Cognizant Reports

Remittance Market: Ready and Waiting for its ‘Skype’ Moment
The high cost of global remittance is in the spotlight, with the advent of new online models that may end the domination of the current leaders.

Executive Summary
The growth of the high-margin global remittance business is outstripping that of even international migration. The business mainly consists of cash-to-cash transactions, largely by under-banked and unbanked population segments. This partially explains the success of money transfer operators (MTO) Western Union and MoneyGram, both of which leverage their large networks to offer convenience to this demographic, as well as inspire trust. While MTOs offer their customers easy access and the convenience of cash transfers, the agent-led intermediation at both ends of each transaction bloats the cost of the transaction. The World Bank pegs the average cost of remittance for retail customers at 9.3%; meanwhile, Western Union and MoneyGram boast profit margins in the range of 25% or higher. At a time when the cost of a long-distance call is zero, thanks to players such as Skype, and the costs of transferring data are marginal, courtesy of the Internet, why should retail customers pay 9.3% to move money? The governments of the

G8 nations have resolved to reduce the average cost of remittance by five percentage points by 2014.1 But while government action can provide an incentive, the real drivers for reshaping the remittance business and reducing costs are competition and emerging innovative models — such as TransferWise — which will challenge the conventional agent-led, brick-and-mortar remittance intermediaries. Players aiming to succeed over the long term in this business will, therefore, need to respond by reducing their operational costs.

Fast-Growing Market
While the international migrant population increased 1.4 times between 1990 and 2010, from 156 million to 210 million, the flow of remittances in the corresponding period increased 6.4 times from $68 billion to $440 billion2 (see Figure 1, next page). This growth is due, in part, to the advent of MTOs and their ubiquitous presence, which led to a reduction in remittances through informal channels. The World Bank estimates the global remittance flow to reach $500 billion by the end of 2012, primarily through MTOs at the originating end of the transaction and through banks at the receiving end.3

cognizant reports | november 2012

Growth of Migration and Remittances, Worldwide
500 400 Millions of people 300 200 100 0 1970 Migrants 1975 1980 1985 1990 1995 2000 2005 2010 Remittances 500 400 Billions of dollars 300 200 100 0

Source: BBVA Research, with United Nations and World Bank figures
Figure 1

With their global network of third-party agents, MTOs are able to provide convenience, payment assurance and multi-language capabilities and thus gain customer trust. Today, one in five dollars remitted globally passes through Western Union (which owns 16% of the market) or MoneyGram (with 4% market share).4 The Price of Trust The World Bank's remittance price data highlights the pricing inefficiency in the market. Because the market is highly fragmented, with multiple players and channels of remittance, a wide range of price points is available across routes or corridors to remit a fixed sum of money. While

the global average cost of sending $200 is 9.3%, the average cost for wiring the same amount through MTOs is 10.16% (see Figure 2). There is wide variation in the average cost of sending $200 even within the G8 countries. Two countries, in particular, stand out: Russia and Japan. The lowest costs are in Russia, which does not allow commercial banks to offer remittance services. The highest are in Japan, where commercial banks dominate the market. Only in 2009 was the Japanese remittance market opened for nonbank remittance service providers (RSPs), following the Payment Services Act of 2009 (see Figure 3, next page).

Average Cost for Sending $200




7% 2008 1Q 2009 3Q 2009 1Q 2010 3Q 2010 1Q 2011 3Q 2011

Global Average

International MTO Index

Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 2

cognizant reports


G8 Countries: Spreads and Averages
50% 40% 30% 20% 10% 0%

Canada Median Price








Spread between Lowest and Highest Price

Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 3

Within G20 countries, commercial banks turn out to be the most expensive of all remittance service providers, with an average cost of 13.58% to wire $200. Post offices are the cheapest, at 7.16%, while MTOs come in a shade higher, at 7.37%. The World Bank’s analysis also indicates that commercial banks are the least transparent when it comes to disclosing exchange rates applied to transactions, while MTOs are the most transparent in disclosing information to their customers (see Figure 4). According to MasterCard, banks in the United Arab Emirates to India corridor exhibit a positive

