryce, then-acting head of the Americas for SWIFT, told a July press briefing, anticipating SWIFT's 2008 payments conference in Vienna. And SWIFT will kick off a global remittance pilot in October to help banks insinuate themselves into the business.

Banks' interest has really emerged recently, sources say. Yet U.S. bank names are few on SWIFT's lists of remittance committees -- just three of 13 on the remittance advisory group are U.S. institutions, all New York-based: Bank of New York Mellon, Citigroup and Deutsche Bank's U.S. division.

Worldwide, about 50 banks and 20 vendors are now on a SWIFT remittances mailing list, according to Michael Whyte, project manager for workers' remittances at SWIFT. "We are recruiting pilot banks," he says. "So far, 16 have signed agreements." Half of those are based in South America, predominantly Colombia. Not one is from the U.S., or even North America. The initial group includes Banco do Brasil (Brasilia, Brazil), Bancafe (Bogota, Colombia), La Caixa (Barcelona), Standard Chartered Bank (Hong Kong), ICICI Bank (Mumbai, India), Russlavbank (Moscow), and Standard Bank of South Africa (Johannesburg).

It's possible that a new SWIFT office in Miami may be involved in the pilot, since the bulk of remittances to Latin America come from the U.S. But, "We don't know which corridor we'll test first," Whyte says.

SWIFT published technical standards for interbank remittance messages and settlement in July. This followed the creation of global principles for remittance practices last December by the World Bank, which wants to see competition lower the rates paid by migrant workers. Remittance transaction fees now vary widely and run as high as 20 percent, says the development bank, which was scheduled to publish existing remittance rates for 100 payment corridors on its Web site in August.

Gregory Watson, the World Bank's remittance specialist, told a SWIFT roundtable late last year, "Six years ago nobody was talking about remittances. Part of my job is to explain to banks [that migrant workers are] an attractive client base." He added, "Cross-selling is the key.

"Many banks act as agents for money transfer companies. If you are receiving a remittance, you go to a bank branch, ... they hand you cash and never offer you a bank loan. It happens a lot more than you think."

Technical Hurdles

SWIFT's Pryce noted at the press briefing, "We're trying to provide industrywide initiatives so there's standard pricing and delivery wherever you are in the world."

As to what this means for banks' technical staffs, SWIFT's Whyte says, "At a minimum, participants will have to support SWIFTNet FileAct Store and Forward [release 6.1], and be able to send and receive the relevant ISO 20022 XML messages specified under SWIFTNet for workers' remittances."

Banks that are already on SWIFT's network still will need to write their own software to integrate with SWIFT's new file and message formats. "What we're supplying is the interbank messaging for the clearance and settlement of remittances," Whyte says. For a bank already using XML -- the language in which the messages are written -- technical integration, to both their back offices and retail systems, "should be relatively simple," he claims.

The bigger challenge may be cultural more than technical, Whyte says. "Banks have always been involved in cross-border payments, but within the wholesale part of the bank," he explains. The major challenge might be getting the retail, wholesale and technology staffs to cooperate and produce the necessary "integrated marketing campaign," he adds.

Compliance culture is also relevant, observers note. While the Single European Payments Act should encourage remittances, some banks are discouraged from participating because of onerous know-your-customer rules, particularly since Sept. 11. They say governments may need to address this to ensure that remittances aren't driven underground into a mostly cash mode.

Key Dates for Global Remittances

December 2007 — The World Bank, with industry input, produces a code of conduct for banks with five operating principles.

July 2008 — SWIFT finalizes technical specifications for communication and settlement of remittances.

September 2008 — The World Bank details global remittance fees to show disparities that exist worldwide.

October 2008 to March 2009 — SWIFT intends to run a world pilot to test the new specifications.