Getting remittances right in the digital era
Rising migration and its linkages to human, socio-economic and political development has for a number of years been a prominent theme on the international agenda. As a result, remittances have attracted significant attention, not least because they are associated with reduced poverty, improved health and education, and increased investment. For low-income households who are susceptible to severe variations in income or expenses, the possibility for the migrant worker to send money immediately in secure and affordable conditions can play a significant role in smoothing consumption, responding positively to adverse shocks, and easing working capital constraints.
According to official UN data, around 36 million Africans have migrated internationally with the majority of the continent’s mobility intra-African. This has had a strong impact on remittance flows to and within the continent, which more than quadrupled in the last decade, reaching USD 85 billion in 2018, making it the largest source of external financing in the continent. There is no wonder then that attention has turned towards the potential of digital remittances and what they can achieve in terms of lowering cost, increasing convenience and ultimately ensuring that more funds are available to sustain the livelihoods of both the migrants and their relatives back home.
Results from a 2018 study found that the global uptake of digital remittances has grown year-on-year from 2014 to 2017. Whether that same trend can be seen in Africa is uncertain and difficult to quantify. That is because the majority of remittances travel along informal channels, estimated to be upwards of 70% in some corridors. The informal methods used can be as simple as sending money through relatives, or bus and taxi drivers, or through the hawala money transfer system. Often times, migrant workers and their families have no choice but to use these informal channels due to the barriers that exist in the formal channels, such as not having the proper identity documentation or the high cost of sending money through traditional players and banks (as high as 15 to 20 per cent in some countries). Another major factor is the persistent reliance on cash for day-to-day transactions. Whether it is the migrant worker whose payroll is received in cash, or the recipient rural family, cash tends to meet the everyday needs of the consumers.
A closer inspection however, provides interesting insights on the potential for digital remittances in Africa. A 2018 GSMA study revealed 36 corridors where mobile money was used to send and receive international remittances, connecting 22 African countries. Some of the important corridors exist in the West African Economic and Monetary Union (WAEMU). In countries within the region, Mobile Network Operators (MNOs) were able to deploy mobile money-enabled cross-border remittances, which are further supported by a common currency and an already assembled distribution network. Furthermore, the Central Bank of West African States (BCEAO) has taken steps to create an enabling environment for the use of mobile money within the economic zone.
A market study conducted by the consortium HORUS in close collaboration with Making Finance Work for Africa and the African Development Bank was able to confirm this trend for mobile money-based remittances in the WAEMU. For example, the majority of the people interviewed in Burkina Faso reported using mobile money as the preferred digital method to transfer money domestically and across borders within the region. With international remittance flows in the WAEMU increasing exponentially and almost 30% of the overall flows staying in the region, MNOs operating across borders are primed to make significant strides in the remittance space due to the increasingly large pool of subscribers and strong agent network.
Beyond MNOs, the evolution of mobile money has pushed traditional money transfer operators (MTOs) and over-the-counter (OTC) services to aggressively expand their digital footprint. This market dynamic has translated into more competitive prices in the region. For intra-regional transfers, for example, average prices when combining all providers range from 14% for transfers of 10,000 FCFA (@ USD17), decreasing considerably for transfers of 100,000 FCFA (@ USD177) to 4.5%. This is almost in line with the Sustainable Development Goal (SDG) 10.c target of lowering remittance transaction costs to less than 3 per cent. It is important to note, however, that the majority of people conducted transfers of less than 50,000 FCFA, and the perception that these services are expensive is still strong among many of the users interviewed.
At the same time, cost does not appear to be the main factor for remittances. Senders and receivers reported that trust is the most important factor followed by convenience and habit. Deciding whether to use formal or informal, digital or cash-based services greatly depends on the customer’s profile, socio-economic characteristics and the location where they are sending or receiving the money. For example, a majority of users prefer to travel to their nearest service point to cash in or cash out, as they saw it an important enough operation to deserve a trip. This is especially true in areas where the close proximity of service points makes it possible to travel on foot or with limited transportation cost. At the same time, many respondents felt they were not ‘in the habit’ of using their e-wallet accounts for remittances. The rate of using formal channels is lower for customers in rural (remote) areas where cash tends to meet their everyday needs, where agency outreach is limited and where mistrust in digital channels is more apparent.
The WAEMU’s experiences underline the barriers and opportunities to keeping remittances in the digital ecosystem. A new interoperability initiative with the BCEAO will see the MNOs and eventually microfinance institutions and fintech platforms become part of the payment ecosystem in the eight countries. This would represent a big step towards improving pricing and unleashing a multitude of digital financial service use cases better suited to the needs and culture of remittance senders and recipients.
We are also seeing more and more remittance industry leaders in these markets and elsewhere in Africa adopt new business models based on partnerships and digital platforms that is bound to increase e-wallet usage for cross-border remittances. One prime example of this is the partnership between the digital remittance service WorldRemit and the mobile payments platform MFS Africa that will enable mobile to mobile cross-border remittances in five new Africa countries. Mowali, is another such example where MNO giants Orange and MTN are collaborating on an interoperable mobile payments platform that will enable customers to transact cross-borders. Remittances are often times the first point of contact for digital financial services for many users. From this perspective, platforms with strong gateways to other digital financial services can create the conditions for remittance cost to come down and build a truly interoperable digital ecosystem.
As more of these solutions come to market, growth of digital remittances is expected to continue in the WAEMU and the rest of the continent but at different pace. In countries like Senegal where there is a well-established agent network and where international remittance is commonplace, digital-based remittances can happen at a faster rate. But for digital remittances to take off anywhere, our research shows that providers are best advised to overcome the issue of trust by putting greater emphasis on training and awareness-raising campaigns. This is especially important in rural areas where financial and digital literacy is an issue. Another important barrier to the successful uptake of digital remittances is the lack of consumer protection in many markets. The most vulnerable people often bear the brunt of risks related to wrong advertising, fraud or a lack of recourse mechanisms. Governments and providers can do more to expand trust in digital remittances by enforcing consumer protection, ensuring transparency and establishing clear rules for remittances.
 UN Synergies between the High-Level Panel on Migration and the Global Compact on Migration. Concept Note for GFMD Side Event in Marrakesh, Morocco, 8 December 2018.
 Members of the WAEMU are Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo.
 Pursuant to the BCEAO’s Instruction No. 013-11 of 2015, operators of Digital Financial Services (DFS) such as e-money services may perform cross-border payments in accordance with the BCEAO regulations on external financial relations, with case-specific limitations on transfers with nations outside the region. Cross-border payment providers also do not face disproportionate initial capital requirements, and can operate within the WAEMU region.
About the author
Abdelkader Benbrahim is the Financial Sector Advisor leading MFW4A’s Financial Inclusion & Housing Finance workstreams. Abdelkader's work aims to advance financial inclusion in Africa by supporting market development and positively influencing policymakers to address the impact of technology on financial systems. He also leads the effort to support the mobilization of long-term finance to meet Africa's investment needs in the affordable housing sector. Prior to joining MFW4A, he worked for Global Affairs Canada supporting its Information and Communication Technology development function, serving in both the President’s and Minister’s offices.