The Undiscovered Country…
I’ve been studying remittances for a long time now; read countless documents, viewed hours of videos, listened to tons of podcasts and interacted with 100s of people on this issue. The one recurring element I see is the problem of micro payments across-the-border.
I think the word ‘micro’ here may do some injustice, for people think micropayments equate to sub $5 payments (which could very well be true). If you were to walk into a money-transfer store on Devon Avenue in Chicago, and wanted to send $25 to your brother in Pakistan, guess what? They can’t do this transaction.
Most MTOs have a lower limit – a minimum – and they cannot do transfers below that amount. It just doesn’t make money for them, and it certainly would cost you a lot just to send that small amount across.
The average fees for $100 money transfers on Devon Avenue averages around $22 in sending fees (including exchange fees). That’s a whopping 22% transfer fees on $100. If you’re planning to ship $50, that number becomes 44%, and on $25, that is 88%. Clearly you can see the pattern. The smaller the denomination being transferred, the larger the percentage as far as transfer fees.
Payments as we know today cover P2P, Remittances, B2C, etc. Eventually, it will be just that: Payment. Be it across the street, across the country, or across the world. Convergence is the word. Herein lies the problem. Small real-time payments across the world, bearing 2%-5% fees are still not possible.
Imagine if someone in New York wanted to send someone money in Manila, $15, you know spot the younger brother who is out on a date? Is it possible to send such a small amount? The answer is no. Granted in a few countries or remittance corridors this might be possible, but overall, this remains an issue.
Sending small amounts like $5, $20, $30 is sometimes trivial for the sender. They will not think twice even if they are amongst the lowest wage earners. But the ability to send such small amount across the world where they do become a reasonably valued number is missing. This could be the next $1 Trillion business opportunity. Imagine how many times small value transactions exchange hands. I’m guessing in the world, Trillions of Dollars are exchanged back and forth on a daily basis.
If you empower people to be able to send small amounts of money across the world, for a fee that is between 2%-5% of the amount being sent, you can bet that the overall transaction volume would be exponential.
Currently to send $25, one would need to pay $22 in transfer fees. With the new model, to send $25, I would need to pay $1.25 (at 5%) – this fee is digestible. At 2% this fee would be 50 cents.
Whomsoever can crack this code (and it is not difficult to crack) would make Millions. It would be copied very quickly across the world. It does have its fair share of issues (one that I am not willing to discuss openly here, as that is where I consult), but I have crunched the numbers again and again, and they look very feasible.
Hint: The solution to the entire problem lies not in the remittance space but outside of it.
Just when UK was implementing the FasterPayments switch, Banks were worried that transaction volume would decline. Did they? No! They went through the roof. Convenience and real-time payments made economically always win.
This is why I called the Small Value Remittances as the Undiscovered Country. There is a world of opportunity waiting.