From time immemorial, human beings have loved to traverse and explore the globe and take advantage of any opportunities to develop themselves and to be able to live better lives. First by walking, then by ships, and now by plane. Human history is filled with stories of migration and exploration, from Abraham in the Bible, through the tales of Aladdin and Greek mythology to the numerous western movies of the 20th century. However, travelling away from one’s home has never been cost free, so this has necessarily meant that they need to be able to move something that proved a both a store of value and a method of exchange (i.e the basic functions of money) efficiently, quickly, and cheaply. While for Abraham this may have consisted of sheep and goats, for people today, this is the ability to send US Dollars, Euros or Pound Sterling.
This requirement is as relevant today as it was in Tang Dynasty China or for the Knights Templar during the Crusades, who respectively developed the precursors of the modern-day promissory note and bill of exchange. Nowadays, most people who relocate abroad are typically economic migrants, searching for higher-paid work and the ability to support their family members back in their countries of origin. These migrants require a secure, suitable and cost-effective way to dispatch and deliver the money that they have earned from their destination country, to their country of origin. This sending of money is what is referred to as a “remittance”.
According to the World Bank there are currently 270 million migrants that send a combined £689bn back to their countries of origin. This means that this year, money remittances will surpass foreign direct investment as the largest inflow of foreign capital. Global remittance payment has grown and burst its seams- from a few drops initially, then a trickle, a stream, a river, to what it is now, a wide ocean. This is primarily because of its pure volume, resilient nature and consistency. Dilip Ratha, the head of the World Bank’s global knowledge partnership on migration and development, opined that remittance payments are “the most important game in town when it comes to financing development”.
Further, the World Bank predicts that 550 million workers from low and middle-income countries will join the workforce, and the immense inequality between the income levels in their nations of origin and the developed nations will continually make work opportunities abroad appear more attractive. “The systemic tendencies in the world are towards more migration, not less”, according to Mr Gareth Leather of Capital Economics.
Historically, transporting cash in the form of specie via a trusted third party was the only way to transmit money over extensive distances. Medieval banking houses like the Peruzzi and Fugger facilitated long-distance trade by settling net accounts between branches only on an annual basis through the introduction of letters of credit and double-entry bookkeeping. Although paper-based ways for transmitting cash without physically moving it developed further over the following centuries, they were invariably restricted with commercial transactions or the activities of the wealthy. With the advent of the use of the telegraph, wire transfers became possible, however they remained primarily the domain of large commercial trade transfers.
The last 50 years has seen a revolution as telecommunication and computer power has increased exponentially while costs have shrunk. The establishment of SWIFT in 1973, and its first message in 1977 was in many ways the catalyst. In the mid-1980s new communication technologies advanced the flourishing of specialist international remittance providers, and through the 1990s companies like MoneyGram and Western Union developed a novel business model for remittances founded on a structure of international agent networks.
Although digital remittances have become a primary character of contemporary globalisation, and a mainstream feature of economic migration, remittance products and services as they currently are, have only been in existence for only a couple of decades. While the last 25 years have been marked by the growth of agent networks and the rise of new players, there was hardly any change to the rudimentary way the service is offered, i.e., the remittance client gives money to an agent who processes a conveyance that ends with money being transferred to an appointed recipient in different country. Usually, it happens within minutes, as the remittance companies have a liquidity pool in numerous countries that they adjust and reconcile every day using bank transfers.
The initial online-only remittance transfer companies appeared in the industry around 15 years as internet use became more extensive, most notably PayPal and M-Pesa. This digital means of remitting money may end the requirement for expensive agent networks and physical agent locations by going straight to a client’s computer or mobile device. In the past 5 years, there has been new surge of players and a renewed effort to digitise remittances. User-friendly apps to get clients on-board, new processes utilising smarter ways to connect to domestic payments systems and novel business models are emerging.
Money remittance companies are also partnering with mobile money providers for remittance pay-outs. New companies are mushrooming that enhance these services. Such companies are for example those that use cryptocurrencies as an instant settlement mechanism (thereby negating the requirement to maintain bank accounts in numerous countries), and technologies like machine learning and remote digital identity verification are being utilised, as they offer potentially better and more efficient methods of complying with the wide and scattered regulatory specifications that typify the industry and provide better service to clients. These developments are also being adopted by the established players, most notably the recent commercial tie up between MoneyGram and Ripple, the developer of the XRP cryptocurrency.
Nevertheless, this digital channel is still tiny in comparison to the volume of remittances transferred through the “traditional” cash-in agents. Although, on average, online services are cheaper than cash-to-cash services, most remittance clients seem happy with their money transfer agent. The digital remittance revolution is still a work in progress. It remains to be seen whether this will change in future.
L Ndungu & N Harriss