Financial technology (fintech) firms are gaining market share that was formerly the preserve of established remittance service providers. Remittances have grown in importance in recent decades and now constitute the largest source of foreign income for many developing economies. They also tend to be countercyclical, increasing during economic downturns or natural disasters when other capital flows generally dwindle. Growth has only gathered pace, with the importance of remittances as a source of income for emerging economies and financial service providers alike set to rise further.
Inflation & Investment
As inflation and global food insecurity place financial pressure on many countries around the world, remittance inflows to emerging markets are expected to continue to provide crucial support. In a recently released report, the World Bank’s Global Knowledge Partnership on Migration and Development (KNOMAD) estimated that remittances to low- and middle-income countries (LMICs) grew by 8% to $647bn in 2022. The figure builds on 10.6% growth in 2021. However, KNOMAD forecast that this expansion would slow to 1.4% in 2023, resulting in total inflows of $656bn, as countries around the world grapple with lower levels of economic growth, high inflation and the impact of Russia’s invasion of Ukraine.
This follows a period that highlighted the value of these inflows to many emerging markets. Despite projections from the World Bank in April 2020 that the Covid-19 pandemic would lead to a 19.7% contraction in year-end remittance flows to LMICs, they instead held firm and increased by 0.8% in 2020.
Such transfers took on greater importance as foreign direct investment (FDI) to LMICs fell by 13.5% over the course of 2020. Indeed, that year the value of remittances to LMICs ($540bn) surpassed the equivalent value of FDI ($259bn) and overseas development assistance ($179bn) combined. In many instances, these inflows provided a source of replacement income as pandemic-related curfews and other health restrictions significantly curtailed the ability of many people to work in person – particularly those active in the informal sector.
Just as remittances proved crucial during the pandemic, they were vital in 2022 following Russia’s invasion of Ukraine in February of that year. Rising inflation and the increase in food prices, which reached all-time highs across March and April 2022, significantly increased the cost of living in many countries and weighed on households, especially in emerging markets. A continued flow of remittances were welcome contribution to many emerging market economies: approximately 800m people around the world benefit from remittances, which are often used to cover essentials such as groceries, health care, school fees and housing, according to a June 2022 report from the UN’s International Fund for Agricultural Development (IFAD).
Regional Differences
KNOMAD found that remittances were resilient following the pandemic, outpacing expectations. However, there were regional differences. KNOMAD reported a 19% increase in remittances in Europe and Central Asia in 2022, with the majority originating from Russia. It was initially expected that Russia’s invasion of Ukraine in February 2022 and the subsequent decline in the value of the rouble and sanctions on Russia would put downwards pressure on remittances. Instead, capital migration was driven by the relocation of Russian citizens and business, especially to countries in the Commonwealth of Independent States, as well as the stronger-than-expected exchange rate and demand for migrant workers in Russia. KNOMAD expects regional remittances to remain above pre-war levels into 2024.
Other regions that saw expansion in terms of remittances in 2022 were South Asia (12.2%), Latin America and the Caribbean (11.3%) and sub-Saharan Africa (6.1%). East Asia and the Pacific saw moderate growth of 0.7%, while remittances in the Middle East and North Africa dropped by 4%. The decline came after a 12% expansion in 2021 and was attributed to the erosion of real wage gains in the EU. Countries in the region that saw the largest drop in remittances included Egypt, Algeria and Jordan.
Egyptian Dynamics
Remittances are the largest source of external resource flows for developing countries in the Middle East and North Africa. Egypt has traditionally received high levels of remittances. The country was the largest recipient of remittances in Middle East and North Africa in 2022, receiving $28.3bn, down from a high of $31.5bn in 2021.
In the 2010-20 period the value of inbound remittances to the country more than doubled, from $12.5bn to $29.6bn, as reported by the World Bank. Much of the growth in remittances to Egypt during this period is attributable to the flotation of the Egyptian pound in 2016. Many Egyptians living oversees refrained from sending their money through the interbank system given the uncompetitive exchange rates offered for exchanging foreign currency to the Egyptian pound. This created a black market for more favourable rates, which virtually disappeared in the years since 2016.
The value of remittances grew substantially in the subsequent years; by 2019 Egyptian foreign exchange reserves were at an historic high, partially as a result of larger inbound remittances. The year 2021 brought higher oil prices – bolstering incomes in the Gulf – alongside stronger economic activity in Europe and North America, all of which are home to substantial Egyptian populations.
Tech Evolution
While the overwhelming majority – at around 97% – of global remittance inflows are paid in cash and transmitted via traditional brickand-mortar banks and financial institutions, there has been a noticeable increase in fund transfers using alternative methods. Lockdowns and border closures led to a 48% increase in mobile phone payments in 2021 alone. A number of remittance-focused fintech players are accelerating operations in emerging markets. Many fintech start-ups are keen to move into the remittances space, which is seen as having significant potential. London-based consultancy and data provider Tellimer estimates that 45% of the global fee pool is above the 3% mark and therefore ripe for disruption.
Meanwhile, data aggregator Statista anticipates that digital remittances will reach $135.2bn in 2023 and $159bn by 2025, up from $69.3bn in 2018. The market is increasingly characterised by intense competition on fees, with apps competing in terms of price. Some have even eliminated remittance fees altogether. For example, in October 2021 leading digital bank Revolut announced that US customers would be able to make 10 free international transfers per month. The following January the company expanded the programme to include Mexico as well.
Reducing Costs
These developments come as companies and institutions seek to reduce the cost of international transfers. IFAD estimated that currency conversions and fees account for an average of 6% of the total amount of cash sent, double the 3% target laid out in the UN Sustainable Development Goals. Initiatives such as the Remittance Community Task Force, launched by IFAD in March 2020, are pushing for far-reaching changes in policy and legislation on remittances, while some financial institutions have sought to cut or reduce fees.
In emerging markets around the world, both public and private sector entities are working – often together – to facilitate lower-cost remittances, often by expanding their own digital offerings or by partnering with a fintech firm. For example, in January 2022 the Nigerian Postal Service launched an e-debit card and finalised arrangements to launch a microfinance bank that will enable 52m previously unbanked Nigerians to conduct financial transactions. Also in Africa, in October 2021 Western Union – an established global remittance company – announced that clients of KCB Bank Kenya, Diamond Trust Bank and the Kenya Post Office Savings Bank would be able to send and receive money via their mobile banking applications. Similarly, in December 2021 Money-Gram – another legacy remittance provider – partnered with urpay on cross-border money transfers. The latter is a digital wallet powered by Saudi Arabia-based start-up neoleap.
Crypto Expansion
In parallel to these developments, the remittances space is being disrupted by blockchain-based digital currencies. Among other advantages, cryptocurrency is traded internationally and its transfer requires no intermediaries. If cryptocurrency expands as far and as fast as its most ardent supporters predict, the technology could challenge legacy service providers and fintech companies alike for a slice of the global remittances pie.
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