What Are the Common Problems of Remittance Companies?
RSPs are working on their part, but they must not be left alone to deal with the inefficiencies of the current financial system on their own.
Remittance flows are lifelines for migrants and their families in need. They are also one of the main sources of income for developing countries and play a crucial role in their economic survival. With the class of global citizens getting crowded and the gig economy passing $340 billion in 2021, the finance industry needs to make sure that remittances safely continue flowing through legitimate channels rather than dangerous, informal ways of transferring money.
The businesses that provide remittance services for a fee to migrant workers and their families, known as remittance service providers (RSPs), are crucial to the continuation of remittance flows. However, they are facing significant problems that are not effectively dealt with yet, but are rather constantly ignored by the finance industry.
There are four common problems of RSPs that come forward:
- Danger of being de-risked: Banks tend to terminate or restrict business relationships with RSPs to avoid risk rather than manage it, especially in times of uncertainty. De-risking has continuously increased in recent years, putting RSPs’ accessibility to the global financial system at stake.
You can read more about De-risking in our article De-Risking: A Decades-Long Problem of The Remittance Industry
- Difficulty in finding trusted partners: Finding trusted and competent partners in recipient countries is a difficult and time-consuming task that concerns all RSPs. An unreliable partner may take their money and run away with it or make them lose the reputation and trust they have built throughout the years with the customers. Due to high financial and reputational risks, RSPs usually have to allocate most of their people, time, and money to find reliable partners.
- Extremely cash-heavy business: Since today's financial system has yet to adopt an efficient solution to cross-border payments, prefunding is still the primary method in use. Due to the need for prefunding, requiring each participant to deposit cash to the expected value, the remittance business is extremely cash-heavy. The tied capital brings limited cash availability, causing lost business opportunities, especially during long settlement cycles.
You can read more about Prefunding in our article What Is Prefunding and How Does It Work?
- Manually operated companies: Most remittance companies are still operated manually rather than digitally, which results in high operational costs, inflexibility, and low resilience, especially in the face of a crisis. Amid lockdowns and social distancing measures due to COVID-19, many RSPs have had to close or limit working hours and downsize to survive.
A survey conducted by the International Association of Money Transfer Network (IAMTN) and the United Nations Capital Development Fund (UNCDF) in 2020 shows that when asked about new initiatives in response to COVID-19, RSPs highlighted the need to scale up digitization. After the harsh results of the pandemic, RSPs recognized the need to develop their digital offerings and innovations. While some have focused on developing apps, some have started exploring novel partnerships with digital solution providers in sending and receiving countries to decrease the high costs resulting from manual operations and increase their resilience.
RSPs are working on their part, but they must not be left alone to deal with the inefficiencies of the current financial system on their own. The global financial services industry is converging in itself, becoming more connected and complex day by day. This means that each player's effect on the other and the global economy is doubled up, and ignoring the existing problems is no longer an acceptable way of dealing with them.
Dialogue between RSPs, banks, and regulatory authorities must be efficiently promoted to take tangible steps towards coming up with practical solutions. Strong partnerships with innovative fintech companies and collaboration of all stakeholders within the industry are keys to tackle the decades-long problems RSPs are facing.
You can read more about Remittances in our article What Are Remittances and Why Are They Important?