The objective of the report is to assess whether the appropriate application of ‘new’ technologies could be leveraged by donors and other development agencies to increase formal remittance flows into Africa and/or reduce the cost of sending money home.
Fragile and conflict-affected states (FCAS) are of particular interest given the importance of remittances to livelihoods and post-conflict development, as well as the exacerbated challenges that are often faced in these jurisdictions.
The objective of the report is to assess whether the appropriate application of ‘new’ technologies could be leveraged by donors and other development agencies to increase formal remittance flows into Africa and/or reduce the cost of sending money home.
Fragile and conflict-affected states (FCAS) are of particular interest given the importance of remittances to livelihoods and post-conflict development, as well as the exacerbated challenges that are often faced in these jurisdictions.
The small bundles of cash loved ones send home might not seem much, but their impact on lives and economies is significant. For families, these regular lifelines help pay for health, education and living expenses. And, as more and more people go abroad to work, remittances have grown to become a significant part of the sub-Saharan African economy, making up 4.3 per cent of the continent’s gross domestic product. To put this in money terms, in 2017, sub-Saharan Africa received $42 billion in foreign direct investment and $25 billion in aid, compared to $42 billion in remittances.
With most remittances being sent from the UK in cash there is a strong drive to use technology to address some of the main challenges. This makes sense, with many online remittance providers offering transparency, security and convenience at significantly lower prices.
Recent focus group research, ‘Moving Money and Mindsets’, indicated that in 2016, 90 per cent of remittances sent by the research participants from the UK were being paid in cash at an agent. Two years later, half of the participants had moved to an online remittance service. Whilst not nationally representative, the groups demonstrate that people are changing the way they send cash home.
This is encouraging. Yet, despite the pricing and efficiency benefits, there are still challenges that digital money transfer operators need to overcome such as: A lack of understanding, problems with registering for a service, scepticism about online services and a lack of personal interaction with the sender. All of these issues could be summed up by one word: Trust. Trusted cash pay-out networks, trusted brands and trusted service. It’s human nature: When you are sending your hard-earned cash – trust matters.
Many traditional cash-based services that people use to send money home are known and trusted; they are established and have a track-record of delivering. Building trust takes sustained, consistent effort over a long period of time. It means getting it right every time.
Moving people to use digital services is not purely down to the actions of money transfer services. Authorities have responsibilities too. An important step is to provide some of the basic infrastructure that is still lacking in some countries. When sending money to countries like the Democratic Republic of the Congo and Sierra Leone, people use cash as there are limited digital alternatives for receiving remittances, especially in rural areas. Most people in these countries still don’t have access to bank accounts or mobile money.
But providing basic infrastructure is not the only step: We also need to build trust in the system. A good example of how to do this is M-pesa in Kenya. Part of M-pesa’s success can be attributed to the focus on gaining the trust of consumers from day one, beginning with domestic transactions and now used for receipt of international remittances. Leveraging the Safaricom brand, training agents to provide a consistent customer experience, and ensuring there was transparency around transactions gave people confidence to try the system. Today it is hard to remember how we transacted without it.
Through investments in marketing and infrastructure, the same could be the case for online remittances. We have the tools to help make sending money home cheaper and easier, now is the time to invest in building trust to get people to use them. One approach could be identifying a group of influencers within migrant circles to communicate the benefits – convenience, safety, and cost – of using online services.
Just as M-pesa transformed the way we transact; digital tools have the potential to change the way people send money home. Building trust is mission critical when it comes to unlocking the full potential of the remittance economy. A penny saved is a penny earned, by making it cheaper to send money home we can make the impact of the penny go further.
originally published in The East African, 1 Jun 2019
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In 2015, the UK government committed to the UN’s Sustainable Development Goal (SDG 10.7c), which states that the global average cost of remittances should be no more than 3% of the send amount by 2030, with no single corridor being more than 5%.
With its goal to reduce costs and scale formal flows, the UK Department for International Development (DFID) and its Africa-based partner, FSD Africa, are interested in exploring whether there are ways of accelerating the migration of remittance senders from cash to digital channels.