bias toward high-value remittances. This is manifested in the pricing spread among commercial banks, MTOs and exchange houses (see Figure 5, next page). Of all the global remittance vehicles, cash-to-cash services are the dominant product and are priced competitively (with an average price of 7.6%) when compared with other products. Accountto-account services are the most expensive, with an average cost of 14.10%. Though not widely available, prepaid cards and account-to-cash services were the cheapest products, at 4.2% and 4.91%, respectively (see Figure 6, next page).

Average Cost of Remittance by Service Provider




0% 2008 Bank 1Q 2009 MTO 3Q 2009 Post Office 1Q 2010 3Q 2010 1Q 2011 3Q 2011 Global Average

Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 4

cognizant reports


Low-Value Remittances Have Wider Pricing Disparities
14% Fees and Foreign Exchange % 12% 10% 8% 6% 4% 2% 0% 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 Money Remitted (in Dirham) Leading Bank Leading MTO Leading Exchange House

Source: MasterCard
Figure 5

Economics of Moving Money With an operating margin of over 25%, MTOs command hefty pricing power, to the envy of many service utilities. Cash-to-cash products account for 80% of global remittances, mostly due to the under-banked and unbanked segments of the global immigrant population. MTOs, with their ubiquitous presence through exclusive relationships with third-party agents, have built a brick-and-mortar business model

that has earned the trust of their franchisees. However, the agent-led intermediation at each end of the transaction results in higher costs for the retail customer (see Figure 7, next page). MTOs derive their revenues primarily through fees (70% to 75%), exchange rate arbitrage (20% to 25%) and other value-added services (0% to 5%). They have a high fixed cost (35% to 45%), which largely comprises expenses to cover

Average Cost by Product Type
18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
Mobile service Account-toaccount (all) Account-toaccount (other bank) Account-toaccount (same bank) Accountto-cash Cash-toaccount Cash-tocash Credit/debit card serviece Door-todoor Online service Pre-paid card service

Source: Remittance Prices Worldwide, The World Bank, November 2011
Figure 6

cognizant reports


salaries, rent, compliance, IT and marketing. The variable cost (55% to 65%) is mostly attributable to agent commissions.5 MTOs spend approximately 3% of their revenue on regulatory compliance. Market leader Western Union reportedly employs 600 full-time compliance staff and spends $60 million annually to monitor its money transfer operations.6

intermediation. Customers need to be nudged toward cheaper online channels. The newer entrants will need to shape consumer behavior over time and proactively rewire their remittance operating models. Forces Supporting Low-Cost Remittance Banks, public sector initiatives, mobility and new emerging online channels look set to dilute MTOs’ pricing power, rewire the business of moving money and lower the cost of intermediation.

Low-Cost Remittance: Triumph of Hope Over Experience
The current remittance business model looks dated, particularly when compared with the cost of wiring money using ever-lower voice and data communications costs, courtesy of Skype and the Internet. Why should retail customers have to pay transaction fees that are 9.3% of the amount they are wiring? The business model is clearly ripe for change. We see the green shoots of change in various payment corridors. For example, 80% of remittances to the Philippines today are sent electronically compared with just 20% 10 years ago. Segments of the African market have created a 100% mobile payment infrastructure in a short span of time.7 Another growing trend is that of disruptive and cheaper online models of money transfer, such as the approach pioneered by TransferWise. Change, however, will not be dramatic. Online channels of remittance are currently more a supplement than a substitute for agent-led

