Rethinking Remittance: Is FinTech the Answer?
The reality is that innovative, quicker, and cheaper won’t always win.
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Hi there,
March 2020… fun time, amirite?
But let's leave the past behind for a moment. Here we stand, with more indoctrinated on the digital bandwagon, reconsidering their financial services partners, and FinTech investors sitting pretty with extra dry powder.
A bright future is ahead of us at the end of this dark tunnel. One space many have had their eyes on? Remittance.
Your aging textbook may describe remittance in a number of ways, but for simplicity, in the schoolyard, we’re defining remittance as sending money abroad. And the act isn’t something novel, it’s been around for quite some time.
As early as the 19th century, countries such as Spain, Italy, and Ireland became dependent on remittance. By 2000, however, remittances began sharply increasing worldwide.
A projected $8.5 trillion in remittances will be sent to developing countries between 2015 and 2030. In 2022 alone, an estimated $800b of global remittances were sent by migrant workers back to family members in low and middle income countries.
Source: World Bank
With our schoolyard definition of remittance, let’s also get on the same page on defining FinTech.
When it comes to the product, technology has to be a moat.
A spicy example we’ll use here is Shopify. Shopify is awesome, the twittersphere adores ‘em. But is financial technology the differentiator here? No.
The same goes with dissecting the remittance space. Just because you may take and transfer payments, does not always mean you are a FinTech company.
To date, there are currently three key players working within the remittance market: Banks, Legacy Operators, and FinTech Operators:
Banks: Brick-and-mortar first, digital second
Banks have long been the main facilitators of international fund transfers. For decades, their wire transfer systems and correspondent banking relationships were the primary mode of transit for cross-border remittances.
Legacy Operators: Cash first, digital second
Legacy operators, also known as Money Transfer Operators (MTOs), are specialized companies that focus on facilitating remittances. These companies have an extensive network of physical locations, such as agent locations and kiosks, where senders can initiate remittances and collect cash at corresponding locations.
FinTech Operators: Digital first
Technology-driven companies that aim to provide innovative financial solutions using modern technology and streamlined processes. In the remittance space, FinTechs have introduced new ways of transferring money internationally, often focusing on reducing costs, increasing speed, and improving user experience. FinTech companies offer mobile apps and online platforms that allow users to initiate remittances digitally.
So, what happened?
In 2020, the perfect FinTech storm was at play. A need for increased reliance on digital channels – i..e online platforms, money wallets, and payment services was dire to the situation at hand. The ante was upped for FinTech to create a positive, lasting impact that would disrupt investments and innovation throughout the remittance industry.
At Empire Startups, we maniacally track funding trends week over week, across various subvertical within the FinTech industry. Dry powder or not, venture capital, as a leading indicator of innovation and growth in a space, isn’t flowing into remittance.
Between 2020 and 2021, FinTech funding in the money movement and remittance space dropped from 0.68% to 0.40%.
It’s important to note between 2020 and 2021, venture deals dropped significantly across the board. We normalize this by tracking sub-vertical investment as a percentage of all deals. In any case, this was not the expected surge.
If you build it… The reality is that innovative, quicker, and cheaper won’t always win. So, what else is missing here?
There is one other, dominant challenge across banks, legacies, and FinTech players when putting these products into the market:
Why should someone trust you to send money back home?
We had the chance to talk with Ken Kruszka, former Co-founder & CEO of Boom Financial (m-Via), the first cross-border mobile banking and remittances service according to Crunchbase.
“Imagine I'm a construction worker and my mom needs $200 for a monthly payment. The bottom line is, the money must reach her. What sets money apart from other goods is that using a different method puts not just the fee at risk, but the entire balance."
Adding to this example:
“I will drive 10 miles. Past 18 different money transfer locations, to go to the same clerk, face-to-face, that has helped me every single time beforehand. Why? Because it’s always there, with him.”
The stickiness of a consumer who has been doing this for 20+ years is not an easy feat to loosen. Just look at WesternUnion, who raked in $4.5b in revenue this past year.
Like anything, brand awareness and recognition takes time (and money). So yes, maybe those who looked to FinTech to transform the remittance industry in 2020 overestimated what we could accomplish in the short term, myself included.
The problem is bigger than FinTech itself, including complex regulatory issues and educational gaps, just to start. However, this doesn’t mean that FinTech isn’t playing an important role.
Competing with financial services incumbents on storing deposits, lending, money movement, investing, and insurance is hard. If trust and regulatory hurdles are the most challenging aspects of global remittance, is it the banks that will come out on top?
“Remittance is never going to be the main business model of a bank,” says Sid Singh, Product Strategy at Wise. “It’s a feature, one of possibly 30 services offered to their customers.”
He continued:
“FinTechs in the remittance space, on the other hand, this is our bread and butter. For us, this is the sort of thing we are going to fight for and want to be best at. While remittance may not solely be a FinTech problem, it is FinTech’s problem to solve.”
–
The remittance landscape stands at a crossroads, with its eyes set on an evolving future shaped by technology and innovation. As the world navigated the unprecedented challenges of the pandemic, the FinTech sector emerged as a beacon of hope, offering digital solutions that could reshape the way money moves across borders.
However, the journey hasn't been without its hurdles.
The path forward involves not only disruptive technology but also a delicate balance of trust, regulatory cooperation, and customer-centricity. The story of remittance is one of both innovation and tradition. The future promises to be a dynamic interplay between these two forces.
Cheers,
Jon
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