The high cost of global remittance is in the spotlight, with the advent of new online models that may end the domination of the current leaders.

1. • Cognizant Reports
Remittance Market: Ready and Waiting for
its ‘Skype’ Moment
The high cost of global remittance is in the spotlight, with the advent of
new online models that may end the domination of the current leaders.
Executive Summary G8 nations have resolved to reduce the average
The growth of the high-margin global remit- cost of remittance by five percentage points by
tance business is outstripping that of even 2014.1 But while government action can provide
international migration. The business mainly an incentive, the real drivers for reshaping the
consists of cash-to-cash transactions, largely remittance business and reducing costs are com-
by under-banked and unbanked population petition and emerging innovative models — such
segments. This partially explains the success of as TransferWise — which will challenge the con-
money transfer operators (MTO) Western Union ventional agent-led, brick-and-mortar remittance
and MoneyGram, both of which leverage their intermediaries. Players aiming to succeed over
large networks to offer convenience to this demo- the long term in this business will, therefore, need
graphic, as well as inspire trust. to respond by reducing their operational costs.
While MTOs offer their customers easy access and Fast-Growing Market
the convenience of cash transfers, the agent-led While the international migrant population
intermediation at both ends of each transaction increased 1.4 times between 1990 and 2010, from
bloats the cost of the transaction. The World Bank 156 million to 210 million, the flow of remittances
pegs the average cost of remittance for retail cus- in the corresponding period increased 6.4 times
tomers at 9.3%; meanwhile, Western Union and from $68 billion to $440 billion2 (see Figure 1,
MoneyGram boast profit margins in the range of next page). This growth is due, in part, to the
25% or higher. advent of MTOs and their ubiquitous presence,
which led to a reduction in remittances through
At a time when the cost of a long-distance call informal channels. The World Bank estimates the
is zero, thanks to players such as Skype, and the global remittance flow to reach $500 billion by
costs of transferring data are marginal, courtesy the end of 2012, primarily through MTOs at the
of the Internet, why should retail customers pay originating end of the transaction and through
9.3% to move money? The governments of the banks at the receiving end.3
cognizant reports | november 2012

2. Growth of Migration and Remittances, Worldwide
500 500
400 400
Billions of dollars
Millions of people
300 300
200 200
100 100
0 0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Migrants Remittances
Source: BBVA Research, with United Nations and World Bank figures
Figure 1
With their global network of third-party agents, the global average cost of sending $200 is 9.3%,
MTOs are able to provide convenience, pay- the average cost for wiring the same amount
ment assurance and multi-language capabilities through MTOs is 10.16% (see Figure 2).
and thus gain customer trust. Today, one in five
dollars remitted globally passes through There is wide variation in the average cost of
Western Union (which owns 16% of the market) or sending $200 even within the G8 countries. Two
MoneyGram (with 4% market share).4 countries, in particular, stand out: Russia and
Japan. The lowest costs are in Russia, which
The Price of Trust does not allow commercial banks to offer remit-
The World Bank's remittance price data highlights tance services. The highest are in Japan, where
the pricing inefficiency in the market. Because commercial banks dominate the market. Only
the market is highly fragmented, with multiple in 2009 was the Japanese remittance market
players and channels of remittance, a wide range opened for nonbank remittance service provid-
of price points is available across routes or ers (RSPs), following the Payment Services Act of
corridors to remit a fixed sum of money. While 2009 (see Figure 3, next page).
Average Cost for Sending $200
11%
10%
9%
8%
7%
2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011
Global Average International MTO Index
Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 2
cognizant reports 2

3. G8 Countries: Spreads and Averages
50%
40%
30%
20%
10%
0%
Canada France Germany Italy Japan Russia UK U.S.
Median Price Spread between Lowest and Highest Price
Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 3
Within G20 countries, commercial banks turn out bias toward high-value remittances. This is mani-
to be the most expensive of all remittance service fested in the pricing spread among commercial
providers, with an average cost of 13.58% to wire banks, MTOs and exchange houses (see Figure 5,
$200. Post offices are the cheapest, at 7.16%, next page).
while MTOs come in a shade higher, at 7.37%.
Of all the global remittance vehicles, cash-to-cash
The World Bank’s analysis also indicates that services are the dominant product and are priced
commercial banks are the least transparent when competitively (with an average price of 7.6%)
it comes to disclosing exchange rates applied to when compared with other products. Account-
transactions, while MTOs are the most transpar- to-account services are the most expensive, with
ent in disclosing information to their customers an average cost of 14.10%. Though not widely
(see Figure 4). available, prepaid cards and account-to-cash
services were the cheapest products, at 4.2%
According to MasterCard, banks in the United and 4.91%, respectively (see Figure 6, next page).
Arab Emirates to India corridor exhibit a positive
Average Cost of Remittance by Service Provider
16%
12%
8%
4%
0%
2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011
Bank MTO Post Office Global Average
Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 4
cognizant reports 3