Banks: Commercial banks, which have a 5% share of the remittance market, have traditionally not considered remittance to be a core banking business. However, in today’s “AA” world, where conventional revenue streams are drying up and their revenues and profitability are under pressure, banks must and will take a fresh look at the remittance business. Banks are not the preferred choice for retail customers to remit money, due to hefty transaction costs resulting from steep fixed costs and compliance needs (know your customer, or KYC, anti-money laundering and fraud detection). Also, MasterCard’s research shows that banks tend to lag MTOs on a host of other parameters, such as speed, customer service and ease of sending and receiving money, which clients value highly. However, banks are in the business of intermediating payments globally, even if they cater to a different franchise and operate on a different scale. There are three

Revenues and Costs in the Cash Transfer Business Model

Pays Cash to MTO branch Revenue Variable costs Fee + FX spread Agent fee (approximately 30% of fee plus FX spread)

MTO Deposits Cash in Bank

FX Foreign Bank Credits Foreign Agent Exchange Foreign Agent’s Account Pays Recipient

Bank charges (approximately 10% of fee plus FX spread)

Agent fee (approximately 20% of fee plus FX spread)

Fixed costs

MTOs’ administrative, regulation, processing and staffing costs

Source: “Supply Side Constraints for Remittance Service Providers,” Developing Markets Associates, March 2010
Figure 7

cognizant reports


distinct advantages on which banks can capitalize to become a preferred choice for both banked and unbanked customers: 1. Reduce remittance time and cost by leveraging their superior payment capabilities, such as direct access to payment systems, forex rates and access to multicurrency reserves. 2. Become more accessible to customers by using online and mobile capabilities. 3. Extend the bank’s reach through prepaid cards.

transfer service for Safaricom, Kenya's largest mobile network operator. With this facility, unbanked, low-income Kenyans can use their mobile phones for person-to-person money transfers. For remittances from outside the country, Safaricom partners with an MTO, adding a layer to the remittance intermediation process and, therefore, increasing the cost. MTOs have partnered with mobile wallet providers and GSM, a mobile networks trade association that represents 750 mobile phone operators, and have thus bolstered their competitive advantage. However, if regulators allow mobile phone operators to handle foreign exchange in order to drive down remittance cost, MTOs’ current partners will very likely turn into serious competitors.

Public sector initiatives: The Federal Reserve banks of the U.S., in partnership with Banco de México, Banco Rendimento and Microfinance International Corp. (MFIC), began offering an “account to receiver” service in 2010. This service helps customers in the U.S. send money to their unbanked relatives in Mexico and 10 other Latin American countries. Initiatives such as these, while improving the efficiency and effectiveness of payments systems, also reduce the cost of global remittance and help attract new customers to the mainstream.

Online channels: TransferWise, founded by an ex-Skype employee, uses a crowdsourced model to remit money from customers in the UK to any EU country, at a fraction of the cost charged by the high-street banks.8 TransferWise uses the daily interbank rate to fix exchange rates and keeps the service charge low — five euros for a GBP 1,000 transfer, in contrast with the roughly 40 to 50 euros charged by banks for a similar transfer.

Mobile money: The mobile phone as a payment device is a game changer, especially in the emerging economies, where banking inclusivity is still evolving. Case in point is the fabled M-PESA, a mobile phone-based money

The Road Ahead
Remittance business players are today at the cusp of change that can potentially redraw the business landscape. They must, therefore,

Quick Take
ICICI, an India-based bank, rose to a leadership position in inward remittances to India in a short time, offering lessons for banks with remittance aspirations. Over the past decade, ICICI Bank has built a competitive, low-cost and accessible remittance platform. Today, one in four dollars remitted to India passes through the bank. The bank’s core value proposition lies in its easy access, simpler processes (registration, transaction requests and follow-ups), quicker transfer and low cost of remittance. ICICI caters to both white-collar, highly banked Indian knowledge workers in the U.S., UK and Middle East, as well as under-banked, blue-collar workers in the Middle East. By striking alliances with MTOs and other banks, ICICI ensured reach and last-mile connectivity, and with a custom-made, cutting-edge remittance technology platform, it ensured instant access to remitters — both banked and unbanked. While the automation of payments, foreign exchange and centralized payment processing increased speed and reduced transaction costs, the bank’s focus on customer service, with a dedicated call center and online tracking of payments, helped it gain customer trust.

cognizant reports


proactively rewire their business model to meet evolving consumer needs and aspirations. We expect MTOs, the current market leaders, to do the following:

• •

• •

Embrace emerging technology platforms, such as mobile devices and online platforms, to reach customers directly and reduce the cost of remittance intermediation. Move to a variable cost structure to bring down the cost of remittance. For example, compliance costs can be reduced by partnering with players that can offer compliance as a service at a reduced cost.

