Reducing Costs and Scaling up Service Provision for Remittance Flows from the UK to Africa
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REPORT | MARCH 2016 Reducing costs and scaling up service provision for remittance flows from the UK to Africa REDUCING POVERTY THROUGH FINANCIAL SECTOR DEVELOPMENT 1 Front cover image: Kristina Just © 2016 Layout and graphics: Kristina Just Reducing Costs and Scaling Up Service Provision for Remittance Flows from the UK to Africa Reducing costs and scaling up service provision for remittance flows from the UK to Africa REPORT | JUNE 2017 3 FSD Africa Report Executive Summary Over the past two decades, there has been a digital In the UK, low adoption of the digital, more revolution with pioneering developments in the form of competitively priced, and technologically sophisticated the internet, email and mobile phones transforming the remittance services among migrant communities way information is accessed and communication takes minimises potential benefits gained from new place. For many market analysts, cross-border payments technology based services. Understanding the reasons are the next frontier, where innovative technologies behind this observed stickiness of cash will be key to will challenge the expensive, clunky business models driving behavioural change amongst African remittance that currently exist. Mobile phone technology, mobile senders in the UK. money, digital currencies, distributed ledgers, electronic It is, however, in the African markets themselves, identification and cloud technology together have the especially in FCAS, that most of the challenges exist. capacity, for the first time, to technically make cross- The absence or weakness of: a digital payments border payments negligible in cost, instant, auditable infrastructure and acceptance network; a financially and accessible to everyone. included population; and/or an identification system, In light of this, the objective of the report is to means that many of the traditional digital remittance assess whether the appropriate application of ‘new’ services, such as terminating into a bank account or technologies could be leveraged by donors and other mobile wallet, are not always available. Invariably the development agencies to increase formal remittance more innovative financial technologies for cross-border flows into Africa and/or reduce the cost of sending payments, including those terminating into a range of money home.1 Fragile and conflict-affected states electronic wallets, using biometrics, cryptocurrencies or (FCAS) are of particular interest given the importance distributed ledger technology, are also not appropriate of remittances to livelihoods and post-conflict for much of Africa. development, as well as the exacerbated challenges that Building the capacity and readiness of the end- are often faced in these jurisdictions. user to access and adopt technology based solutions as well as creating an enabling environment to foster the Sender to Recipient - Digitising the development and roll out of such solutions, will be just Remittances Value Chain as important as the solutions themselves, if scale is to be achieved and the anticipated benefits realised. Surveying the ‘Financial Technology’ (FinTech) landscape, and assessing technologies in relation to Recommendations for Donor and the challenges facing Remittance Service Providers Development Agencies to Reduce Costs and in the UK to Africa corridors, has shown that in the Achieve Scale current operating environment, no single technology offers a complete solution. Instead, there are a range The report makes a series of recommendations to improve of technologies that are, or can be, applied to different the efficiency of the UK to Africa remittance market segments of the chain. Once scaled these technologies through the application of technologies; reducing costs have the potential to improve the efficiency of the and scaling the flow of formal funds. Recommendations market, drive down costs and promote formal flows. focus on the different segments of the remittance value The UK to Africa remittance market is heavily chain (the first, middle and last mile) and complement cash-based, both in the UK and in the African-receive one another in application (see Figure 1 and 2). They markets. Analysis suggests that digitisation of the value- are primarily targeted at donors and other development chain, from the sender in the UK to recipient in Africa, agencies. Of the original recommendations, five is the only mechanism through which technology can are prioritised. Improving financial inclusion and be used to drive down costs. Digitisation will not only developing electronic identification schemes linked to reduce the dependency on cash agents in both the digital payment instruments are viewed as key longer- send