A recently released report alleges that Western Union and Moneygram are charging a "super tax" on remittances to Africa. How could Diaspora Banking change the market?
Western Union and Moneygram, the world's leading money transfer companies, have been accused of charging a premium of up to 12 per cent on remittances into Africa, according to a recently released report by UK-based think tank The Overseas Development Institute (ODI). Yet the banks in Africa appear to charge even higher.
The ODI report claimed that the two money transfer operators' (MTOs) excessive charges cost African migrants approximately $1.8 billion annually, a significant leap from global rates.
"Migrants sending $200 home can expect to pay 12 per cent in charges, which is almost double the global average. While the governments of the G8 and the G20 have pledged to reduce charges to five per cent, there is no evidence of any decline in the fees incurred by Africa's diaspora. There is no justification for the high charges incurred by African migrants," the ODI said.
While it is difficult to pin down just how many Africans live outside their countries of origin, an assortment of statistics can paint a picture. The World Bank said in 2011 that the number of Africans that have migrated outside their country of origin in recent decades is "conservatively" estimated to be more than 30 million (according to the United Nations, some 232 million international migrants are living in the world today) and has grown more than any other migrant community at 53 per cent in the past ten years. The OECD estimated that one in every nine persons born in Africa with a tertiary diploma lived in an OECD country in 2010-2011. At the same time, the highest share of low educated migrants in the same period was recorded for migrants born in Sao TomÉ and Principe (73 per cent), Cape Verde (68 per cent), Mali (67 per cent) and Guinea-Bissau (66 per cent).
The latest World Bank figures show that remittances from migrants are expected to rise to $436 billion this year, more than three times what poor countries receive in overseas aid. That number is expected to rise to $516 billion in 2016.
Nigeria alone accounted for about $21 billion, or 65.6 per cent of flows into the region, and is forecasted to bring in $41 billion of remittances in 2016. The booming activity has led many banks in the region to establish Diaspora Banking services, including bonds, investments and remittance offerings.
However according to the ODI, banks are part of the price problem. While the ODI does not allege any sort of rate fixing between the two transfer companies, it notes that each one's "exclusivity agreements" with banks and remittance agents in Africa have been one factor in the charges hike.
"Governments and regulatory authorities in sending countries should do far more to promote competition and encourage innovation," The ODI said. "In an age of mobile banking, internet transfers and rapid technological innovation, no region should be paying charges at the levels reported for Africa."
Yet remittance corridors within Africa actually charge the most excessive prices. The ODI reports that migrant workers from Mozambique sending money home from South Africa, or Ghanaians remitting from Nigeria, can face charges of more than 20 per cent.
"In several African countries, banks are the only agency authorised to conduct money-transfer operations, and typically partner with large MTOs," the report noted. In countries where only banks are authorised to pay remittances, such as South Africa, Mozambique and Lesotho, half are agents of Western Union and MoneyGram. According to The International Fund for Agricultural Development, banks in partnership with Western Union service about 41 per cent of payments and 65 per cent of all pay-out location. The ODI says that there are 29 countries in Africa where banks account for over half of the in-bound remittance payments; in Ethiopia, Niger and Nigeria the share is more than 80 per cent.
A home for innovation: Diaspora Banking
All this begs the question: what do Diaspora Banking products at commercial banks provide? The service has risen over the past few years, and is already offered through many Sub Saharan African banks attempting to reach citizens scattered throughout the world.
Yet ODI reports that all of the world's top ten remittance-charging corridors are in Sub Saharan Africa, with South Africa and Tanzania "figuring in all but one of these corridors." Migrants from Malawi, Mozambique and Zimbabwe employed in South Africa, and Ugandans remitting money home from Kenya face charges well over 20 per cent. In Ghana, Nigerian workers can expect to pay 39 per cent in charges.
"The very high charges levied on remittance corridors to and within Africa reflect the central role of banks – the most costly transfer vehicle," said the ODI. Why are remittance charges for Africa so high? The ODI says it's difficult to answer that question, largely due to the "opaque nature of commercial operations." For MTOs, cost structures and foreign currency exchange fees, including currency volatility measures, are not openly provided and no MTO has disclosed the terms of their commercial agreements with African banks.
"While there is considerable variation across remittance corridors, several inter-connected factors combine to maintain Africa's high charge structure. These include a lack of transparency on the part of RSPs, limited competition, regulatory practices that restrict market entry and – critically – a lack of financial inclusion in Africa itself."
The key problem comes down to competition. A 2007 survey in Nigeria found that 21 out of 25 banks operating in the country had exclusive agreements with either Western Union or MoneyGram. The stifled market caused the Nigerian Central Bank to rule the next year that "exclusivity clauses aimed at protecting the interest of the International Money Transfer Operators constitute a restraint on competition and unnecessarily increase the cost of money transfer services to the users."
Ghana and Senegal have followed suit and adopted rules prohibiting exclusivity, though in Ghana and Nigeria some of these exclusivity agreements do still persist. Tunisia has revoked all exclusivity clauses and made it law for banks to offer services from more than one MTO.