4. Low-Value Remittances Have Wider Pricing Disparities
14%
Fees and Foreign Exchange %
12%
10%
8%
6%
4%
2%
0%
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
Money Remitted (in Dirham)
Leading Bank Leading MTO Leading Exchange House
Source: MasterCard
Figure 5
Economics of Moving Money that has earned the trust of their franchisees.
With an operating margin of over 25%, MTOs However, the agent-led intermediation at each
command hefty pricing power, to the envy end of the transaction results in higher costs for
of many service utilities. Cash-to-cash prod- the retail customer (see Figure 7, next page).
ucts account for 80% of global remittances,
mostly due to the under-banked and unbanked MTOs derive their revenues primarily through
segments of the global immigrant population. fees (70% to 75%), exchange rate arbitrage
MTOs, with their ubiquitous presence through (20% to 25%) and other value-added services
exclusive relationships with third-party agents, (0% to 5%). They have a high fixed cost (35% to
have built a brick-and-mortar business model 45%), which largely comprises expenses to cover
Average Cost by Product Type
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
account (all)
account
(other bank)
Account-to-
account
(same bank)
Account-
to-cash
Cash-to-
account
Cash-to-
cash
Credit/debit
card serviece
Door-to-
door
Mobile
service
Online
service
Pre-paid
card service
Account-to-
Account-to-
Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 6
cognizant reports 4

5. salaries, rent, compliance, IT and marketing. The intermediation. Customers need to be nudged
variable cost (55% to 65%) is mostly attributable toward cheaper online channels. The newer
to agent commissions.5 entrants will need to shape consumer behavior
over time and proactively rewire their remittance
MTOs spend approximately 3% of their revenue operating models.
on regulatory compliance. Market leader Western
Union reportedly employs 600 full-time compli- Forces Supporting Low-Cost Remittance
ance staff and spends $60 million annually to Banks, public sector initiatives, mobility and new
monitor its money transfer operations.6 emerging online channels look set to dilute MTOs’
pricing power, rewire the business of moving
Low-Cost Remittance: Triumph of Hope money and lower the cost of intermediation.
Over Experience
The current remittance business model looks • Banks: Commercial banks, which have a 5%
dated, particularly when compared with the cost share of the remittance market, have tradi-
of wiring money using ever-lower voice and data tionally not considered remittance to be a core
communications costs, courtesy of Skype and the banking business. However, in today’s “AA”
Internet. Why should retail customers have to pay world, where conventional revenue streams
transaction fees that are 9.3% of the amount are drying up and their revenues and profit-
they are wiring? The business model is clearly ability are under pressure, banks must and will
ripe for change. take a fresh look at the remittance business.
We see the green shoots of change in various Banks are not the preferred choice for retail
payment corridors. For example, 80% of remit- customers to remit money, due to hefty transac-
tances to the Philippines today are sent electroni- tion costs resulting from steep fixed costs and
cally compared with just 20% 10 years ago. Seg- compliance needs (know your customer, or KYC,
ments of the African market have created a 100% anti-money laundering and fraud detection).
mobile payment infrastructure in a short span of Also, MasterCard’s research shows that banks
time.7 Another growing trend is that of disruptive tend to lag MTOs on a host of other parame-
and cheaper online models of money transfer, ters, such as speed, customer service and ease
such as the approach pioneered by TransferWise. of sending and receiving money, which clients
value highly. However, banks are in the busi-
Change, however, will not be dramatic. Online ness of intermediating payments globally,
channels of remittance are currently more a even if they cater to a different franchise and
supplement than a substitute for agent-led operate on a different scale. There are three
Revenues and Costs in the Cash Transfer Business Model
Pays Cash MTO Deposits FX Foreign Bank Credits Foreign Agent
to MTO branch Cash in Bank Exchange Foreign Agent’s Account Pays Recipient
Revenue Fee + FX spread
Variable Agent fee Bank charges Agent fee
costs (approximately 30% (approximately 10% (approximately 20% of
of fee plus FX spread) of fee plus FX spread) fee plus FX spread)
Fixed
costs MTOs’ administrative, regulation, processing and staffing costs
Source: “Supply Side Constraints for Remittance Service Providers,” Developing Markets Associates, March 2010
Figure 7
cognizant reports 5