and receive country, who currently contribute to term objectives, however are not prioritised as they have sustaining high transaction fees, but will also address broader development agendas beyond remittances. many of the risks, barriers and costs associated with know-your-customer (KYC) and security. ¹ To be in line with the UN’s Sustainable Development Goal 10.7c. 4 Reducing Costs and Scaling Up Service Provision for Remittance Flows from the UK to Africa Figure ES-1: Summary of Priority Recommendations Cryptocurrency/distributed 1. understanding the stickiness Building agent 3. Pilot providing access to UK ledger thought leadership/tech- of cash in UK migrant distribution networks based RSPs into SADC’s RACH nical assistance to regulators, communities sandboxes and pilots in Africa FINANCIAL INCLUSION FIRST MILE MIDDLE MILE LAST MILE Funding Sending Sending Network/ Receiving Receiving Payment methods channel Provider Hub Provider Channel Methods 4. Support to expand the 5. Regulation for paying-out 2. Awareness and promoting Electronic ID linked to network of remittance hubs in remittances and agency non-cash transfers to Africa payment infrastructure FCAS in Africa banking Main recommendation Broader development agenda Non-priority/of interest Figure ES-2: Estimated Costs, Timeframes and Impact of Priority Recommendations 1. Understanding the stickiness of cash in UK migrant communities Costs £45-60k Timeframes 3 months Impact Low; information for programme design 2. Awareness and promoting non-cash transfers to Africa Costs £100k - £300k Timeframes 1-2 years Impact Medium; changing consumer behavior in the UK 3. Pilot providing access to UK-based RSPs to SADC Costs £100k - £200k Timeframes 1-2 years Impact Direct impact low; potential to change market high 4. Support to expand the network of remittance hubs in FCAS in Africa Costs £500k - £5mn Timeframes 1-5 years Impact Medium/high 5. Policy influencing for non-bank financial institutions to be able to pay-out remittances and agency banking regulation Costs Limited Timeframes 0-5 years Impact High Main Findings – For Impact, There Must Figure ES-3: Map of the Range of Technologies Sur- Be Scale veyed in Relation to the Remittances Value Chain A review of the FinTech landscape was conducted between April and August 2016. Figure 3 provides a visual overview of the primary areas of technologies assessed and a few of the service providers in each. FinTech providers, such as WorldRemit and Azimo, are offering a more streamlined money transfer service online, cutting out the need for an agent in the UK, and often in the receive market too, and utilising digital onboarding and identification checkers. This digitized process is reflected in their competitive pricing models. Source: Author’s own 5 FSD Africa Report Remittance processing hubs are also capitalising on environment. However, they are an exciting technology technological advancements, including application worth monitoring into the future. programming interface (API) technology (which A developed digital payment infrastructure and enables different systems to “talk” to each other) and acceptance network, together with a national biometric the increasing access to the internet, smart phones electronic identification (ID) scheme have the potential and alternative digital payment instruments across the to address many of the challenges in scaling formal globe. Remittance processing hubs, such as MasterCard remittances into Africa at competitive costs. However, both Send, MFS Africa, TerraPay, Ericcson, TransferTo, are financial inclusion and digital ID schemes also have much interconnecting payment providers (banks, mobile broader applications and benefits beyond remittances network operators, MTOs etc.) across multiple payment and achieving these goals involves long-term strategies channels (cards, banks, eWallets, mWallets and cash) that require significant resourcing and commitment. and across borders through one single connection and In 2014 in sub-Saharan Africa, as many as 55% of contract with service providers. As digital acceptance individuals did not have an official identification record.2 networks develop domestically across Africa, and in Globally, it is estimated that approximately 375 million FCASs, and usage becomes more widespread, hubs are in unbanked adults in developing countries (18%) are a prime position to open these networks to international prevented from obtaining an account because they lack remittance flows. At present, volumes through digital the necessary ID documentation.3 A biometric electronic MTOs and remittance processing hubs are still relatively ID linked to digital payments addresses key challenges small. As volumes increase it is anticipated that costs per around KYC and financial inclusion. Examples of this transaction will also be driven