LONDON — The importance of remittances in many African nations cannot be ignored, as in some areas those funds number more than foreign aid. However, the money-transfer market itself has become a burden for those receiving remittances, with many having to pay high rates to access their funds. The issue is wrought with risk and timidity on the part of governments and financial institutions wary of the potential for crime.
Remittances are a large source of income for needy nations, though, and are arguably the best form of direct aid, but in the wake of tremendous risk aversion, access to that aid has been compromised. The call to end a money-transfer monopoly is growing louder, and Ismail Ahmed, CEO of the organization WorldRemit, is at the forefront of an impending market shift.
Investopedia defines remittances as money sent home by migrants to help support families, composing family savings necessary for survival. At times, the total amounts sent back to a home country sometimes surpass foreign aid and rival foreign direct investment. In areas of political unrest for instance, it is difficult for people to borrow or rely on unstable government to provide help and opportunity, making remittances an imperative and hassle-free source of wealth. These monies can be sent through wire-transfer companies or even national banks.
“Hong Kong-based Ghanaian academic Adams Bodomo,” announced to the BBC in 2013 that global remittances outpaced Official Development Assistance (ODA) to the tune of $220 billion. Even when that figure is unpacked to the full extent, the difference remains. Bodomo claims that “family aid” is better because those sending cash back are more aware of the immediate issues the funds will help solve; a more poignant form of assistance. The diaspora’s homeland contributions can potentially help ultimately solve long-standing poverty.
A Euro Money report explains that problems in Africa arise when money transfer operators (MTOs) forge exclusivity pacts with banks and national lenders that have saddled consumers with high transfer rates. The problem is a systemic one, as many nations don’t lawfully allow banks to directly handle currency exchanges. The result is an effective monopoly where Western Union and MoneyGram “…control about 50 percent of the market and account for around two-thirds of all transactions in the region. In some countries, including Zambia, Angola, and Mali, they control up to 90 percent.”
Increased outward emigration has quadrupled the amount of remittances Africa receives, reaching $40 billion in 2010. Kanika Saigal for Euro Money contends “…the African diaspora pays approximately 12 percent to MTOs to send $200 home… The global average is 7.8 percent and the G8 aims to reduce this to 5 percent. Africa loses between $1.4 and $2.3 billion annually in remittance charges.” Quoting the Overseas Development Institute (ODI), if those rates were lowered to the global average Africa would gain nearly $2 billion annually.
ODI alleges that Africa is paying the highest money transfer fees globally and calls it a “super tax.” In an extensive April report, ODI specifies that the duopoly of MoneyGram and Western Union alone account for $586 million in African loss and call on African financial institutions to implement sweeping reforms aimed at increasing competition, ending exclusivity partnerships, and making money transferring more efficient. Regulators like the Financial Conduct authority in Britain are encouraged to emulate the United States-born Dodd-Frank legislation practices of demanding transparency for foreign currency rates.
Western Union and MoneyGram were quick to dispel ODI’s findings and pointed to a range of externalities that influenced rate structures on local levels. In other words, rates vary across nations and take into account national law and sociopolitical factors that would influence any market. ODI, while calling for an international investigation into the matter, did not “…allege price collusion between Western Union and Moneygram…,” according to a report from The Guardian.
There is merit to the seemingly stingy fiscal policies from both sending and receiving nations. Michael Corkery of The New York Times posits that governments and banks are ramping down to discourage criminal funds from floating across foreign borders. This has effectively made banks partners in law enforcement, which may force global average transfer fees to rise across the board. Banks see money transfers as risky on all levels, and they would assume responsibility if money laundering or worse were occurring.
Ismail Ahmed of WorldRemit, is working to break the MTO monopoly through charging lower, flat rates or rates based on individual amounts. Ahmed thought of increasing transparency for remittance transmission after the events of September 11, 2001 spurred new international money laundering legislation. A former United Nations employee, Ahmed’s venture is now expanding quickly by undermining exclusivity agreements with transparency, fairness and the option of making and receiving mobile payments. According to Euro Money, “Africa is on track to hit more than one billion mobile-phone subscriptions by the end of 2015.”
The platform WorldRemit offers to customers is very simple, requiring a quick one-time registration process. From there, people can send or receive in three easy steps, beginning by choosing a country and entering the dollar amount. From there, senders need to provide a receiver’s information and mobile phone number and then make the payment. Both sender and receiver get SMS text messages when the payment is available to collect and when it has been collected or credited to the proper account.
Firms like WorldRemit are an inclusive and important step in the right direction to ending high remittance transfer rates. Market competition is historically a great thing, even in potentially risky markets. WorldRemit serves as a model for more competition, because perhaps unlike market leaders MoneyGram and Western Union, it is built for the African continent and the inherent risk it brings. Risk is always a factor in business, as is the potential for crime. Stronger national fiscal policies from nations and effective enforcement can curb corruption and discourage money laundering, especially if the regulated wire-transfer firms operate with transparency.
– Dave Smith