The Money Transfer Race for Africa

Money Transfer is on the rise in Africa, and there are several brands taking the lead in dominating territories and other market segments. Remittance flows to sub-Saharan Africa were recorded to be $48 billion in 2019, but the true total is likely to be significantly larger. Nigeria alone received about half of total remittance flows to sub-Saharan Africa.

The market leaders include Western Union, Mama Money, Mukuru, and many more.

The largest market by brand diversity and density of service providers is South Africa. In South Africa, the Competitive landscape of major players including ABSA Bank, Capitec Bank, Bidvest Bank, Standard Bank, Western Union, MoneyGram, Hello Paisa, Mama Money, Mukuru, Shoprite, SPAR, PEP Stores and Pick n Pay. 

Regionally, in Southern Africa, Remittances are an important source of income for households in the Southern African Development Community (SADC), as well as a crucial source of foreign exchange for countries in the region.

Despite the relatively large inflows of remittances to SADC, the cost of sending money to and within the region is significantly higher than other regions in the world.

Notwithstanding these challenges, several new and innovative MTOs are emerging in a few remittance corridors in SADC. Leveraging new technologies, MTOs have begun offering innovative mobile and online-based remittance services, placing competitive pressure on incumbent MTOs, particularly in the South Africa–Zimbabwe and South Africa–Lesotho remittance corridors. Scaling up these new services, encouraging widespread consumer uptake, and promoting an enabling environment for innovation will be crucial to further reducing the cost of remittances in the region. 

Drawing on World Bank assessments of remittance markets in several SADC countries, this report provides an overview of the key issues and challenges facing the remittances market in the region. Since 2011, the World Bank has undertaken remittance market assessments, based on the CPMIWorld Bank General Principles for International Remittance Services, in nine SADC countries: Lesotho, Madagascar, Malawi, Mozambique, Namibia, South Africa, Tanzania, Zambia, and Zimbabwe.

According to the World Bank, as at the end of the second quarter of 2016, the global average cost of USD200 remittances was 7.43% of the amount sent by remitting customers. For remittances sent from South Africa, the average cost was 16.71%; more than double the global average. Contrary to World Bank estimates, Genesis found that the total cost of remitting USD200 from South Africa to Zimbabwe, Mozambique and Lesotho is lower than the global average, with an average cost of 6.7% of the amount sent. Previous research has shown that the median value of cross-border remittances from South Africa is USD55, for which Genesis estimated the average cost to be 13.6% of the amount sent, as opposed to previous estimates of 13.3%. Genesis results generally support previous findings that the World Bank statistics over-estimate the average cost of transfers across these corridors.

There are primarily three types of cross-border remittance services providers (RSPs) in the South African market, namely: retail banks, Money Transfer Operators (MTOs) and authorised dealers with limited authority (ADLAs). There are 19 retail banks providing retail forex and transfer services. There are currently two MTOs operating in the market (Western Union and MoneyGram). Of the 16 licensed ADLAs, 14 provide remittance services, bringing the total provider pool for cross-border remittances to 35. 

The number of RSPs in South Africa is relatively higher than that of other African countries, where a few dominant players dominate the market share at the expense of smaller local MTOs. For example, in Malawi, the top four players account for 89% of the market share. In Zimbabwe, there are seven licensed MTOs authorised to operate within Zimbabwe.

According to the World Bank Group’s Migration and Remittances Fact-book 2016 report, an estimated USD1.26 billion was remitted from South Africa to sub-Saharan Africa in 2015; USD0.59 billion and USD0.67 billion were remitted from South Africa to Nigeria and India respectively with average costs at 9.8% and 13.

According to a Finmark Trust research, in Africa, there are currently four distinctive business models operating in the Remittances market – the ADLA model, the MTO model, the Bank model, and the Bank-Retailer partnership model. Providers operating each of these models all participate differently in the value chain of a remittance transaction: origination, sending money, clearing and settlement, and distribution. Furthermore, the reliance on different channels and how each provider accesses other parts of the value chain, whether internally, or through third-party relationships, determines that model’s profitability.

In terms of pricing, the ADLA, bank-retailer partnership and bank digital models are the most competitive. In terms of operating costs, these models also appear to be the most cost-effective. The bank traditional model is both the costliest to operate, together with the MTO model, and the least competitive in terms of pricing. MTOs appear to compete more effectively with ADLAs for higher value transfers, given their relatively fixed pricing compared to ADLAs’ variable pricing models.

The structure of the foreign exchange market is dominated by authorised dealers, which have significant pricing power. This study was unable to access any data that shows the rate at which spreads change according to the size of the dealers’ business customers. However, this study surfaced anecdotal evidence from the mystery shopping exercise which suggests that ADLAs’ spreads are relatively narrow relative to the interbank rate.

The structure of the formal cross-border remittance market is dominated by two business models (branch-based and agent-led). This is due to the requirements for KYC, which necessitate that the initial on-boarding of customers be done through face-to-face interaction, and the predominance of cash-based transfers. As a result, there is a limited market for purely digital models which have been shown to significantly lower the cost associated with transfers in other markets.

The study found that it is still difficult to find reliable data on the source of remittance payments. The current study highlighted the difficulties in obtaining data from financial institutions about their cross-border remittance clients, as well as difficulties in accessing information about cross-border transfers.

Interestingly however, the study did find that there are substantial differences between this type of retail payment and traditional formal banking transactions. For instance, the average transaction value was approximately nine times greater for a retail customer compared to a bank account holder. In addition, there were substantial differences in the way that payments were made for a retail customer compared to a bank account holder, in terms of the types of channels used and the average time to complete transfers.

Key challenges include the structure of the formal cross-border remittance market is dominated by two business models (branch-based and agent-led) due to the requirements for KYC, which necessitate that the initial on-boarding of customers be done through face-to-face interaction. Furthermore, it is a high-cost market due to: its predominantly cash-based nature; it being generally cash heavy; and due to regulatory requirements related to AML/KYC.

Sources: WTO, World Bank, Finmark

Leave a Reply

Your email address will not be published. Required fields are marked *