Thirty years after being first introduced, digital remittances have failed to truly take off. 90 percent of remittances begin as cash and end as cash - even when banks are the facilitating intermediary. The struggle to move migrant families away from cash includes issues of trust, access and interoperability that normal fledgling mobile money operations also face, but it is compounded by the complex system of cross-border transfers it is operating in. Though insiders are skeptical of dramatic progress being made in the short-term, efforts by remittance providers in areas like customer engagement, regulatory lobbying and delivery mechanisms offer hope for consistent — if slow — movement towards remittances remaining in the digital ecosystem.

Surface Potential Meets Complex Woes

With global migration ever increasing, the remittance industry as a whole is booming, moving over USD$600 billion around the world per year, with an estimated USD$466 billion flowing to low and middle income countries alone. Digital remittances are indeed comprising a larger share of remittances overall year-after-year, tripling in amount from 2014 to 2017 as non-digital remittance values remained the same to encompass about 30 percent of the total value of remittances sent.

This should be expected considering digital remittances’ potential advantages over traditional forms in terms of speed and cost. As the World Bank described, a study of mobile money remittances by the GSMA found that mobile technology cuts remittance costs in half. Similarly, research from PayPal and Xoom showed that the average cost of sending a digital remittance is just 3.93 percent of its total, nearly half the cost of traditional remittances. A Boston Consulting Group study of five emerging markets estimated that mobile financial services produce a savings of 1 percent percent of income due to reduced travel and wait times.

Taking it a step further, as a source of income delivered to populations in developing countries often through bank branches, remittances are a logical tool for enabling financial access for the unbanked and underbanked. Research from the World Bank has shown that increased remittances through formal methods lead to enhanced formal deposits and credit. With government deposit insurance schemes providing a greater measure of safety, remitters send approximately 30 percent more through account-based transfers than informal channels outside traditional financial institutions

But the promise on paper has not reflected reality for migrants and their families back home. Most migrant workers receive payments in cash or check, in which case it is often easier to bring their cash to a nearby brick and mortar remittance provider like Western Union to be disbursed in cash abroad instead of converting it into digital currencies. On the receiving end, remittances frequently aren’t savings, but a main source of income for families back home. Basic expenses like food, water and electricity in many locales are cash only, maybe check. With little trust in banks, many families of migrant workers cash out immediately upon receiving remittances at formal institutions.

Another issue is that migrant workers disproportionately come from lower-income, less-educated populations equipped with little familiarity of digital options. The 10 percent of remittances kept in the digital ecosystem are largely concentrated in only two or three corridors, particularly between the U.S. and India, where many of the Indian remittance senders are educated workers in the tech sector already.

On the regulatory side of things, handling transactions across borders can add significant barriers. Differing banking laws and KYC rules internationally and domestically make it hard at times for recipients to deposit the money because of a lack of proper documentation. Often, migrant workers abroad are unable to perform transactions or pay bills directly back home, so they opt for informal methods instead, like through friends, family or the hawala network.

Nepal’s situation bares out the stubborn hurdles of trying to keep remittances in the digital ecosystem when they are sent to cash-based economies. Nepal’s economy is heavily reliant on remittances sent from abroad, with remittances accounting for 28 percent of the country’s GDP. Incentives by the Nepalese government to subsidize agent networks have led to the proliferation of over 50 licensed remittance companies. However, studies show such inflows have not led to socioeconomic development. The UNCDF contracted Amarante Consulting and partnered with Laxmi Bank to dig deeper into the remittance landscape in Nepal and develop new digital use cases for remittances.

As the UNCDF described, remittances in Nepal are largely used for consumption and repayment of loans. Little is put away into savings. Residing in a heavily cash-based society, remittance recipients in Nepal — disproportionately women, who often manage family microbusinesses while their husbands work abroad — don’t trust banks, which have historically interacted little with the community. Running the family business and taking care of the kids, they also don’t have time to wait in line sometimes for durations as long as 45 minutes at a branch. This is in contrast to informal savings cooperatives, which utilize door-to-door money collection methods.

“At the last mile, [remittances are] always cashed out. A lot of people are asking why, but it seems apparent that cash is really sticky in markets.... Nepal is a very community-driven society, and cash is all about a personal experience in exchanging money with another person.” Audrey Misquith, Senior Consultant at Amarante Consulting

Due to Nepalese banks’ traditional approach towards KYC efforts, migrant workers are also not able to access credit in Nepal because they aren’t physically present. Despite the Nepalese governments’ efforts to encourage financial inclusion of remittance recipients, banks often refuse to provide credit to remittance recipient families with no collateral — even though regulations mandate otherwise. This reality is unlikley to change without a mature compliance infrastructure put in place to enforce government rules.

Trailblazers Of Inclusion?

However, remittance providers and related fintech entities are exploring, in places like Nepal, multiple avenues for encouraging recipients to keep remittances in the digital ecosystem and possibly use them for other financial products. In March of this year, Laxmi Bank rolled out a “travelling tablet” program in Nepal, in which its employees visit families’ houses in remote locations and collect cash received through remittances, banking it directly into accounts using tablets. Laxmi Bank already uses tablets at their branches, but this approach mimics the door-to-door service that informal savings cooperatives employ.

While Nepal’s pre-existing agent network enables such efforts in even remote areas, obvious issues of scalability persist. Sustainability concerns aside, such programs have reaped rewards, as personal engagement with recipient families helps foster the relationships needed in order to ease cash-based communities into digital options. To better penetrate insular communities like the impoverished Dalit caste, Misquith says they are working with partners that have previous ties to such communities in order to gain insights on a communal level.

