remittance market has fallen victim to the financial crisis that
has left the world economy in turmoil. Combined with increasing
competition, stalling growth in remittance volumes could hasten the
end of ultra-high fees charged on many major country-to-country
Little remains unscathed by global financial
turmoil, not even the traditionally stable remittances by migrant
workers to their home countries. According to development agency
the World Bank, there was a significant slowdown in growth in the
third quarter of 2008, marking the start of a trend likely to
continue for a considerable period.
The slowdown follows years of robust growth that saw officially
recorded remittances to developing countries increase from $85
billion in 2000 to $265 billion in 2007, a CAGR of 17.6 percent.
During this period remittance to developing countries increased
from 64 percent of the world’s total international remittance
market in 2000 to 74 percent of the total in 2006.
The World Bank highlights key factors that contributed to the
strong performance of remittances to developing countries over the
past several years. These were:
• Growth in the number of migrant workers with the total now
approaching 200 million;
• More accurate scrutiny of flows since 2001;
• Depreciation of the US dollar (until 2008) encouraged higher
remittances to compensate for the loss of purchasing power vis à
vis appreciating local currencies; and
• Reduction in remittance costs and expanding networks in the
Remittance network expansion is illustrated by Western Union,
the largest player in the industry accounting for about 17 percent
of recorded cross border remittances.
Following an aggressive international expansion strategy since
2002, Western Union has increased its agent locations from 130,000
in 190 countries and territories in mid-2002 to 365,000 agent
locations in 240 countries and territories at the end of the third
quarter of 2008. Total revenue increased from $2.7 billion in 2002
to an annualised $5.3 billion in the first three quarters of
In 2008 World Bank analysts Dilip Ratha, Sanket Mohapatra and
Zhimei Xu estimate that total remittances to developing countries
will reach $283 billion, up 6.7 percent compared with 2007. Growth
in 2008 will also be roughly half the lowest annual increase seen
since 2000: 12.4 percent in 2006.
How badly the global remittance market will be impacted by the
economic turmoil is uncertain.
In their study, the analysts note: “Under the current
circumstances of uncertainty, however, this analysis ought to be
taken as an attempt to understand the risks rather than present
Key uncertainties in 2009 and 2010 highlighted by the analysts
include the severity of the economic slowdown in the world’s
high-income nations which are estimated to account for 71 percent
of remittances to developing countries in 2008. Of the high-income
countries the US is estimated to account for 39 percent of total
remittances and Western Europe 24 percent. Also uncertain is the
impact of the world economic slowdown on developing countries which
themselves account for half of migrants from developing countries
and 12 percent of remittances to other developing countries.
However, the analyst believes one thing is certain, the
deceleration in growth seen in the third quarter of 2008 will
continue into 2009.
Two possible scenarios
The analysts put forward two possible scenarios, a best ‘base case’
and a worst ‘low case’. In the base case, total remittances to
developing countries in 2009 are forecast at $280 billion, down 1
percent compared with the 2008 estimate. The base case anticipates
remittances to increase by 6 percent in 2010 to $297 billion.
In the low case scenario remittances to developing countries in
2009 are forecast at $267 billion, down 5.6 percent compared with
the 2008 estimate, increasing marginally to $270 billion in
In their base case scenario the analysts assume that migrants’
incomes will grow in tandem with GDP growth in the host countries
and that the number of migrants in those countries remains
constant. In the low case scenario a key assumption is a fall in
the number of migrant workers by, for example, 4 percent in the US
and 8 percent in the 15 major European Union countries.
Even under the analysts’ base case scenario there will be
notable differences in remittance flows in a number of regions.
This is already evident in US-Mexico remittances, the world’s
third-largest remittance channel.
According to the analysts, remittances from the US to Mexico in
the first nine months of 2008 fell by 3.7 percent compared with the
same period in 2007 and for 2008 as a whole they anticipate a 4.4
percent fall to $23.8 billion. Several reasons are advanced for the
decline by the analysts. These include the US economic slowdown,
especially in the construction sector, and tighter enforcement of
emigration rules by the US.
But even the analysts’ gloomy estimate may well prove to be
optimistic. According to Mexico’s central bank inbound remittances
totalling $1.9 billion in August 2008 were down 12.2 percent
compared with August 2007. The decline in August 2008 was the worst
monthly decline since records began being kept 12 years ago, noted
However, for the present Mexico is an exception and other
countries have continued to enjoy growth in inbound remittances in
2008. This is especially true of countries outside Latin America, a
region that in 2008 will rely on the US for an estimated 79 percent
of its inbound remittances.
In 2008 particularly strong remittance growth has continued into
countries in South Asia, the major ones in the region being India,
Pakistan and Bangladesh which together represent some 16 percent of
total inbound remittance flows to developing countries. In total
the region is forecast to receive inbound remittances of $51
billion in 2008, up 16.2 percent compared with 2007.
But South Asia will not escape the impact of the global economic
slowdown believe the analysts who predict zero growth in
remittances to the region in 2009. Of particular concern are
remittances from the six oil-producing Gulf Cooperation Council
(GCC) member countries: Saudi Arabia, the United Arab Emirates,
Kuwait, Bahrain, Qatar and Oman.
