How the Fintech boom is reshaping international money transfer?
How Did FinTech Spur Money Transfer Industry To Change
The rise of FinTech technology is no surprise to anyone in this modern era. Whether it is marketing, human resources, or the finance departments – the technological revolution is reshaping the financial world, the money transfer industry is no exception. Through its rapid growth in the economic, political, and social sectors, FinTech has changed the game. Now it competes with banks and forex brokers over the international money transfer market.
Money dealing structures are being challenged by new high-tech companies that can design and develop new innovative products. Moreover, they offer сutting-edge business models and a better supply of services.
As noted by Jamie Dimon, boss of JPMorgan Chase, “The banking system is smaller, as a share of finance, than it was before”. There is no doubt traditional banks have to update their technology options and adapt to market conditions.
What Is Money Transfer Market Size?
It should be pointed out that the financial transaction most commonly used in international money transfers is remittance. The International Monetary Fund (IMF) defines remittances as the sum of two terms:
- Compensation of employees (income earned by temporary workers in the host country and the income of workers who are employed by companies or international organizations);
- Personal transfers (money transfers from or to individuals in other countries).
In a 2021 report by Grand View Research the global digital remittance market size was valued at USD 16.28 billion in 2020 and is expected to reach USD 17.7 billion in 2021. Market growth is stimulated by digitalization and new FinTech technologies that quicken payments automation.
As there are global restrictions on movement due to the COVID-19 outbreak, the market of international digital remittance will as a result experience a positive impact. The most notable inflows are to low and middle-income countries. According to new World Bank data, global remittances are expected to reach a total of $702 billion in 2020, down from $719 billion in 2019 (-2.4 percent). Of that total, $540 billion are expected to have flown into low and middle-income countries, down from $548 billion (-1.6 percent).
Remittance flow plays an important role in maintaining living standards in low- and middle-income countries. It will continue to provide a vital source of income for the poor in the near future. Thanks to technology development, there are a lot of ways of sending money abroad.
Modern Ways Of Transferring Money Online
The detriment inflicted by lockdown, travel bans, border closed and other factors increased the need for digital remittance. At this time, it can be said that it’s a silver lining that people started to develop technology to fulfill this demand.
There are now three main modes of online money transfer:
- Mobile-to-Mobile remittance: in this mode, the receivers can send and receive remittance directly into their mobile wallet account, all within a phone. The money thus received can be used for future financial transactions. The amount transferred is withdrawn from the account of the sender and credited to the account of the recipient after the relevant charges have been collected.
- Mobile-to-Bank remittance: in this mode, users can send money from their mobile phone directly to any bank account. The amount transferred is withdrawn from the account of the sender and credited to the account of the recipient after the relevant charges have been collected. This can be achieved by API integrated directly with the receiver’s bank or by using a third-party switch that provides the process of carrying out international transfers.
- Mobile-to-Cash remittance: in this mode, the senders transfer money to any recipient via their mobile phones. Money can be collected on the other side in the form of cash from IMT (International Money Transfer) partner agent.
Following are some of the factors that have to be considered while transferring money online: exchange rate, the amount of money, and transfer fees. These factors also cause changes in the money transfer industry.
What Are The Major Drivers Of Reshaping Global Remittance?
As the foreign exchange rates are difficult to predict, this results in higher fees related to foreign exchange combined with higher operating costs. It may lead to increasing remittance prices in the short term.
International organizations (UN, G20, and others) put a lot of pressure on the biggest cross-border money transfer companies like Western Union, Xoom, Moneygram. The reason is the relatively high cost of remittance for users, so prices are closely monitored. Government-led awareness campaigns for both sides of money transfer impact remittance costs too.
Three factors may determine the success and investment potential of the remittance business:
– brand strength (by winning customer trust and engagement);
– more fast and convenient options of sending and receiving money;
– quality of technology (powerful technology is required for reconciling transfers in a low-margin business, managing working capital risk, and observing customer trends).
The World Bank expects the growth of remittance to rise by 5.6 % in 2021 and the economic situation to improve at some level in various regions, so how is FinTech contributing to it?
How FinTech Changes Users Behavior?
As pointed out in the report of the World FinTech Report 2020, FinTech companies are sharpening and increasing their offerings, market presence, and customer base. The ability to fuse innovative technology expertise with an obsessive customer focus is driving FinTech’s success. Such an approach enhances its attractiveness in terms of partnership suitability.
What are the reasons customers adopt banking services from non-traditional players?
- 70% attracted by low-cost offerings;
- 68% seek ease of use;
- 54% want faster service;
- 39% pursue better features;
- 39% want personalized products.
“For far too long, the banks have been able to command big margins on their foreign exchange business largely due to a lack of transparency in the market. This allows them to hide charges within the exchange rates they pass on to their customers. Even worse, there are no regulatory obligations on the bank to disclose just how significant those charges are”, Jamie Holmes, director of FX broker CurrencyWave comments.
How FinTech Empowers Money Transfer Industry?
Changes in the global remittance industry result in the effective interaction between FinTech companies and banks, partnering for profitability. Here are a few examples:
– Berlin-based challenger bank N26 began a partnership with London-based online money transfer service TransferWise to help N26 customers save forex fees when making payments in foreign currencies.
– London-based Revolut collaborated with Currencycloud (a New York-based API and service provider for cross-border payments) that allows users to transfer currencies from all over the world. Currencycloud gives Revolut customers access to its payment network via APIs that can integrate in two hours, without applying for new regulatory permissions.
– Commerzbank, a major German bank, collaborates with IDnow, a late-stage German scaleup that uses machine learning to verify its customers’ identities via video on a smartphone or computer. The result? A 50% higher conversion rate, and 30% of Commerzbank customers verifying their identity through IDnow.
FinTech advantages are a contributing growth driver in international money transfer. There is a huge demand for a source of more efficient and faster remittance for low- and middle-income countries. In a world of change, it is needed to support those hit hardest, and limited access to financing and reaching the unbanked is crucial. In order to deal with the problems resulting from the international economic and financial situation, more effective cooperation between banks and FinTech companies should be put in place.
There’s an optimistic saying by Carlos López-Moctezuma, Global Head of Open Banking, BBVA: “The most important thing now is partnerships – be it with FinTechs or bigger firms or firms operating in other industries – wherever you can find opportunities to share an idea to create experiences jointly. Collaborations are not just win-win; they are win-win-win.”