Why banks should avoid the remittance markets

Great conversations continue in the remittances space, or money transfer space if you prefer, with a chat with the global transaction services folks from a major bank.

This bank has a dilemma: are they in the remittances space or are they not?

They really want to be in this space but are worried about risk exposures, particularly reputational risk.

Their challenge is to find out whether there’s enough profit in remittances to be worth the risk.

They recognise that processing money transfers is a good business to be in. It can make money for them, and would fill in some missing pieces of their transaction services business.

Not just that, but it may be critical for them. For example, they see mobile money transfer as being key to their future, and see the use of mobile and transaction services as being so obvious that it’s a no brainer for them to be in this space.

They would like to do this in partnership with one of the major mobile carriers as, if they aren’t in partnership, others will be and that is dangerous as there are only so many partners out there.

If Deutsche Bank gets T-Mobile for example, and Citi gets AT&T, HSBC gets Hutchinson, Bank of Tokyo-Mitsubishi gets KDDI and Royal Bank of Scotland gets Vodafone, then there aren’t that many mobile firms left to partner with.

Soon, the markets are stitched up and banks that want to be mobile payments processors globally will be left in the cold.

Hmmmm.

Meanwhile, the real dilemma is why would a mobile carrier want to be the partner?

Sure, it’s not their business to process payments although, as they are also transaction processors, they can find this extension of their core business something they could implement quite easily.

Mobile carriers are also used to dealing with small accountholders. Think of your son or daughter’s mobile account.

How much is spent per month and how many transactions are made?

Maybe a few hundred text messages and a few telephone calls?

Maybe €5 to €10 of cost per month.

That’s diddly-squat, so mobile carriers are used to processing high volume, low margin transactions on masse.

And what’s the real game changer for mobile?

Reach.

Every person on the planet can probably get access to a mobile handset if they wanted – there are over four billion users out there – and so mobile carriers want to enable financial transactions for all o f their customers.

And there’s the rub: a bank only wants to deal with profitable customers, which is why only a billion people on the planet are banked, whilst carriers want to work with all customers, and three out of four are unbanked.

Now that wouldn’t be an issue, a bank could offer remittance and money transfers for the three out of four who are unbanked, but it is a problem because banks need to comply with AML and KYC rules.

Mobile carriers don’t provide that information and, in many instance, they don’t get or need that information.

Mobiles can be picked up and SIM cards used anonymously.

That’s no good for a bank ... although if the account is only €5 a month, maybe that is OK as banks do support limited use prepaid cards anonymously.

But then mobiles are topped up and that additional value needs to be monitored.

So, you now have mobile carriers starting to come in to the AML and KYC rules.

For example, on e African money transfer operator told me that customers are being instructed to re-register their telephones with some form of identification in some countries.

All well and good you may say, but then a banker replied that that is OK except that the mobile firms just get an ID with no proof of correct details.

For the banks, they need all the customer’s details plus proof to ensure the correct ID is being presented via utility bills and other means.

So there is an issue here.

But let’s say that it is solvable.

Then there’s still another issue: profit.

For a bank, the risk versus reward equation for remittances is skewed heavily against the money transfer market.

For example, several banks got into buying money transfer operations during the first half of the last decade as global migrant worker movements exploded.

They thought they could cross-sell to the users of these services and, as migrants became more affluent, maybe get them fully banked along with their family.

But this was not the case.

For example, Spanish banks tell me that the users they thought they could cross-sell to in Spain already had bank accounts. They just used the remittance service because it was cheaper, faster and more reliable than using the bank.

Hence, the cross-sell dream was a flawed vision.

And there are hardly any profits in remittances unless you’re a really big player with massive volume.

In fact, on that note, it’s getting worse as the credit crisis means that not only are there fewer migrant workers these days, as many have moved back home, but the ones that remain are sending less money home.

So margins are tight, there’s no growth in volumes or values, and profits are almost non-existent.