6. distinct advantages on which banks can capi- transfer service for Safaricom, Kenya's larg-
talize to become a preferred choice for both est mobile network operator. With this facility,
banked and unbanked customers: unbanked, low-income Kenyans can use their
mobile phones for person-to-person money
1. Reduce remittance time and cost by transfers. For remittances from outside the
leveraging their superior payment capa- country, Safaricom partners with an MTO, add-
bilities, such as direct access to payment ing a layer to the remittance intermediation
systems, forex rates and access to multi- process and, therefore, increasing the cost.
currency reserves.
2. Become more accessible to customers MTOs have partnered with mobile wallet
by using online and mobile capabilities. providers and GSM, a mobile networks trade
3. Extend the bank’s reach through association that represents 750 mobile phone
prepaid cards. operators, and have thus bolstered their
competitive advantage. However, if regula-
• Public sector initiatives: The Federal Reserve tors allow mobile phone operators to handle
banks of the U.S., in partnership with Banco de foreign exchange in order to drive down
México, Banco Rendimento and Microfinance remittance cost, MTOs’ current partners will
International Corp. (MFIC), began offering an very likely turn into serious competitors.
“account to receiver” service in 2010. This
service helps customers in the U.S. send • Online channels: TransferWise, founded by
money to their unbanked relatives in Mexico an ex-Skype employee, uses a crowdsourced
and 10 other Latin American countries. model to remit money from customers in the
UK to any EU country, at a fraction of the
Initiatives such as these, while improving cost charged by the high-street banks.8 Trans-
the efficiency and effectiveness of payments ferWise uses the daily interbank rate to fix
systems, also reduce the cost of global exchange rates and keeps the service charge
remittance and help attract new customers to low — five euros for a GBP 1,000 transfer, in
the mainstream. contrast with the roughly 40 to 50 euros
charged by banks for a similar transfer.
• Mobile money: The mobile phone as a
payment device is a game changer, especially The Road Ahead
in the emerging economies, where banking Remittance business players are today at
inclusivity is still evolving. Case in point is the the cusp of change that can potentially redraw
fabled M-PESA, a mobile phone-based money the business landscape. They must, therefore,
Quick Take
ICICI Story
ICICI, an India-based bank, rose to a leadership position in inward remittances to India in a short time,
offering lessons for banks with remittance aspirations. Over the past decade, ICICI Bank has built a
competitive, low-cost and accessible remittance platform. Today, one in four dollars remitted to India
passes through the bank. The bank’s core value proposition lies in its easy access, simpler processes
(registration, transaction requests and follow-ups), quicker transfer and low cost of remittance.
ICICI caters to both white-collar, highly banked Indian knowledge workers in the U.S., UK and Middle
East, as well as under-banked, blue-collar workers in the Middle East. By striking alliances with MTOs
and other banks, ICICI ensured reach and last-mile connectivity, and with a custom-made, cutting-edge
remittance technology platform, it ensured instant access to remitters — both banked and unbanked.
While the automation of payments, foreign exchange and centralized payment processing increased
speed and reduced transaction costs, the bank’s focus on customer service, with a dedicated call center
and online tracking of payments, helped it gain customer trust.
cognizant reports 6

7. proactively rewire their business model to meet • Reduce the cost of remittance intermedia-
evolving consumer needs and aspirations. tion and compliance through automation of
payments, foreign exchange and centralized
We expect MTOs, the current market leaders, to payment and compliance management.
do the following: • Market themselves as the preferred choice
for customers by offering lower remittance
• Embrace emerging technology platforms, time and costs by leveraging their superior
such as mobile devices and online platforms, payment capabilities, as well as becoming
to reach customers directly and reduce the more accessible to customers through online
cost of remittance intermediation. and mobile capabilities.
• Move to a variable cost structure to bring
down the cost of remittance. For example, Mobile and online operators, hoping to radically
compliance costs can be reduced by partner- change the marketplace, will likely seek to do the
ing with players that can offer compliance as a following:
service at a reduced cost.
• Disrupt remittance supply chains with inno-
Meanwhile, banks — looking to leverage their core vative models aimed at convenience, ubiquity
proven strengths in financial transactions — will and simplicity.
likely take the following actions: • Gain market share through aggressive
pricing.
• Take a long-term view of the remittance • Keep the cost of operations and compliance
business given its secular growth rate and low in order to stay profitable.
potential for steady revenue generation.
Footnotes
The 2009 G8 meeting in Aquila, Italy, agreed to reduce the global average remittance cost from 10%
1
to 5% within five years through enhanced information, transparency, competition and cooperation.
2
BBVA Research, with United Nations and World Bank figures.
3
MasterCard Global Insights.
4
International Investor Presentation, MoneyGram, Goldman Sachs Conference, September 2011.
5
“Supply Side Constraints for Remittance Service Providers in the UK,” Developing Markets Associates,
March 2010.
6
Investor Day Presentations, Western Union, 2012 .
7
“International Money Transfer: The New And The Constant,” Money Transfer International, 2010.
8
Parmy Olson, “Investors Bet $1.3 Million on The Money-Transfer Guys Undercutting Banks,” Forbes,
April 19, 2012.
cognizant reports 7

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cognizant reports 9

10. Credits
Author
Anand Chandramouli, Director, Cognizant Research Center
Subject Matter Expert
Rahul Kapur, Senior Director, Cognizant Business Consulting, Banking, Cards and Payments Practice
Analysts
Divya Sekar, Cognizant Research Center
Priyam Dutta, Cognizant Research Center
Design
Harleen Bhatia, Creative Director
Suresh Sambandhan, Designer
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