Remittances to Latin America totaled $65 billion in 2014, a historical high, finally surpassing pre-financial crisis levels. Recovery of the US economy in 2013 and 2014 resulted in resumed growth of remittances to the region, particularly to Mexico and Central America, which achieved 8% and 7% growth in 2014 respectively. South America, in contrast, receiving most remittance inflows from Spain, saw remittances decline 1% in 2014, the result of persisting economic lethargy in the remitting country.[1] Within the US, increased migration flows, especially from Central America, climbing wages of remitters, and declining sending fees all contributed to positive growth in 2014. The US-Mexico corridor is the bread and butter of LatAm remittance providers, alone representing 40%+ of all money sent to Latin America.

Remittances to Latin America and the Caribbean, 2014, USD bn

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Source: International Development Bank

The remittance space is competitive, with 15+ providers serving the US-Mexico corridor alone. Most providers have vast brick and mortar infrastructure across the Americas to enable cash-in and cash-out transactions; Western Union has 45,000 agent locations in the US and 31,000 in Latin America. Arguably the number-two provider, Wells Fargo, is a close second with 9,000 stores in the US and 40,000+ cash out agents in LatAm. Extensive retail networks are necessary, as most migrant remitters prefer to pay in cash, as opposed to online, using a computer or mobile device from a bank account or payment card. The reasons for this are multiple. Migrants in the US often have limited access to the Internet and even fewer have the resources, documentation and wherewithal to open a bank account. Since banking crises are commonplace in Latin America—the 1990s banking crisis in Mexico being one—many are wary of banks. Fear of deportation motivates protecting anonymity, and the trust generated between remitters and in-person agents promotes customer loyalty. For these reasons, retail remittances are well-entrenched. But despite decades of success, market incumbents are now coming under threat by online providers.

 

Today, the online channel represents less than 10% of total volume sent to Latin America, but it is encroaching on space traditionally owned by brick and mortar operators at an estimated pace of 10% annually. The much celebrated success of low cost money sender Xoom, present in the region since 2005, has sparked three trends: 1) market incumbents are forced to develop an online option to remain competitive; 2) additional online-only providers have come to market; and 3) prices have dropped. Today, nearly all MTOs offering service in Latin America have a digital offering. Wells Fargo’s ExpressSend launched in 2007, and Western Union premiered its online option in2011. Other online only providers Remitly and Transferwise began offering service in Latin America in 2014.

 

Albeit nascent, online remittances are posing significant threat to traditional players. By 2011, Western Union’s fees had dropped by over 50% since 2001, and margins fell below 1% in 2013. Faced with a fierce price war, MTO fees no longer constitute their principle moneymaker; rather, they generate income from managing their foreign exchange spread.  With more competition, cost pressure will increase and retail MTOs will migrate more and more customers to the digital channel, as they shrink their agent network. The 2015 acquisition of Xoom by PayPal indicates interest of big payment companies in this growing business and the opportunity to capitalize on the trend toward digitalization.

 

Yet, this trend has limits. The big sell of online money sending is convenience. As remitters inch up into the middle class, gain access to technology and become more time crunched, their preferences trend toward online. This may be especially true for remitters from South America, who are overall better educated and wealthier than Mexican and Central American migrants. However, this ascent into the middle class takes time, and during the process migrants become settled, have children, lose ties with their homelands, and eventually cease to be remittance customers. New migrants who take their place are poor, oftentimes undocumented, and have the same barriers to online remittances as the generation of migrants before them. Remittances as a product necessarily targets low-income folks with low technological literacy; cash-in is a mainstay of the industry.

 

An additional draw toward online, however, is remittances as a service, in which remitters pay for cell phone top-ups and utility bills of their relatives abroad directly. This segment is rapidly trending toward online, and more importantly, mobile, which now accounts for 60% of all online cross-border mobile top-ups to Latin America. Xoom, using technology furnished by white label provider TransferTo, enables mobile tops-ups in 15 Latin American markets. Some users prefer this option, since the funds go directly to pay for services chosen by the remitter, guaranteeing they go to good use, instead of paid out in cash. Bill payments save friends and families in Latin America lengthy trips to the bank to pay for utilities—a serious time suck for people living in rural areas or underserved urban neighborhoods. Growing at an estimated 10% annually, airtime remittances capitalize on the large opportunity to capture small value transfers cost-effectively—most such transfers are for values less than $20.

 

TransferTo estimates the airtime top-up market from the US to Latin America to be an estimated $1.5 bn, a small share of all money transfers to the region. But operators believe airtime remittances effectively attract new customers to money sending services. By enabling secure, low-value transactions, remittances as a service help generate trust among new users, who may eventually migrate to a money-sending platform. And these transactions are gaining ever-increasing online presence. Traditional players must plan accordingly.

 

[1] Multilateral Investment Group. 2016. “Remittances to Latin America and the Caribbean set a new record high in 2014.” International Development Bank. http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=39619143/

 

Original source of the article: Americas Market Intelligence

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By | 2017-05-29T18:52:17+00:00 August 3rd, 2016|Blog|0 Comments

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