Remittances – some recent innovations in Africa

Jul 09, 2010
Remittance flows to Africa slightly decreased in 2009 and are expected to stabilize in 2010. These remittances to Africa are characterised by high prices, mostly in the range of 10-15% and sometimes even 25% of the sum transferred. This is often explained by the lack of competition and because it is costly to reach remote areas. But some interesting innovations have appeared on the radar screen, that could put pressure on prices, provided it is accompanied by the access of new players.

Mobile payments are said to lead to lower priced remittance products, even though M-remittances are still in a nascent phase. However, it is observed that innovations in remittances (e.g. mobile banking, cardless withdrawals from ATMs ) are preceded by the deployment of these innovations in the domestic payments system. This web article presents some recent innovations and their potential in Africa.

Worldwide, formal remittances inflows doubled in the period 2003-2008 (to US$443 bn in 2008) but the growth slowed down to
US$ 420 bn in 2009. Africa experienced a slim decrease: Sub-Saharan Africa received an estimated US$ 20.5 billion in formal remittances and Middle-East and North Africa 32.2 billion in 2009 .

The traditional ‘cash-to-cash’ remittance product is still the most popular, estimated to cover about 80-90% of the remittance market . It is typically offered by the Money Transfer Organisations (MTOs)
often in combination with bank partners. The remittances to Africa, apart from flows within the African continent, originate mainly from the US and Europe. The African market is dominated by the MTOs Western Union and Moneygram (together 65% of the market) . They could meet with future competition from smaller MTOs using innovations such as Person-to-Person (P2P) mobile payments, (pre-paid) cards or cardless withdrawals from ATMs.

Most innovative pilots in Africa are linked to the mobile phone and to a lesser extent to cards. Due to low internet penetration not much is expected from pilots making use of the Internet. Some examples: ###MORE###

M-Pesa with to Western Union (account/cash – to – mobile)

The successful domestic mobile payments services in Kenya, M-Pesa, entered into a cooperation with Western Union in 2008. The service initially focuses on cross border transfers from the United Kingdom to Kenya. M-Pesa also offers the possibility to withdraw money from an ATM without owning a card but by using a code received by SMS instead.

ARIAS, SWIFTnet, QuikRemit and Auxfam
are all providers offering a ‘money transfer solution’, but not the distribution network. Linked with parties that have agent networks at sending and/or receiving side they could build interesting MTOs.

Moneygram and LUUP (account/cash – to – mobile)

In August 2009, Moneygram announced its cooperation with LUUP, a mobile payments solution provider. This could evolve into a remittance service, once LUUP’s technology is being deployed by parties at the receiving end.

ABSA uses ATMs ‘cardless’ (account-to-cash)

ABSA in South Africa offers its account holders the possibility to send money to someone without a bank account or card. The receiver withdraws the money from an ATM and, instead of a card, uses a PIN code (sent by SMS) and an additional security check (exact amount or other number). Initially, this service can only be used in South Africa.

Currently in many African countries mobile payments are introduced for domestic payments (MTN Money, Zain with Zap money, Orange, Vodafone with M-Pesa). These can be deployed in the future for remittances, from Europe and the US as well as for regional migrants (south-south migration) to send money home.
However, this will only happen after they prove successful and are accepted as reliable payment means locally, to be demonstrated by quickly increasing
numbers of subscribers and transactions over these networks.

Eventually, to assess the potential of a remittance service, it
will depend crucially on the ‘first mile’ and ‘last mile’, i.e. the distribution network at the end of the sender and at the end of the receiver. The technology will not be the determining factor for success but it could increase efficiency and lower costs. Promising pilots (such as M-Pesa and Western Union) have a model that covers the entire chain, combining the strengths of the business partners. The interesting issue remains what the impact is on the remittance fee paid by the customer.

An elaborate global overview can be found in ‘Remittances - how to shorten the long way home, products, channels and innovations– an inventory’. Author Gera Voorrips, September 2009

Gera Voorrips is Advisor and Implementation Manager for projects in microfinance and accessible financial services.

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