Remittances to Latin America and the Caribbean set a record in 2015 with $68.3 billion—higher than the previous peak of $64.5 billion, set back in 2008 before the recession.The figures are from Inter-American Dialogue, which analyzed data from more than 20 central banks in Latin America. Among the top Latin American countries with growth in remittances in 2015 are:
- Guatemala: 15% increase versus 2014 to reach $6.3 billion
- Colombia: 13.3% increase to reach $4.64 billion
- Honduras: 10.9% growth to reach $3.72 billion
- Dominican Republic: 8.3% growth to reach $4.9 billion
- Cuba: 5% growth to $1.3 billion
- Mexico: 4.8% to $24.7 billion
- Nicaragua: 4.8% growth to $1.1 billion
- Peru: 3.8% growth to $2.7 billion
- El Salvador: 3% growth to reach $4.28 billion
- Bolivia: 2.8% growth to reach $1.1 billion
Within the US, increased migration flows, especially from Central America, climbing wages of remitters and declining sending fees all contributed to positive growth in 2015. The US-Mexico corridor is the bread and butter of LatAm remittance providers, alone representing 40%+ of all money sent to Latin America.
Crowded Marketplace with Significant Competition
The remittance space has more than 15 providers serving just the US-Mexico corridor. Most providers have vast brick and mortar infrastructure across the Americas to enable cash-in and cash-out transactions; Western Union has 45,000 agent locations in the US and 31,000 in Latin America. Arguably the number-two provider, Wells Fargo, is a close second with 9,000 stores in the US and 40,000+ cash out agents in LatAm. Extensive retail networks are necessary, as most migrant remitters prefer to pay in cash, as opposed to online, using a computer or mobile device from a bank account or payment card. There are several reasons for this:
- Migrants in the US often have limited access to the Internet
- Few also have the resources, documentation and wherewithal to open a bank account
- Fear of deportation motivates protecting anonymity
- Trust between remitters and in-person agents promotes customer loyalty
The Looming Online Remittance Threat
While retail remittance providers are well-entrenched, online providers are starting to challenge them. On one hand, the online remittance channel represents less than 10% of total volume sent to Latin America…but it’s encroaching on a space traditionally owned by brick and mortar operators at an estimated pace of 10% a year.
The much-celebrated success of low cost money sender Xoom, present in the region since 2005, has sparked three trends:
- Market incumbents are forced to develop an online option to remain competitive
- Additional online-only providers have come to market
- Prices have dropped
These days, nearly all money transfer operators (MTOs) with service to Latin America have a digital offering. Wells Fargo’s ExpressSend launched in 2007, and Western Union premiered its online option in 2011. Other online-only providers Remitly and Transferwise began offering service in Latin America in 2014.
However, traditional MTOs are still feeling the effects of online remitters. For example, Western Union’s fees dropped by more than 50% between 2001 and 2011, and margins fell below 1% in 2013. Faced with a fierce price war, Western Union no longer relies on MTO fees as their main moneymaker; instead, they generate income from managing their foreign exchange spread. With more competition, cost pressure will increase and retail MTOs will migrate more and more customers to the digital channel, as they shrink their agent network. The 2015 acquisition of Xoom by PayPal indicates interest of big payment companies in this growing business and the opportunity to capitalize on the trend toward digitalization.
A Catch-22 Creates a Ceiling for Online Remittance
Despite these changes, there are some limiting factors for online remittance. Convenience is the big hook for online money sending. As remitters inch up into the middle class, gain access to technology and become more time-crunched, their preferences trend toward online. This may be especially true for remitters from South America, who are overall better educated and wealthier than Mexican and Central American migrants.
However, this ascent into the middle class takes time, and during the process migrants become settled, have children, lose ties with their homelands and eventually cease to be remittance customers. New migrants who take their place are poor, oftentimes undocumented and have the same barriers to online remittances as the generation of migrants before them. Remittances as a product necessarily targets low-income folks with low technological literacy; cash-in is a mainstay of the industry.
The Role of Services Adds Value to Online Remittance
This socioeconomic ceiling, however, doesn’t mean traditional MTOs are necessarily insulated from online encroachment. Online options aren’t just a way for migrants to send money—they can also use them to pay for services for their loved ones back home, i.e. paying for phone top-ups and utility bills. This segment is rapidly trending toward online, and more importantly, mobile, which now accounts for 60% of all online cross-border mobile top-ups to Latin America. Xoom—using technology furnished by white label provider TransferTo—enables mobile tops-ups in 15 Latin American markets. Some users prefer this option, since the funds go directly to pay for services chosen by the remitter, guaranteeing they go to good use, instead of being paid out in cash. Bill payments save friends and families in Latin America lengthy trips to the bank to pay for utilities—a serious time suck for people living in rural areas or underserved urban neighborhoods.
Growing at an estimated 10% annually, airtime remittances capitalize on the large opportunity to capture small value transfers cost-effectively—most such transfers are for values less than $20. TransferTo estimates the airtime top-up market from the US to Latin America to be an estimated $1.5 billion, a small share of all money transfers to the region. But operators believe airtime remittances effectively attract new customers to money sending services. By enabling secure, low-value transactions, remittances as a service help generate trust among new users, who may eventually migrate to a money-sending platform. And these transactions are gaining ever-increasing onlinepresence.
As such, traditional MTO players must plan accordingly.
Contact Americas Market Intelligence to gain even more insights into the remittance and payments market in Latin America—including affluent business or consumer cards, digital wallets, merchant POS systems and more.