FSD Africa and DMA Global’s research across 7 African diaspora communities in London aims to understand the reasons behind the existing preference for cash-based remittances in the UK-based Africa diaspora community and the main motivators that could – and are – being used for a switch to digital services.
Moving Money and Mindsets finds that the use of online remittance services has surged in recent years, with roughly half of the FGD participants now using formse participants, for the most part, report having switched to using online services within the last one to two years.
The FGDs suggest that the ‘stickiness of cash’ with respect to sending remittances, varies significantly between diaspora communities. Cash was found to be most ‘sticky’ amongst diaspora from DRC, Zimbabwe and Sierra Leone. These are also the ‘receive-countries’ with the least-developed domestic payment systems. A developed domestic payment system is essential for the growth of international digital remittance services. Conversely, the use of online services was most common (and cash least ‘sticky’) among the Tanzanian, Ghanaian and Kenyan participants. These are also the receive-countries with the more developed domes
Remittances are a pivotal, though often unseen, driver of economic growth across Africa, in particular having a positive pro-poor effect on health, education and human capital development. The continent’s remittance economy has grown quietly and organically, taking up an essential role not just as a safety net, but also as a catalyst for entrepreneurship. Why is this so important? Because it changes how we should think about remittances: these flows are international development finance by another name, with the potential to be highly targeted, efficient and effective.
Remittances are an efficient, impactful and resilient form of development capital. FSD Africa has supported research by Cenfri which shows that the value of remittances in sub-Saharan Africa (SSA) is almost equal to that of “traditional” foreign capital flows such as overseas development assistance (ODA) and foreign direct investment (FDI). And their impact is potentially greater – especially in areas like health and education. In 2015, the region received USD39 billion in FDI and USD37.1 billion in ODA, compared to USD34.6 billion in remittances. However, between 2012 and 2015, formal flows of remittances grew at a higher growth rate than both FDI and ODA. If we isolate the UK as a source of capital, between 2015 and 2016 remittance flows actually overtook the value of ODA and FDI combined. Cenfri’s most recent case study, Remittances in Uganda, tells us that remittances from the UK to Uganda amounted to USD275 million annually – more than double the amount of foreign aid from the UK.
Yet the cost to send money home remains high. The average cost of remittances to SSA is over 9% of the value of the transaction, compared to a global average of 7% (we dig deeper into this in our infographic on the cost of remitting money from the UK). We want to bring these costs down. Signatories to the UN’s Sustainable Development Goals have pledged to reduce the average transaction costs of remittances to less than 3% of the amount transferred by 2030, with no remittance corridor costing more than 5%.
Our new research, Moving Money and Mindsets, shows an exciting new trend towards transferring money online. In 2016, 90% of remittances from the UK were being paid in cash at an agent. Fast forward two years, and we found that roughly half of focus group members now use online services – a significant and rapid switch in behaviour. Online remittances providers – like WorldRemit, Wave and TransferWise – not only provide transparency, security and convenience but are also significantly cheaper. It costs almost £16 to send £120 from the UK to Ethiopia in cash using an agent. The same amount costs only £6 to send online. Switching online clearly makes economic sense, so why stick to cash?
Some remittance markets are simply “stickier” than others. In countries with underdeveloped payment systems – like Zimbabwe, Sierra Leone and the DRC – cash is still king. For example, in the DRC, less than 10% of people have a bank account, and mobile money is virtually non-existent. Other barriers to switching to online services include the registration process, perceived security issues and technological barriers for older people. The solutions range from relatively easy quick fixes like simplifying the registration process and marketing online services to customers to longer-term interventions designed to develop digital payment infrastructures in Africa. Our Risk, Remittances and Integrity (RRI) Programme is working at the individual, regional and global levels to remove these barriers to switching to online, and to bring the transfer costs down. Cash may still be king in some countries in Africa, but cash is costly and with digital alternatives on the rise, its reign may be nearing its end.
