Who will be the WhatsApp of remittances?
It's clear the ingredients are ready for long-overdue disruption in the remittances space, resulting in competition and eventual commoditisation.
We may not have won the World Cup yet, but Africa sure is running circles around the developed world when it comes to digital payments.
The M-Pesa model continues to drive radical new products across start-ups and large corporations alike, and Sub-Saharan Africa accounts for over half of the world's mobile money deployments.
It's a perspective I've long had but one that's been reaffirmed in my recent travels to Rwanda and Kenya. Having seen for myself some of the innovations coming out of the region, I'm more confident than ever that Africa is the undisputed leader when it comes to financial services innovations.
But even leaders have weaknesses, and ours comes in the form of a guy on a bus holding an envelope full of banknotes. Despite the massive strides in mobile cash products and microfinancing, cross-border payments are still overwhelmingly cash-based. Estimates suggest between 45% and 65% of remittances in Sub-Saharan Africa take place through informal channels.
Why, in a market where anyone with a feature phone can easily complete a mobile payment, do so many still rely on enterprising bus and taxi drivers to deliver physical bags of cash to their relatives?
As my Nairobi-based colleague Billy Owino would say: "We are as good as our data." So what does the data tell us about African remittances, and how can we use this knowledge to drive the market forward?
An unseen economic force
The global remittances market is the very definition of a sleeping giant. Worth $600 billion-plus, it's a largely undertapped sphere that accounts for a huge percentage of the flow of global wealth. An estimated $466 billion of that goes to developing countries, more than three times the size of international aid.
The global remittances market is the very definition of a sleeping giant.
In Africa, especially, the cross-border payments space is a hotbed of opportunity. Migrant economic activity is estimated to account for over half of all capital flow within Africa, and plays a major role in driving financial inclusion and economic development. Yet, the continent has the highest transaction costs in the world, losing billions of dollars in the process.
If you were to wager on who emerges as the next African unicorn, the cross-border payments market seems like a pretty safe bet. After all, there's no shortage of companies looking to disrupt traditional players like Western Union and Moneygram: around 40% of Africa's 300-plus fintech start-ups are already focused on payments and remittances.
However, when you compare the sheer size of the remittances market, the impact of emerging low-cost, mobile-first players like Mama Money and WorldRemit has been subdued. Part of the reason for this is that the remittances space is more complex than it first appears; cost is only one of the factors hindering mobile payments players from offering superior-value propositions.
There are the ubiquitous regulatory challenges that hamper international payments and make it difficult to introduce any kind of standardisation. The Payments Association of South Africa has identified interoperability and integration as some of the biggest factors obstructing cross-border peer-to-peer payments.
This is worsened by a global trend towards de-risking; remittances are one of the sectors most affected by anti-money laundering policies. Many of the usual barriers to financial inclusion (lack of formal identity, for example) apply even more strongly when it comes to cross-border money transfers. Finally, there's the challenge of scaling successful platforms beyond communities and borders; even M-Pesa has struggled to take hold in many countries.
If any remittances player is going to assert itself as a universal platform for cross-border payments, it's going to need to do a lot more than just offer lower transaction fees.
An industry on the brink of disruption
Alright, say you're feeling up to the challenge of transforming the remittances space forever. What do you have working in your favour? And who are you up against?
Thankfully, a range of new technologies and digital tools are addressing the major barriers that have stifled remittances innovation disruption. Alternative data is helping to bridge not only the identity and documentation gap, but also introducing better ways to mitigate the risk of international transactions while minimising friction.
Then there's blockchain on the horizon, offering a real chance at interoperability by removing the middleman from transactions; something that SA's banking players are already investigating. The South African Reserve Bank's Project Khokha pilot was a resounding success, processing 70 000 interbank transactions in less than two hours using distributed ledger technology. While the pilot was centred on domestic payments, global players like Alibaba are busy testing the possibility of using blockchain for cross-border trade as well.
Some believe the breakthrough in remittances will come from technology giants rather than financial services players. Between Messenger and WhatsApp, Facebook has unmatched reach across both Africa and the diaspora, making it the perfect candidate to shake up the remittances space. In fact, WhatsApp launched a full-feature money transfer service in India, a development that's worth keeping an eye on.
Don't count out local players like FNB, either, which recently launched a spin-off of its eWallet remittance service that requires no monthly fees or paperwork. Shoprite has also partnered with Google and Standard Bank for its own mobile transactions service that will offer cross-border remittances as it rolls out in other countries.
Banking on the bus
Whoever makes the most splash, it's clear the ingredients are ready for long-overdue disruption in the remittances space. That means competition; and eventual commoditisation if the state of the Kenyan market is anything to go by. Required then is winning the hearts and minds of customers, largely using the same strategies that are bearing fruit in the rest of the financial services industry: a mobile-first approach, smart risk mitigation, the right inter- and intra-industry partnerships, and a multidimensional understanding of your customer.
However, Rome wasn't built in a day. The remittances market is too large and too complex to take on as a whole, even for giants like Facebook. If you really want to know who the emerging players of the cross-border payments industry are, don't compare them to Uber or M-Pesa or Apple.
Judge them against the guy on the bus with an envelope. Because that's your real competition.
Who do you think is emerging as a challenger in the African remittances market? Do any existing players have the potential to scale to continent-level?