On the 1st of February I wrote an article which outlined the shutdown of traditional remittance services, spurred on by stricter know your customer regulations. These regulations forced banks, who provided the necessary bank accounts to remittance agencies, to know not only the identities of these remittance agencies, but also the customers that they dealt with. This has caused banks such as Westpac and ANZ to cease dealing with remittance agencies in the Pacific. The increase in regulations were motivated by increased fears and evidence of terrorism funding through small remittance agencies. The full article can be found at http://lucaswatt.com/fears-terrorism-funding-shutting-remittance-sector-many-rely-upon/ . This initial article however has only raised more questions in terms of how this affects the remittance sector. The biggest of these is, who or what will fill the void of the now extinct small remittance agencies? Will the void be filled by large remittance agencies such as Western Union or Money Gram? What is the impact of new regulations on these remittance giants? What are the other methods of remitting money without going through a remittance agency? Will mobile remittance services fill the void? Are these equally regulated by the new remittance regulations? These are the questions I investigate in this article.
In the press, opinion suggests that remittance giants Western Union and Moneygram will be relatively unaffected by the new regulations. Only small remittance agencies seem to be cut of the loop by financial institutions and the new remittance regulations. This initially led me to question whether Western Union and Moneygram were perhaps operating as “banks” that can store sender’s money in an internal organisational bank account before being processed to the receiver. This would allow them the access to a bank account without the need of a partner financial institution, leaving them unaffected by the shutdown of remittance accounts by banks. However, with some research it was found that Western Union and Moneygram are not legally classified as “Banks” (however there is evidence that Moneygram has tried to legally classify itself as a bank with no success). As a result they cannot hold an internal organisational bank account where the remittances of senders can be stored before being processed to the receiver. They therefore must have an external registered bank such as Westpac or ANZ to hold a bank account for them to process their transactions. The question therefore needs to be asked why banks still provide bank accounts to these remittance giants and not to small remittance agencies. By all indication, these big remittance agencies do already require their customers to diligently provide identification at their outlets and post offices where transfers can be made. Efficient systems must be in place where customer identification details are passed on to their partner banks. The economies of scale between these large institutions must ensure that it still profitable for the partner bank to provide them such services. A certain degree of long established institutional trust may also exist. Small remittance agencies on the other hand may not have the number or size of transactions for banks to provide such services in a profitable manner. Their institutional trust may also not be well established with banks. The relative non-effect and continued strength of large remittance agencies has led some to believe that they will stumble into windfall profits as their competition is decimated. There is also concerns that the lack of competition will allow them to increase fee charges to the detriment of their customers.
This is unlikely to occur as there are increasingly new methods of sending remittances that bypass the financial sector and regulations. In my previous article I did highlight the inform remittance sector where they can be delivered personally or by a known intermediary. There is also the “hawala system” whereby an informal intermediary is paid to deliver remittances. This is a system which I envision to be similar to the title picture of this article, wads of cash, in-depth conversations, and mobiles in hands. However there are new innovative systems emerging. One of these is where individuals in developed countries purchase goods and services for relatives at online stores. These include supermarkets or appliance stores. The sender either arranges delivery to the receiver’s house, or the receiver can go pick it up with identification. Because this form of remittance service delivers common goods, and money is received by a known retailer, it is not regulated with the same scrutiny by the financial sector in the same manner as cash remittances. Another method of sending money that bypasses financial regulation is sending money to a registered local organisation that involves itself in local projects such as the building of schools or infrastructure. This project does not benefit the households that migrants have left behind directly, but the wider community which they are a part of. Because money is not directly sent to an unknown entity but rather to a registered and known organisation these transactions are straight forward to process.
Another innovative way of sending money home is through the use of mobile phones. This can firstly be done by purchasing credit for someone’s mobile back home. This is restricted to phone related uses, therefore reducing its flexibility to be used for the variety of receiver’s needs/wants. However, sometimes the very purpose of such mobile top ups is to ensure that migrants and those that remain in the home country are able to stay in contact. Secondly, mobile remittances are also being facilitated by a variety of start-up companies which allow migrants to send electronic money from their mobile phone to another’s mobile phone back home. The difference here is that the electronic cash received via the mobile can be transformed into physical cash which can be used for whatever the receiver desires. The entire process entails; the sender turning physical cash into electronic cash which is then stored on their mobile, sending the electronic cash via mobile to the receiver’s mobile, the receiver then turning this electronic cash into physical cash again via an agent. Agents are located at small kiosks (as shown below), or the stores of telecommunication providers. The users do not have to come into contact with banks. This type of service is being pursued in the Pacific by a New Zealand based company called Klickex which has partnered with the telecommunication company Digicel Pacific. The amount of remittances sent from developed countries in the region, including New Zealand and Australia, to island states such as Tonga, Samoa, and Fiji are substantial due to large migration flows between these countries. Partnerships such as Klickex-Digicel have great potential for growth and use. With the shutdown of small remittance agencies, perhaps mobile remittance services will increase in prominence.
A fairly typical mobile money agent kiosk
The question that needs to be asked is, how are the regulatory requirements for mobile remittance companies such as the Kilckex-Digicel partnership different to the small remittance agencies? The answer is that they are no different. Firstly, a bank account still needs to be held to process the transactions. The transaction costs for banks in carrying out all the regulatory requirements are therefore equally cumbersome and expensive. As a result we can expect the exclusive participation of big players that have economies of scale and institutional trust such as Digicel and Vodafone, much like Western Union and Moneygram. The presence of small mobile remittance companies is unlikely to emerge. Secondly, know your customer regulations still need to be adhered to. In the mobile remittance system, when the sender signs up to the service, identification is required and this is attached to their mobile number. Any transaction that is processed through that number is therefore associated with their identity. The receiver also must have a Klickex account, or if they don’t, they must show their identity to the agent when collecting the money off their mobile. At first glance such a system seems fairly straight forward with the appropriate identity checks. However, it seems that money could be sent to the mobile of an “innocent” party with contacts that partake in terrorism. The physical cash that this innocent party withdraws could then be transferred to this individual associated with terrorism. The security of the system therefore seems as dubious, (if not more!), as the services provided by small remittance agencies, or by any remittance agency for that matter.
So what is the outcome? Large remittance agencies such Western Union and Moneygram, along with mobile remittance businesses backed by large telecommunication companies such as the Klickex-Digicel partnership, will dominate the market. These agencies will be served by banks, and they will fulfil the regulatory requirements. Their size and institutional trust will ensure that the service is profitable with a more or less safe outcome for the institutions and transactors involved. Small remittance agencies on the other hand will cease to exist. This may have adverse effects as they may have served isolated areas or provided services or a sense of relatedness to customers that big agencies are not able to provide. Informal and innovative remittance services may fill the void, such as mobile remittances or buying food from supermarkets online for relatives back home. However more evidence is required in assessing what, to what extent, or if this void will be filled.
So stay tuned!