As is the case with mobile money, in Nepal and elsewhere, a critical component needed to keep remittances in digital form is the construction of a truly interoperable digital ecosystem, in this case starting from the point of payment abroad to paying expenses back home. Nepal is seeing an uptick in e-commerce activity, as well as the start of fintechs like F1Soft venturing to become super-platforms that can be entire digital ecosystems by themselves, which would greatly enhance remittance use cases.

The effort to keep remittances digitized has seen different ideas percolate in other regions. Some companies have focused on specific remittance channels with less constricting variables, like in the instance of Orange Money, which utilizes its already assembled network in West Africa and the common mobile network, currency and central bank shared among the three West African countries to avoid much of the usual complexities and take over their respective remittance corridors. On a policy level, countries like Malaysia and Rwanda license non-bank digital remittance providers, opening channels beyond the banks to enable greater access for remittance recipients.

But even among the banks themselves, positive steps are underway to enhance financial access and use cases for remittances. In Colombia, Bancolombia has for over a decade undertaken such efforts, creating an ecosystem of products and services that better include remittance receivers in financial services and push them towards savings and investment options. Like Laxmi Bank’s initiatives in Nepal, Bancolombia has focused on cultivating personal relationships with families of migrant workers. The bank deploys a team of sales people to customers waiting at branches to pick up cash transfers, informing them of the ease and cost-effectiveness (including avoiding certain taxes) of automatically depositing their remittances instead.

But beyond cultivating trust, Bancolombia has ventured to make financial products more accessible. On the regulatory side, Bancolombia successfully lobbied the government to allow Colombians abroad to put money into savings accounts back home. Further, Bancolombia changed its policies to allow a remittance recipient to add 50 percent of the average remittance income over the previous four months to total income when applying for loans or a credit card. To accommodate the financial situations of Colombian migrant workers, whose earnings are often not salaried and can be irregular and informal, Bancolombia customized its credit policy for Colombian migrants to better reflect their true financial portfolio.

With such policies in hand, Bancolombia set up an ecosystem to sell mortgages to Colombians abroad, with over 9,000 Colombians living abroad paying mortgages back home – often for houses they plan to move back to or rent out, according to Xavier Martin Palomas, a DFS expert that has previously done research and work for Bancolombia.

Allowing remittance benefactors to make such everyday payments back home directly, both through bank and government policy changes, can potentially unlock use cases and thus adoption of digitized end-to-end remittances. Bancolombia followed the path of many El Salvadorean banks opening branches in the U.S, though results have been uneven.

“Most of the major banks in El Salvador tried to open branches in America, but it was not profitable. It could not achieve sustainable economies of scale. It’s very difficult to make money doing just that.”Xavier Martin Palomas, Digital Frontier Institute

Though such banks tried to promote savings as well, it soon caught the ire of U.S. regulators, said Palomas.

Pushing Boundaries, Or Crossing Them?

On bolder fronts, blockchain and cryptocurrency endeavor to overhaul the remittance system and even remove banks - and corresponding international switches - from the equation completely. As blockchain technology is decentralized and has multiple nodes, it would greatly aid in data protection and transfer across different corridors. Back in Nepal, Amarante Consulting and the UNCDF are working to create a blockchain-enabled ecosystem in which information about migrant workers in the UAE, authentic and validated, can flow to Laxmi Bank, which can thus make an informed credit decision.

As a settlement mechanism for the complex system of international transactions among corresponding banks, many also see cryptocurrency like Bitcoin as a solution. By simply doing away with banks and only having to convert cash in and out of one single cryptocurrency, like Bitcoin, remittance transfers would in theory cost almost nothing and sidestep whatever issues any particular corridor faces. Its very nature makes it easy to scale.

Numerous regulatory issues persist in such domains, however, with many governments banning remittances made through Bitcoin. Skeptics like Palomas point out that the cost saved without corresponding bank transfers are actually minimal and outweighed by the need to convert cryptocurrency back into cash at the last mile. Of the several crypto remittance companies, essentially all have abandoned P2P transfers in their early years, unable to generate activity. But for some DFS experts working in the field, the potential for cryptocurrency as a settlement mechanism is impressive, and at the very least, blockchain technology can easily and securely transfer valuable information from abroad that may better legitimize migrants’ financial claims, like those in Nepal.

With all these possible solutions to its myriad of issues, is the digital remittance revolution upon us? Industry experts believe that growth will continue, but cash-outs will linger. Relaxed regulations allowing for the interoperability of payment systems from remitters to back home may unleash a preponderance of use cases, and tailoring financial products to better suit the finances and culture of remittance recipients will increase access and usage as well. But with cryptocurrency’s failure to match the hype, there is no real silver bullet to ending cash-outs. After all, the greatest hurdle of all — convincing migrants and their families from cash-based societies to abandon tradition — remains in many countries a long-term struggle, potentially taking decades, generations even.

In a place like Kenya with well-established agent networks and mobile money use, digitizing remittances can happen at an accelerated rate. But for recipient countries, that is the exception to the rule. Elsewhere, cultivating trust alongside an entire digitized ecosystem that draws in remittance recipients will take some time. If digital remittances are to spark some financial inclusion explosion, they need more than some flint to do it.

Image courtesy of R00DY

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