June 19, 2017    5 minute read

Fixing the Remittances Market

Financial Loyalty    June 19, 2017    5 minute read

Fixing the Remittances Market

In honour of the UN-sponsored International Day of Family Remittances on June 16th, the banking company Wells Fargo announced that it will waive all transfer fees for ExpressSend remittances. While that might sound like a move aimed at a niche clientele, remittances are an increasingly crucial engine helping to lift migrants’ families, particularly in Sub-Saharan Africa, out of poverty.

Africa and Remittances

According to a new report from the International Fund for Agricultural Development (IFAD), from 2007 to 2016, global remittances to developing countries increased by 51% to reach nearly half a trillion dollars, helping to providing migrant workers’ relatives with financial security, access to education, healthcare, and housing. Meanwhile, the number of migrants from those countries grew by only 28% and the populations of their countries of origin grew by only 13% during that period. An estimated 800 million people worldwide now depend directly on remittances, which typically represent around 60% of household income. In Africa, the total number of migrants has leapt by 29% and total remittances grew by 33% since 2007 to reach roughly $60bn in 2016, accounting for a 13% share in global remittances. African nations are among those that depend most heavily on money sent by their relatives abroad. Since 2007, for instance, Liberia’s dependence on remittances surged by nearly 1,000% to reach $64m – or 31.2% of their GDP – in 2016. In total, 19 African countries rely on remittances for 3% or more of their GDP, while six countries depend on remittances for 10% or more.

Unfortunately, given Africa’s critical reliance on remittances, that market remains among the most expensive of all. For Southern Africa, costs hover at 14.6% – the highest in the world. In the past few years, the average global cost of sending remittances has remained relatively flat, far above the sustainable development goal target of 3% by 2030. The UN estimates that by meeting this goal, remittance recipients worldwide would save an extra $20bn every year.

A Remittance Monopoly

One of the biggest obstacles to achieving that objective is the rising concentration of market share – now 35% – in three worldwide money transfer operators (MTOs), Western Union, MoneyGram, and RIA, as well as two regional MTOs, UAE Exchange and Unistream. Western Union is the undeniable king of the court, with 15% market share in 2015 – a significant proportion for a sector with high barriers to entry and consequent lack of effective competition. Western Union is subject to high fees and foreign exchange margins – costs that it has succeeded in shifting squarely on the shoulders of immigrant workers and their families, thanks to its dominant market position. Even worse, it has solidified its dominance in part by imposing exclusivity agreements on its agents, which prevent them from working with other MTOs. Such agreements restrict competition and increase the cost of transferring money, which ultimately negatively impacts immigrant workers and their families.

Over the years, there have been a number of efforts by regulatory bodies and NGOs to draw attention to and stop these issues – with middling degrees of success. In 2003, for instance, Russlavbank appealed to the Commission of the Russian Ministry for Antimonopoly Policy, filing a complaint against Western Union for infringing antimonopoly legislation by prohibiting banks from cooperating with other companies. The Commission ruled that Western Union’s exclusivity agreement was intended to reduce market access and therefore constituted an unlawful restriction of competition. As a result, Russia became the first country where exclusivity clauses in money transfers were deemed illegal. And not surprisingly, it became the least expensive country in the G8 for sending remittances. Yet the high cost of sending remittances remained a major issue elsewhere in the world. In April 2014, the UK’s Overseas Development Institute called for the Financial Conduct Authority to investigate Western Union and MoneyGram after publishing a report saying that Africa was losing $1.8bn from high fees. The Africa Progress Panel followed suit in a report published the following month, with chairman Kofi Annan calling remittance fees to Africa “unethically expensive.” Partly in response to such appeals, at a migration summit between the EU and more than 30 African nations in November 2015, leaders pledged to cut remittances fees to less than 3% – but only by 2030.

Unfortunately, such minimal progress will only make a dent in the armour of players like Western Union, and will ultimately mean little for Sub-Saharan Africa and other developing nations that continue to suffer under high fees. In recognition of this, international stakeholders are making a renewed push for reform. Honouring the International Day of Family Remittances, the IFAD, in collaboration with the World Bank and the UN Department of Economic and Social Affairs, organised the Global Forum on Remittances, Investment, and Development at UN Headquarters. The event aims to “contribute to the global governance and enhanced coordination of remittances and migrant investment, pursuing efforts to significantly decrease transfer costs.”

Conclusion

But efforts to “contribute to global governance,” much like Wells Fargo’s decision to cut fees (for a grand total of three days, by the way), don’t go far enough to have any meaningful impact the remittances market. It’s safe to say that major MTOs won’t take it upon themselves to play nice, drop their exclusive agreements, and cut remittance fees simply because a non-binding UN resolution said so. It’s up to domestic and international regulatory bodies – from the EU to the US to African nations – to take more decisive action.

 

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