Reduce the cost of remittance intermediation and compliance through automation of payments, foreign exchange and centralized payment and compliance management. Market themselves as the preferred choice for customers by offering lower remittance time and costs by leveraging their superior payment capabilities, as well as becoming more accessible to customers through online and mobile capabilities.

Mobile and online operators, hoping to radically change the marketplace, will likely seek to do the following:

Meanwhile, banks — looking to leverage their core proven strengths in financial transactions — will likely take the following actions:

• • •

Take a long-term view of the remittance business given its secular growth rate and potential for steady revenue generation.

Disrupt remittance supply chains with innovative models aimed at convenience, ubiquity and simplicity. Gain market share through aggressive pricing. Keep the cost of operations and compliance low in order to stay profitable.


The 2009 G8 meeting in Aquila, Italy, agreed to reduce the global average remittance cost from 10% to 5% within five years through enhanced information, transparency, competition and cooperation. BBVA Research, with United Nations and World Bank figures. MasterCard Global Insights. International Investor Presentation, MoneyGram, Goldman Sachs Conference, September 2011. “Supply Side Constraints for Remittance Service Providers in the UK,” Developing Markets Associates, March 2010. Investor Day Presentations, Western Union, 2012 . “International Money Transfer: The New And The Constant,” Money Transfer International, 2010. Parmy Olson, “Investors Bet $1.3 Million on The Money-Transfer Guys Undercutting Banks,” Forbes, April 19, 2012.








cognizant reports


"Cloud Start-up: The Currency Cloud Targets Global FX," CloudTweaks, March 20, 2012. http://www.cloudtweaks. com/2012/03/cloud-start-up-the-currency-cloud-targets-global-fx/ Erik Lueth and Marta Ruiz-Arranz, "A Gravity Model of Workers’ Remittances," IMF Working Paper, International Monetary Fund, 2006. "A Technical Guide to Remittances," World Council of Credit Unions. document-1.9.29426/26599_file_8.pdf "An Analysis of Trends in the Average Total Cost of Migrant Remittance Services," Remittance Prices Worldwide, World Bank, Issue 3, November 2011. Documents/RemittancePriceWorldwide-Analysis-Dec2011.pdf Manuel Orozco, "Attracting Remittances: Market, Money and Reduced Costs," Multilateral Investment Fund of the Inter-American Development Bank, Jan. 28, 2002. Alphina Jos and Graham A. N. White, "Beyond Remittances - How To Expand Your Mobile Money Product Suite," Briefing Note 113, MicroSave, November 2011. Manuel Orozco, Katy Jacob and Jennifer Tescher, "Business-to-Business Electronic Payments: Straight Through Processing," Implementation Guide, Electronics Payment Network, Issue 2.4, February 2008. "Card Based Remittances: A Closer Look at Supply and Demand," The Center for Financial Services Innovation, February 2007. "CGAP Landscape Study on International Remittances through Mobile Money," GSMA, February 2012. http:// Muhammad Sayeedul Haque and M. A. Bashar, "Channel of Remittances – A Micro Level Study." http://www.scribd. com/doc/16152588/Channel-of-Remittances-A-Micro-Level-Study Kangni Kpodar and Maelan Le Goff, "Do Remittances Reduce Aid Dependency?" IMF Working Paper, October 2011. Adolfo Albo, Juan Luis Ordaz Diaz and Juan Jose Li Ng, "Evolution of Sending Remittance Mechanism Has Favored More Resources Sent at Lower Costs," BBVA Bancomer, Jan. 17, 2012. mult/120117_MigracionMexico_32_eng_tcm348-284556.pdf?ts=2262012 "General Principles for International Remittance Services," Committee on Payment and Settlement Systems, The World Bank, January 2007. Dilip Ratha, "Global Prospects for Migration and Remittances in 2012: Implications for Asia," The World Bank, ADBI-OECD Roundtable on Labor Migration in Asia, Jan. 18-20, 2012. "ICICI International Remittances Case Study, "Implementation of Mobile Money Transfer: ICT Report," BizClim, Restitution Workshop, June 2009. http://www.

