The remittance market in Africa has for too long been monopolised by companies imposing very high fees that are on average three times those charged on remittances to Asia. They combine a pricing structure that imposes extortionate minimum charges with consistently poor services.
This has its roots in Western Union’s early activities in the African continent. As the first formal mover in the money transfer market, it worked to establish long-standing exclusivity agreements with all major African banks and money transfer agents, barring them from working with competitors. Such exclusivity agreements have propelled Western Union to a near-monopoly position in key African corridors, and have prevented the industry from being competitive. In spite of successful campaigns on the part of African diaspora groups which have resulted in the banning of exclusivity clauses by African governments, progress has generally been very slow.
In West Africa, regulators have been particularly successful in breaking down the barriers created by Western Union’s near-monopoly position. However, in spite of signs that the markets are opening up and that competition is finally beginning to flourish in some African remittance corridors, banks and other financial service providers have been slow in entering into new relationships with money transfer companies offering lower fees. This is hardly surprising given that the existing arrangements were of benefit to both Western Union and their correspondent banks.
This long-term remittance malpractice has meant the cost of sending money to Africa has remained high. According to the World Bank, in 2011 the average cost of sending money from Ghana to Nigeria was 38.94 per cent of the send amount and it was as much as 47.24 per cent between Tanzania and Kenya. In contrast, the cost of sending money from Malaysia to the Philippines is less than three percent of the send amount.
In 2009, with support from G8 heads of state, the Global Remittances Working Group pledged that it would:
“…work to achieve in particular the objective of a reduction of the global average costs of transferring remittances from the present 10% to 5% in 5 years through enhanced information, transparency, competition and cooperation with partners, generating a significant net increase in income for migrants and their families in the developing world.”
We are nearing the five year deadline of this agreement, and still some way off achieving these goals.
Companies working in remittance need to be more customer-focused. When we start to look at the needs of those transferring money to Africa, what becomes clear is that migrants (particularly those earning a weekly wage) prefer to send smaller amounts of money more frequently. At present, extortionate minimum fees (which can be as much as half of the send money) leave migrants with little choice but to wait until the end of the month to remit comparatively large amounts (typically values greater than $200).
The World Bank is not setting a good example. Mandated to lead international efforts in reducing the cost of remittances, its flagship project – a remittance price comparison website – is based on the flawed assumption that migrants will want to send larger amounts of money back to Africa, basing its model on average remittance transactions of $200 and $500. Only a very small percentage of African migrants send $500 at a time, and those that do send $200 or more usually only do so because of prohibitive minimum fees.
At WorldRemit, we have seen that offering comparatively low fees for transferring small amounts of money has resulted in a far lower average transaction value (around £96 to Africa) than the industry average of about £350. When looking at transfers from the UK to Ghana, for example, 60 percent are below £50 in value, and we have seen huge take-up of airtime top-up, which allows migrants to send mobile airtime without incurring minimum fees.
Lowering the price of remittance to Africa has significant implications for development. According to the World Bank, reducing fees would generate a net increase in income for recipients in developing countries of about $15 billion.
In some African countries, up to 40 percent of households rely entirely on remittances to get by; in these instances, the ability to send small amounts of money swiftly is vitally important. We see African migrants sending as little as £1 in airtime top-up. Frequently this is in response to a crisis, where a family member requires the small amount of money it takes to make an important call or pay for transport to a doctor. This support is not possible when you have large minimum fees.
The big international remittance players have created services that don’t cater for customers’ actual needs. As we look forward, advances in remittance technology such as mobile money transfer and airtime top up will continue to help drive down prices. However, the market must become more competitive and respond better to the needs of migrants. At present, it is being held back by artificial barriers erected by big global brands. This must change if the remittance industry is to truly serve its customers.
Dr Ismail Ahmed is founder of WorldRemit.