The analysts anticipate the sharp fall in the oil price could
result in a significant fall in construction activity in the GCC, a
major employer of South Asian migrants, especially from Pakistan
and Bangladesh. In 2008 these two countries will receive an
estimated 52 percent and 63 percent of inbound remittances from GEC
Notably, according to Bangladesh’s central bank inbound
remittances fell by an estimated 4.4 percent between August and
September this year. In total, remittances from GEC countries is
anticipated to increase by 37.6 percent compared with 2007 to $23
billion. In their base case scenario the analysts forecast a 9
percent fall in remittances from GCC countries in 2009.
Also at risk are remittances from the GCC to the fourth largest
developing country remittance recipient, the Philippines in the
East Asia Pacific (EAP) region. According to the analysts between
80 percent and 90 percent of deployments of overseas Filipino
workers are to GCC oil-producing countries, primarily in the
In total remittances to the EAP region are forecast to increase
by a marginal 0.4 percent in 2009. However, reports in the Filipino
media indicate that the country’s government is preparing for a
substantial decline in inbound remittances from the 8 million
Filipino’s working abroad in 2009.
Remittances to developing countries in Europe will also face
headwinds. Indeed in dollar terms the largest European developing
country recipient of inbound remittances, Poland is estimated by
the analysts to see inflow in 2008 remain unchanged at $11 billion.
Poland receives about 80 percent of its remittances from European
Headwinds in the global remittance market are also not good news
for money transfer organisations (MTO) that have for years ridden
high on burgeoning volumes.
Indicative of the changed outlook Western Union in its third
quarter financial statement noted: “Management believes it prudent
at this time to withdraw the previously stated long-term growth
objectives for revenue and earnings per share.”
In its second quarter 2008 financial statement, Western Union
CEO Christina Gold said: “Our leadership position in the growing
money transfer market and our ability to execute our growth
strategy gives me confidence in our ability to achieve our
long-term objectives of 10 percent to 12 percent revenue growth and
15 percent to 18 percent EPS [earnings] growth.”
The poor outlook for growth in the global remittance market
comes at a time when MTOs face the prospects of increasing
competition in their traditional business.
Beyond growth prospects, new entrants into the remittance market
have been lured by attractive profit margins on small value
transfers. These vary considerably but even in the lowest cost
channels total fees (basic fee plus foreign exchange margin) are
attractive to MTOs given the high volumes.
For example, according to the World Bank between the US and
Mexico the average total fee on a $200 remittance is $11.60 (5.8
percent). From the UK the lowest average total fee on a $200
remittance is to Nigeria at $13.34 (6.67 percent).
However, there are far more lucrative remittance channels.
According to the World Bank the highest average total fee on a $200
remittance is between Germany and China – a staggering $49.30
Other ultra-high fee channels abound. Using a $200 remittance as
an illustration, between the Netherlands and Indonesia the average
total fee is $45.09 (22.55 percent), between Germany and Romania
$48.79 (24.39 percent) and between France and Algeria $33.98 (16.99
percent).Total average fees for a $200 transfer to India range from
$11.19 (5.6 percent) from the US to $21.41 (10.7 percent) from
New competition in the lucrative global remittance market has
come in a number of forms in recent years. Among these are the
launch by major banks of white label remittance services running
off their own platforms.
Among major companies that have seized this opportunity is US
bank Citigroup. In late 2006 its global transaction services unit
began offering retail banks a white label solution for providing
global remittance services aimed at migrant workers.
In February 2008, Citibank relaunched its service as QuikRemit
following its acquisition of PayQuik, a US provider of money
transfer solutions to banks, credit unions and MTOs. QuikRemit now
has distribution and foreign exchange capabilities covering some 90
In February 2008 another major US bank, Bank of New York Melon
(BoNYM) opted to follow Citigroup’s lead by making its own
cross-border remittance platform launched a number of years ago
available to client US banks as a white label solution dubbed
At the time, BoNYM laid the blame for the small share of US
banks in international remittances on infrastructure and technology
constraints which white label solutions will overcome.
Visa has also entered the fray with its Visa money transfer
(VMT) service, first launched as a pilot project in Ukraine in 2003
and now fast gaining momentum in an increasing number of
A major selling point of the VMT service is it eliminates the
need for a trip to a money transfer agent’s office. Instead Visa
cardholders use their 16-digit account number to send to or receive
money from another Visa cardholder. Depending on their issuing bank
transactions can be executed via an ATM, self-service kiosk, the
internet or bank branch. The service now has 46 programmes
operating in 13 countries in Europe, the Asia Pacific region and
the Middle East.
Other potentially major new competitive forces in the global
remittance market are in the making. These include MasterCard’s
mobile phone-based remittance initiative together with mobile phone
industry body the GSM Association.
Another significant growing player is United Nations agency the
Universal Postal Union which is progressing well with its plan to
postal services in all its 192 member countries linked by its
international financial system electronic payments network by
Overall pressured by a slowdown in volume growth and growing
competition the end of the days of generally ultra-high margins on
global remittances could well be in sight.