Saturday, 10 June 2023

Strategy & Business Insights

SEND MONEY HOME: The Money Transfer Race for Africa

Like a gold rush, there is a race for the “Send Money Home” market in Africa, as Money Transfer is on the rise, with remittance flows to Africa expected to exceed US$50 billion in 2022.

There are several Money Transfer Operators (MTOs), large multinational retailers and commercial banks competing in the African money transfer corridors, as the average amount sent rose from US$60 in 2017 to US$200 in 2020.

This article exams research reports compiled by RemiSCOPE Research, Finmark Trust Research, and World Bank, in relation to the landscape and opportunities available in Africa for financial services provision, focusing on South Africa as a base market for “Sending Money Home”.

An insight into the Money Transfer industry is evidence of growth of Import-Export businesses, and micro-economic developments in local communities in the receiving countries. It would be interesting, for example, for a Building Materials supplier based in Johannesburg, to invest in creating contacts in Zimbabwe, Mozambique, Tanzania, Lesotho, Zambia, and other African countries, in order to find ways to export their products, as all financial movements are indicating growth or access to capital in those markets.

The most influential money transfer market is South Africa, and from it a host of global, regional, and local MTOs and Banks are taking the lead in dominating territories and other market segments. According to RemiSCOPE, the market leaders include Western Union, Mama Money, Cassava Fintech, Mukuru, Standard Bank, MoneyGram, Hello Paisa, Mama Money, Mukuru, Shoprite, SPAR, PEP Stores and Pick n Pay, and more.

Regionally, in Southern Africa, Remittances are an important source of income for households in the Southern African Development Community (SADC), as well as a crucial source of foreign exchange for countries in the region. Despite the relatively large inflows of remittances to SADC, the cost of sending money to and within the region is significantly higher than other regions in the world.

Notwithstanding these challenges, several new and innovative MTOs are emerging in a few remittance corridors in SADC. Leveraging new technologies, MTOs have begun offering innovative mobile and online-based remittance services, placing competitive pressure on incumbent MTOs, particularly in the South Africa–Zimbabwe and South Africa–Lesotho remittance corridors. Scaling up these new services, encouraging widespread consumer uptake, and promoting an enabling environment for innovation will be crucial to further reducing the cost of remittances in the region.

According to the World Bank, as at the end of the second quarter of 2016, the global average cost of USD200 remittances was 7.43% of the amount sent by remitting customers. For remittances sent from South Africa, the average cost was 16.71%; more than double the global average. Contrary to World Bank estimates, Genesis found that the total cost of remitting USD200 from South Africa to Zimbabwe, Mozambique and Lesotho is lower than the global average, with an average cost of 6.7% of the amount sent.

Previous research has shown that the median value of cross-border remittances from South Africa is USD55, for which Genesis estimated the average cost to be 13.6% of the amount sent, as opposed to previous estimates of 13.3%. Genesis results generally support previous findings that the World Bank statistics over-estimate the average cost of transfers across these corridors. Finmark estimated that the median value in 2017 was USD60, in 2020 FemiSCOPE estimated it as USD200, a 230% rise.

There are primarily three types of cross-border remittance services providers (RSPs) in the South African market, namely: retail banks, Money Transfer Operators (MTOs) and authorised dealers with limited authority (ADLAs). There are 19 retail banks providing retail forex and transfer services. There are currently two MTOs operating in the market (Western Union and MoneyGram). Of the 16 licensed ADLAs, 14 provide remittance services, bringing the total provider pool for cross-border remittances to 35.

The number of RSPs in South Africa is relatively higher than that of other African countries, where a few dominant players dominate the market share at the expense of smaller local MTOs. For example, in Malawi, the top four players account for 89% of the market share. In Zimbabwe, there are seven licensed MTOs authorised to operate within Zimbabwe.

According to the World Bank Group’s Migration and Remittances Fact-book 2016 report, an estimated USD1.26 billion was remitted from South Africa to sub-Saharan Africa in 2015; USD0.59 billion and USD0.67 billion were remitted from South Africa to Nigeria and India respectively with average costs at 9.8% and 13%. FemiSCOPE reported US$921 million in remittances volumes from South Africa in 2020, US$721 million being sent to Zimbabwe, the leading destination market in South Africa.

According to a Finmark Trust research, in Africa, there are currently four distinctive business models operating in the Remittances market – the ADLA model, the MTO model, the Bank model, and the Bank-Retailer partnership model. Providers operating each of these models all participate differently in the value chain of a remittance transaction: origination, sending money, clearing and settlement, and distribution. Furthermore, the reliance on different channels and how each provider accesses other parts of the value chain, whether internally, or through third-party relationships, determines that model’s profitability.

In terms of pricing, the ADLA, bank-retailer partnership and bank digital models are the most competitive. In terms of operating costs, these models also appear to be the most cost-effective. The bank traditional model is both the costliest to operate, together with the MTO model, and the least competitive in terms of pricing. MTOs appear to compete more effectively with ADLAs for higher value transfers, given their relatively fixed pricing compared to ADLAs’ variable pricing models.

The structure of the foreign exchange market is dominated by authorised dealers, which have significant pricing power. This study was unable to access any data that shows the rate at which spreads change according to the size of the dealers’ business customers. However, this study surfaced anecdotal evidence from the mystery shopping exercise which suggests that ADLAs’ spreads are relatively narrow relative to the interbank rate.

The studies found that it is still difficult to find reliable data on the source of remittance payments. The current studies highlighted the difficulties in obtaining data from financial institutions about their cross-border remittance clients, as well as difficulties in accessing information about cross-border transfers.

Interestingly however, the study did find that there are substantial differences between this type of retail payment and traditional formal banking transactions. For instance, the average transaction value was approximately nine times greater for a retail customer compared to a bank account holder. In addition, there were substantial differences in the way that payments were made for a retail customer compared to a bank account holder, in terms of the types of channels used and the average time to complete transfers.

The structure of the formal cross-border remittance market is dominated by two business models (branch-based and agent-led). This is due to the requirements for KYC, which necessitate that the initial on-boarding of customers be done through face-to-face interaction, and the predominance of cash-based transfers. As a result, there is a limited market for purely digital models which have been shown to significantly lower the cost associated with transfers in other markets.

Key challenges include the structure of the formal cross-border remittance market is dominated by two business models (branch-based and agent-led) due to the requirements for KYC, which necessitate that the initial on-boarding of customers be done through face-to-face interaction. Furthermore, it is a high-cost market due to: its predominantly cash-based nature; it being generally cash heavy; and due to regulatory requirements related to AML/KYC.

According to FemiSCOPE, in SADC, South Africa has the largest number of MTO agents, with over 9,000 MTO agents, followed Tanzania and DRC, that have little over 900 each. A rising trend is having one-sqaure-metre MTO agent stalls in convenient locations, being done by regional market leader Mukuru. Mukuru has branded stalls litted across South African townships, ready to send money from South Africa. Other operators make use of spaza shops (tuckshop/convenience store), with big banks in partnership with retailers, and large chain-supermarkets utilizing their in-store facilities across borders.

Technlogy advancements, by use of social media platforms and APIs has made KYC and Onboarding easier, with examples like Mukuru that use WhatsApp as part of the CRM to get customers to send money and use other products.

Sources: WTO, World Bank, Finmark Trust Research, FemiSCOPE Research