Why Are Banks Struggling In the Remittance Market?

  The international remittance business, spurred by an influx of immigrants sending funds home from countries across the globe, represents a potentially lucrative market for banks.
  The problem is financial institutions have found it difficult to generate a profit from person-to-person funds transfers. Some major banks such as Citibank, Bank of America and Wells Fargo are making efforts to grasp a share of the global funds-transfer dollar. But even they have run into a number of barriers.
  Also, some banks do not view remittances as their core business. Such institutions, observers say, enter the market only to form relationships with immigrants in the hopes of courting them into becoming eventual bank customers.
  "At the end of the day, transfers are not going to help them make much money," says Gwenn Bézard, research director of Boston-base Aite Group.
  But the potential for profitability is there. The World Bank says remittances in 2005 exceeded $250 billion and likely were significantly higher last year. Some have estimated that the total amount of funds transferred, including through informal channels, could be approaching $1 trillion annually.
  One of the principal obstacles facing banks is that many of the individuals who transfer funds across international boundaries have no relationship with banks. The Federal Deposit Insurance Corp. says of the more than 40 million Hispanics living in the United States in 2005, nearly 20 million lacked a basic bank account.
  Instead of using banks, they use small remittance shops where they can be charged significant fees. Charges can vary greatly and hinge on the amount being remitted, the destination country and the whims of the shop.
  Or individuals can rely on companies such as Western Union and MoneyGram to conduct the transfers. Those companies' fees fluctuate depending on amount and destination; both charge $9.99 to send $1,000 or less to Mexico.
  Banks are at a disadvantage when it comes to competing on the same playing field as Western Union and MoneyGram, especially in terms of visibility. Western Union offers 300,000 sites in more than 200 countries and territories across the world where consumers can go to send or receive money. MoneyGram provides 110,000 outlets in 175 countries.
  "The money-transfer industry is very competitive and always has been," says Kristin Kelly of The Western Union Co. "Banks are only the latest entrants into the market. We welcome competition. It's good for us, good for the industry and good for consumers."
  Aite's Bézard believes banks are, in essence, fragmented entities when it comes to international funds transfers. "It's a tough market for them to get into on their own," he says. "But it's a great market for banks to get into if they can partner" either with other banks or with a Western Union-type business, as CitiBank and BofA have been attempting to do.
  A few years ago, Citibank purchased Banamex, Mexico's second-largest bank. Through that acquisition, immigrants from Mexico living in the United States can remit funds to relatives or friends directly from a Citibank branch to a Banamex branch.
  But they must be customers of Citibank to effect such transfers. Citibank also has relationships with banks in other countries or territories where remittances commonly are sent, including India, Ecuador, the Philippines and Puerto Rico.
  Similarly, Bank of America has established a network of 4,500 locations, or what it calls "paying agents," in Mexico. That program, known as SafeSend, is free to BofA checking-account customers who want to send funds to Mexico. The paying agents, spread across Mexico, vary in venue but all have relationships with BofA and have agreed to make the payments to recipients.
  Last year, according to the Inter-American Development Bank, Latin American migrants in the United States sent $45 billion to consumers in their home countries. Approximately half of those dollars went to Mexico, according to Banco de Mexico.
  EARLY ISSUER EFFORTS
  BofA originally launched SafeSend in 2002 but based it on the use of prepaid debit cards. One card was used to send remittances and another was used by recipients to receive funds at ATMs in Mexico. The bank dropped the card program in 2005 because recipients in Mexico preferred to obtain transferred funds as cash from agents as opposed to dealing with bank protocol.
  U.S. Bank also found that a prepaid card remittance program it had launched that was similar to BofA's was not attracting many remitters. The Minneapolis-based bank discontinued the program last summer.
  Banks and other financial institutions, though, are trying to figure out the most efficient, cost-effective and safe vehicle for international remittances. "Banks are doing quite a bit in this regard, although they haven't had significant market penetration," says Jennifer Tescher, director of The Center for Financial Services Innovation, an affiliate of Chicago-based ShoreBank Corp.
  MasterCard Worldwide, in partnership with the GSM Association, a global association of more than 700 mobile-phone operators that employ GSM cellular technology, is launching a pilot this spring that will test the feasibility of immigrants using cell phones to send money back to their native countries. The theory is that more immigrants have cell phones than have bank accounts. The association estimates the number of mobile phones in the world is 2.5 billion, a number it expects to double by 2015.
  Under preliminary plans, recipients would receive text messages advising them that money has been sent their way. They then could receive the money via deposit into a prepaid card account that does not require a direct relationship with a bank. But MasterCard says the details of the pilot, such as the costs for remitters and how the cards will be distributed, have yet to be worked out.
  Adding complexity to the whole funds-transfer process is the USA Patriot Act. Depending on the amount and destination of the remittance, the law can require that banks or other financial institutions compile basic information on the senders and the recipients of funds.
  "It can be very onerous," says Douglas J. Landy, a bank regulatory lawyer formerly with the Federal Reserve Bank of New York and now an attorney with the law firm Cadwalader, Wickersham & Taft.
  Administrative costs, including paperwork and compliance with the Patriot Act, add to the costs for banks, according to Bézard.
  So banks are limited in how much they can save customers on their remittances. BofA, for instance, while giving a free ride to its account- holders sending money to Mexico, charges $45 to transfer funds to other countries. Citi charges customers $5 to $8 for remittances to Mexico.
  "Operationally," says Landy, "there is a lot to do for the banks. So to make it worthwhile for them, given the cost and risk, they have to charge fees."
  One way to help immigrants without bank accounts is to try a variation of what BofA did initially with its SafeSend program: use prepaid cards as a remittance vehicle. Prepaid cards, according to a report issued in February by The Center for Financial Services Innovation, "are emerging as a promising product to serve underbanked customers because of their convenience, accessibility and liquidity."
  The study says several remittance models can be used with prepaid cards: "card-to-cash, dual card and recipient-only card."
  But even the prepaid card route presents challenges. First, there remain the regulatory complexities of the Patriot Act. There also are fee structures, card reloadability and dual-user capability issues that likely will determine how successful prepaid card remittances will be.
  Officials at The Center for Financial Services Innovation also worry that immigrants have not embraced card products. "With the exception of phone and transit cards, fewer than 60% of migrants use any type of card product," according to the center's study.
  Tescher acknowledges that the success of bank efforts to promote prepaid card remittance programs has been mixed. The problems institutions like BofA and U.S. Bank had in their prepaid programs, she says, were finding ways for the recipients to receive the money without having to have relationships with banks.
  "People would rather walk across the street [to a remittance shop], the way they're comfortable with, the way they've been doing it for years, and the way their mother or family member likes to receive it," Tescher says.
  The key for banks and others is to better understand the behavior of the market and reach it through promotion, marketing and education, according to the center's report.
  Companies that consider the entire financial picture of remittance senders can begin to develop marketing, distribution, consumer-education and pricing models needed to allow card-based transfers to compete with traditional money-transfer companies, the report states.
  Specialized marketing models may help banks interested in succeeding in the remittance market. Given banks' lack of success thus far, perhaps few really are interested.
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