cognizant reports


Mohammed El Qorchi, Samuel Munzele Maimbo and John F. Wilson, "Informal Funds Transfer Systems: An Analysis of the Informal Hawala System," The International Monetary Fund and The World Bank, March 24, 2003. "International Money Transfer — The New and the Constant: A Roundtable Discussion Report by Money Transfer International," Money Transfer International, 2010. Manuel Oroczo, "International Money Transfers: Issues and Development on IT Models." wsdocs/getdocument.aspx?docnum=1216924 Neil Daly, "International Remittance Service Providers: An Overview of Mobile International Remittance Service Provider Service Offerings," GSMA, May 2010. wp-content/uploads/2012/03/gsmaremittanceserviceproviderwhitepaper182.pdf Parmy Olson, "Investors Bet $1.3 Million on the Money-Transfer Guys Undercutting Banks," Forbes, April 19, 2012. "IOM and Remittances," IOM International Organization for Migration. iom_and_remittances.pdf Manuel Orozco, Elisabeth Burgess and Netta Ascoli, "Is There a Match Among Migrants, Remittances and Technology?" Inter-American Dialogue, Sept. 30, 2010. match%20in%20migrants%20remittances%20and%20technology%20MO_FINAL_11.4.101.pdf Ross Peat, "Klickex: Currency Exchange for Everyone," July 2011. newsitefiles/Ross%20Peat.pdf Peter Cohan, "m-Via to Disrupt Moneygram, Western Union," Forbes, June 12, 2012. petercohan/2012/06/21/m-via-to-disrupt-moneygram-western-union/2/ "Payments Systems Worldwide: A Snapshot," The World Bank, 2011. FINANCIALSECTOR/Resources/282044-1323805522895/121534_text_corrections_5-7.pdf Jennifer Windh, "Peer-to-Peer Payments: Surveying a Rapidly Changing Landscape," Federal Reserve Bank of Atlanta, Aug. 15, 2011. "It's No Accident," Security Alert, Western Union. Stanton R. Koppel, "The Dodd-Frank Act: Remittance Transfers," StayCurrent, Oct. 8, 2010. "The UK Remittance Market," UK Remittance Working Group. "Tipping Point for Outsourcing of Remittance Processing," First Data, 2008. thought-leadership/fd_tipping_point_outsourcing_remittance_processing_whitepaper.pdf Mick Weinstein, "TransferWise Closes $1.3M Seed Funding to Streamline Forex Payments," PandoDaily, April 17, 2012.

cognizant reports


Credits Author
Anand Chandramouli, Director, Cognizant Research Center

Subject Matter Expert
Rahul Kapur, Senior Director, Cognizant Business Consulting, Banking, Cards and Payments Practice

Divya Sekar, Cognizant Research Center Priyam Dutta, Cognizant Research Center

Harleen Bhatia, Creative Director Suresh Sambandhan, Designer

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 150,400 employees as of September 30, 2012, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at for more information.

World Headquarters
500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email:

European Headquarters
1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 207 297 7600 Fax: +44 (0) 207 121 0102 Email:

India Operations Headquarters
#5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email:

© Copyright 2012, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.

Sign up to vote on this title
UsefulNot useful