But let’s say you overcome the issue of AML and profitability, then what?

There’s another issue: coverage.

To be a player in this game, you need a lot of agents – Moneygram has 200,000 agents worldwide for example – to disburse payments and manage accounts. Those agents need appropriate licensing and vetting, and that’s a challenge for a bank.

Even if you have all the agents, you then need geographic coverage – Moneygram has reach to over 160 countries – and most banks do not have that coverage and, in the case of some, don’t want it.

For example, think about an American bank. An American bank would have no issue covering global service provision ... except when you start talking about coverage in Iran maybe. Or in Pakistan and other politically sensitive country operations.

Now these banks start to worry that they might have an exposure like the one that UBS encountered.

When the American forces broke open Saddam Hussein’s vaults in Baghdad, they found millions of dollars of crisp new dollar bills. However, the US had outlawed the supply of US dollars to Iraq for over a decade, so how did they get there?

The Fed investigated and found the currencies came through other outlawed nations including Libya and Syria, via branches of UBS.

Result: UBS were fined $100 million which, at the time, was one of the largest fines ever made for a bank infringement of US regulations.

So there’s the rub.

Even if you can organise money transfers, monitor things well, get the AML and KYC in place and operate profitability, a bank still has a huge reputational risk exposure if they get heavily into the remittances market.

Let’s say you can overcome all of this though, as a bank, then what?

Well, there’s a final issue: smell.

Banks think migrant workers are smelly and don’t want them in their branches and migrant workers think that banks are smelly, as they look down their noses at them.

You may think it over-states that case, but one French bank openly stated that they did not want to be in remittance services because they don’t want these “poor, foreign workers” in their branches.

And these “poor, foreign workers” often feel intimidated by bank lobbies and branches, and the sort of people who use them, so would rather deal with someone who speaks their language who they feel they can trust more.

There are loads of other points that could be made here but, all in all, even if you can organise money transfers, deal with the AML and KYC issues, find a way to make some money and manage the high reputational risk, a bank shouldn’t be getting into remittances because it does not smell right.

So who will make this space their own?

Hmmm ... now who are leading the remittances and financial inclusion space today?

Oh yes, Safaricom/Vodafone (M-PESA) and a few other mobile carriers and operators.

And so the real dilemma is: why would a mobile carrier want to be the partner?

Now it gets interesting...

Comments

[Neil Burton]

G8 development ministers, in a communique in July 2009 (http://www.moneytransferint.org/index.php?pageID=2&type=member&newswireIssueID=3&newswireArticleID=23&newswireLink=cfsboheztzmztlodowblbicncchnqitwgytihynxokwjwmjlxm ,) called for the commission charged on making remittances to be halved, from the present ten percent to five percent in 5 years, thereby freeing up $12 to $15 billion for immigrants’ home countries.

Just today the UK PM is calling for the G8 to be "more than just grand talking shops".( http://news.bbc.co.uk/1/hi/politics/10409574.stm .)

Do we need more regulation to achieve the G8 goals? Or is the problem an unintended consequence of current regulation? A participant at a Money Transfer International event earlier this year (moderated by the ubiquitous Mr Skinner) commented “we make 1% of the value of each transaction, but if we get one transaction wrong it could cost us over $100m in lawyer fees and $1-2bn of lost business”. That does seem a massive disincentive to banks; at a time when aid budgets are under pressure and bank involvement is a prerequisite to enable financial inclusion.

[Erik]

Looking at M-PESA, an interesting evolution in this is the partnership between Safaricom and Equity Bank just a few weeks ago. They launched an account that will allow M-PESA users to transfer funds directly into their Equity Bank accounts.
Dubbed M-KESHO, the account seeks to ease access to financial services and create convenience to most Kenyans. This now opens a new sales channel for Equity Bank and quite a big one, as 20% of Kenya's population are M-PESA users today. Remittances only might not make the business case but using it as an option to attract new customers might well do it ...