Developments in the digital space are changing the dynamics of the remittance market, driving it on a steady upward curve. According to the World Bank, in 2018, remittances to low- and middle-income countries (LMICs) amounted to $529 billion – an increase
of 9.6% over the previous year.
Global remittances, which include flows to high-income countries, reached $689 billion in 2018, up from $633 billion in 2017. As a new decade dawns, global remittances are expected to touch $746 billion by the end of 2020. Further, as per industry reports,
the digital remittance space is expected to clock a CAGR of 11.75% between 2019-2024.
Growth drivers
In a report titled 'A Vision for the Future of Cross-border Payments', consultancy firm McKinsey & Co identifies critical drivers that are likely to propel the payments sector, including cross border remittances. The factors that will come into play for
the remittance sector are:
- Evolving customer demands
- Collaborations and newer technologies
- Robust compliance framework
What also helps are government-backed initiatives targeted at the traditionally unbanked and under-banked populations in developing countries. Some trends that are likely to fuel the growth of the remittance sector and present new opportunities in 2020 are:-
1. Customer demands
Customer demands will define the pace of remittance growth. In recent years, the digital money transfer market has received acceptance among consumers in low- and medium-income economies.
Rising incomes and rapid urbanisation are vital factors for the prominence of digital remittances. The convenience of digital payments have caught on primarily due to the penetration of smartphones and mobile apps. In many cases, domestic economic trends
have played a significant role, as well. For instance, in India, two major developments fuelled the growth spark for fintech startups; the demonetisation drive in November 2016, followed by the launch of several government initiatives added to the digital
momentum.
When reviewed against the developments of the past few years that have catalysed the fintech ecosystem, through some extrapolation, one can estimate the trends for 2020. According to a PwC report on the 'Role of disruptive technologies in India's fintech
sector', the next wave of growth would be led by the bundling of fintech solutions to feed consumer demand.
In one of their reports titled 'Driving the Future of Payments' Accenture noted that 'as the payments universe expands, customer experience is becoming the prime competitive differentiator'.
2. Collaborations and newer technologies
The money transfer and remittance industry has always depended on partnerships to thrive, and collaborations will continue to play a significant role in the cross-border payments sector. The premise for collaborations is the ability of international money
transfer organisations to offer brand recognition, industry knowledge, compliance framework and an extensive customer base to scale; while fintech companies bring forth advanced technologies and agility. Moreover, technological advent will also enable SMEs
to enlarge their footprint in the money transfer and remittance sector, owing to a cost-effective and competitive cross-border payments model.
3. Robust compliance framework
The rise of digital remittances is likely to enhance focus on enabling faster payments within secure channels of remittances. To this end, a robust compliance framework is imperative to ensure the safety net around digital money transfers and payments. Over
the years, governments too, are putting in place stricter regulatory frameworks to ensure the digital remittance ecosystem is not only convenient but safe and secure.
The challenges
In recent times one of the major challenges facing the remittance sector is de-risking. Derisking is a practice where banks sever relationships with businesses considered as 'high risk'. This move was initiated to curb money laundering and terror funding;
however, now money transfer organisations are categorised as 'high risk' despite adhering to stringent compliance standards.
The opportunities
According to McKinsey's report, despite geopolitical turmoil, international payments are expected to be driven by 'strong global GDP and associated trade growth'; thereby setting up global payments sector for exponential growth in 2020.