Read FSD Africa’s new research, “Moving Money and Mindsets” here.
If you’ve ever been to Africa (or even the United States), chances are that you’ve had your finger prints taken on a scanner on the desk at immigration. If you’ve tried to skip the queue at Heathrow, you’ve probably tried to use the facial recognition scanners, which always seem to have a shorter line. None of us try to travel across borders without our passports but we probably don’t give the biometric databases they connect to a second thought.
But one of the biggest challenges in sending and receiving money in developing countries stems from the need to be able to identify yourself at both ends of the transaction. The world over, millions of people do not possess any form of formal identification. But biometric technology could be an important part of the solution.
Banks, money transfer operators and other, all need to comply with so called ‘know-your-customer’ regulations. But the World Bankestimates that more than half the people in sub-Saharan Africa have no official identification record. That’s more than half a billion people. This issue is key to the broader agenda of financial exclusion since it prevents an estimated 375 million adults around the world from obtaining a bank account.
And it is not just banks but prepaid SIM cards in many countries also require proof of identity to register. So people without ID fall at the first hurdle of being eligible for mobile money wallets. Using biometric technology to identify people and assign them an identity for life, is key to improving financial inclusion; improving access to bank accounts and mobile wallets, and the uptake and use of digital financial services. It is literally the first step on the journey to formal financial inclusion.
Biometric-based ID cards can be used for multiple purposes apart from identifying people who are sending and receiving money across international borders. They can also enable the distribution of government services and social security benefits, and act as an electronic passport, voter identity document, and offer identification for healthcare and welfare service distribution. As a result, various governments, including Nigeria, Ghana, Kenya, Egypt, DRC and Malawi in Africa, are recognising the value of electronic IDs that utilise biometric technology. Investment has begun and the benefits being seen.
When it comes to moving money, the widespread lack of formalised ID in sub-Saharan Africa, combined with the largely cash-based economies makes the traceability of funds difficult and makes financial service providers nervous. Each party involved in processing a money transfer from the UK into Africa is accountable for ensuring that funds not are being used for money laundering or terrorist financing. And it is this perceived risk that is at the root of many UK banks’ decision to ‘de-risk’ money transfer operators. In fragile and conflict affected states, meeting know-your-customer regulations can be particularly difficult, especially where there are international sanctions in place and the risk is higher due to known or suspected terrorist activity.
A national electronic ID scheme, with biometrics used to authenticate and verify money transfer beneficiaries, could help to sustain formal remittance services to these markets. The difficulty of cheating or defrauding such a system should help reassure money transfer operators and in turn, international banks, that the recipient is who they claim to be. This is of crucial importance in economies like Somalia, Eritrea, Liberia, Libya and the Democratic Republic of Congo, where international remittances make up between a fifth and half of the entire national GDP.
In a few countries, biometric electronic IDs are actually being directly linked to digital payment instruments (such as a bank account, credit or debit card, or mobile wallet). The Aadhaarscheme in India is undoubtedly the largest and most advanced. By April 2016 the Indian government had captured the fingerprints and iris scans of 1 billion people (93% of the population) which have been stored on an open platform so that they can be seeded to bank accounts and digital payment instruments. In Africa, the National Identity Management Commission in Nigeria has also started its electronic ID scheme, collecting ten fingerprints, a facial image and a digital signature which are stored in a central database. The new electronic ID cards offer MasterCard payment functionality to help drive financial inclusion.
It will, however, be some time before a biometric electronic ID system can become reality for everyone across Africa. Its roll out requires significant commitment and coordination, both human and financial, at a national level, and then there is still the thorny question as to who owns the data and how it will be used.
Biometric electronic identification technology will certainly have a key role to play in improving access to, and the security of, remittances into Africa. Biometric ID will also have a key role to play in moving remittances from cash to digital, which ultimately, is the only way to significantly reduce the cost of sending money.
A new report on remittances from the UK to Africa was published in June 2017 by Financial Sector Deepening Africa. For more details see:https://fsdafrica.org/uktoafricaremittances/