In countries where MoneyGram and Western Union dominate on the ground services, it's difficult for banks to cut these agreements and still offer the same type of presence and reach. The ODI reports that in Africa there are 22 countries in which either Western Union or MoneyGram alone accounts for more than half of the total of remittance market share, and another 11 countries where the two together represent over half of locations. In Gambia alone, the two companies account for 96 per cent market share.
Remittance payments fall directly into the scope of Diaspora Banking services, and some banks are rising to meet the challenges. Equity Bank in Kenya offers remittance payments through the usual MTOs as well as PayPal, Visa Personal Payments (a service designed for direct payments from card to card) and Equity Direct, a UK-exclusive deal with VFX financial PLC for direct transfers. The end result is that Equity Bank users enjoy affordable transfer rates while Equity Bank continues to pick up a healthy profit margin.
I&M Bank Limited also offers remittance payments through both the typical channels and alternate options such as I&M Webpay, which charges a fixed fee of two per cent per transfer, and "Brisk Transfers" with "low and reasonable charges" to account holders in Rwanda, Tanzania and Kenya.
In the Western region, Nigeria-based Fidelity Bank's Diaspora services also offer multiple channels. "Fidelity operates a supermarket model offering all the major players and channels of remittance from all parts of the world to Nigeria," Desmond Ohamma, Head of Diaspora Banking for Fidelity Bank, told Banker Africa. "These include Western Union, MoneyGram, RIA and Fidelity Bank's flagship money transfer product Quickpay." Fidelity Diaspora also offers bank accounts in dollars, euros, pounds and naira to minimise currency exchange fees, and as with many other Diaspora offerings, account holders can also use internet banking to transfer funds to other bank accounts within Nigeria. "For us the emphasis is on migrating customers to self-service platforms," Ohamma said.
Yet so far, very few banks offering Diaspora products seem to offer extensive MTO or direct transfer options. Despite the promise of fixed fees and free transfer within the bank, the real issue of migrant worker remittances from other countries continues to be a missed opportunity for innovation.
What is the incentive for banks?
The mobile banking industry has stepped up to offer incredibly simple person-to-person transfers, but mobile money has its limitations when it comes to formal savings accounts, loans, mortgages and other banking services. Diaspora Banking offers these services, yet often alongside hefty fees.
The ODI estimates that if remittance fees to Africa were reduced to the global average, transfers would increase by $85 million, rising to $225 million if charges were lowered to five per cent of payments.
Governments have already seen the massive potential in development financing drawn from Diaspora citizens. "Diaspora savings represent another potential source of development financing. With governments across Africa seeking long-term, affordable financing for infrastructure, these savings are an attractive proposition. Several have issued diaspora bonds to supplement aid, grants and sovereign debt," The ODI said.
"Financial advisory services is one area that is key concern to [migrants abroad] and they value it a lot because is vital to decisions they make back home," Ohamma said. "So as migrants in foreign countries, they don't lose the focus to improve the life of people and the communities they left behind. The local financial needs include supporting their family members and dependents back home, building savings, housing projects and real estate investments, supporting development programmes, and making financial investments for higher returns in Money Market and Capital market investments."
In March this year, Nigeria announced a bond issue of up to $300 million in cooperation with a number of international banks and registered with the US Securities and Exchange Commission. Observers predict it will be oversubscribed and the ODI claims that "The Government of Nigeria stands to secure financing at levels below the rate available on sovereign debt markets (around eight to nine per cent) and the diaspora would have access to an asset generating higher returns than the close-to-zero real interest on bank deposits in the US."
"Remittances are not just an economic transfer. They represent a social link between people," The ODI said. "Migrants around the world have created 'home town associations' through which they retain links and provide support to communities."
Moneygram has vehemently denied ODI's allegations. A spokesperson for the company said that migrants remitting from the UK to an African country could expect to pay a charge of 5.1 per cent against a global average of 4.9 per cent. "We don't recognise those numbers at all. There is no Africa premium," the spokesperson said of ODI's report.
Western Union said in a statement that "The average global revenue earned by Western Union from transferring money (including fee and FX) is five to six per cent of the amount being sent. However, our pricing varies between countries depending on a number of factors such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility, and other market efficiencies. These factors can impact the fees and foreign exchange rates offered."
Kevin Watkins, ODI director, said "The $1.8 billion lost through the super tax could put 14 million children in school, deliver clean water to 21 million and sanitation to eight million people."
The report called for an investigation into the global money transfer firms by anti-trust bodies in the US and the UK, two of the largest remittance senders to Africa. While it is careful to note it is not claiming price collusion, it says that the "stifling" of competition by the two MTO powerhouses has removes a need for competitive rates.
During a talk given on the report on April 16, Dilip Ratha, Head of the World Bank Migration and Remittances Unit, said, "If you are waiting for the banks to cut the costs of remittances, you're barking up the wrong tree."