Africa loses billions due to money-transfer operators

By:
Kanika Saigal
Published on:

The monopoly that some money-transfer operators have on systemically important remittance flows to sub-Saharan Africa has stifled innovation in the payments industry – and imposed high costs on consumers – but change is afoot.

Onerous due-diligence demands imposed on money-transfer companies, especially in the US and UK, have triggered fears that the business of facilitating remittances around the world is no longer economic, with a spate of banks no longer providing services to money-transfer companies, citing expensive know-your-customer regulation.

However, money-transfer companies in many sub-Saharan African (SSA) countries boast high margins, thanks to a slew of exclusivity agreements, triggering reform calls from budding payment facilitators that challenge incumbents.

While remittances provide a lifeline to many in Africa, paying for education, healthcare and ensuring food security, such exclusivity agreements between the large money transfer operators (MTOs) in the region have led to billions of dollars of losses for the continent, says Ismail Ahmed, CEO of WorldRemit, an online remittance platform.

Ismail ahmed 
Ismail Ahmed, CEO of
WorldRemit 

"First movers in the industry, including the likes of Western Union and MoneyGram, have entered into exclusivity agreements with many banks in Africa, meaning that rates have remained high for African customers," says Ahmed.

These types of agreements are widespread across the African continent, partly because the majority of countries do not allow financial institutions other than banks to handle foreign-currency exchanges.

As a result, a small number of MTOs dominate the market, limiting the choice for available to the consumer.

According to research published by the Overseas Development Institute (ODI) in April, in three quarters of SSA, Western Union and MoneyGram control about 50% of the market and account for around two thirds of all transactions in the region. In some countries, including Zambia, Angola and Mali, they control up to 90%.

Exceeding aid

Ahmed’s point comes at a time when remittances are exceeding aid in importance after an extended period of emigration out of Africa and the "brain drain" epidemic.

Research by the African Development Bank with the World Bank shows that remittance flows into Africa reached $40 billion in 2010 and has quadrupled since 1990. African remittances account for approximately 2.6% of GDP, which in some countries equals or even exceeds foreign direct investment and aid.

Meanwhile, the African diaspora pays approximately 12% to MTOs to send $200 home, according to recent research published by the ODI. The global average is 7.8% and the G8 aims to reduce this to 5%. Africa loses between $1.4 and $2.3 billion annually in remittance charges.

If transfer charges could be reduced to world average levels, the ODI claims this would generate around $1.8 billion annually – enough to pay for the education of approximately 14 million primary-age children in SSA, improve sanitation for eight million people, or provide clean water for 21 million.

Africa is a very different story, however. It is a
lot harder to create relationships with depositors
because of exclusivity agreements

Ismail Ahmed

In response to high charges and the apparent monopoly that certain remittance companies have in Africa, Ahmed has set up WorldRemit, an online remittance company that can offer competitive prices compared with larger MTOs where the market is more open. 

In certain cases, such as in India, WorldRemit can offer customers a flat rate for transfers. In others, including many African countries, fees depend on the amount of money being sent across borders. Either way, the process aims to offer more transparency than some of the more established MTOs, with all fees expressed up front.

WorldRemit already sends remittances from 37 countries to more than 100 countries, and is expanding.

"I came up with the idea for WorldRemit during my time working at the United Nations, when after 9/11 tough new anti-money laundering regulations changed the way remittances could be processed," says Ahmed. 

WorldRemit is the latest in a growing number of mobile money services available to African customers, which allows customers to send money abroad as cash, bank deposits or even airtime top-up, depending on the facilities available in the receiving country.

Mobile-payment services such as WorldRemit and the world-renowned M-Pesa are becoming more popular on the mobile continent, where mobile phone penetration is growing faster than in any other region. Africa is on track to hit more than one billion mobile-phone subscriptions by the end of 2015. 

Competitive environment

At the same time, some African countries, including Ghana, Nigeria and Senegal, are seeking to undermine exclusivity agreements and are working towards a more competitive environment. 

However, while the market is opening up to new platforms, such as WorldRemit, international organizations such as the World Bank, are not doing enough to facilitate the change, says Ahmed.

The Philippines is a good example, explains Ahmed, where exclusivity agreements between banks and money-transfer companies have been banned. Competition in the Philippines ensures a level playing field and better value for money.

"Africa is a very different story, however," he says. "It is a lot harder to create relationships with depositors because of exclusivity agreements. Take Tanzania for example. For the last four years, we have been trying to enter the African market and gain a meaningful presence there, but we were only able to establish one relationship with a bank based there.

"But then typically what happens is that if there is one licensed player not attached to Western Union or MoneyGram then there could be up to 200 other like ours. It’s a tricky business."

WorldRemit and other similar companies, if given equal access to the market, give users the option of transferring much smaller funds without the punitive fees imposed by the mainstream MTOs, Ahmed concludes.