Remittance industry is not that difficult to enter into, once you understand the basics (which would be true for any other business as well), then you can, with relative confidence, ease into the business.
It is also important to understand that money transfer is a serious business as far as the law is concerned. Attempting to be clever or trying to convince yourself and/or others that you don’t need a license, etc. to operate can very easily land you into trouble (fines + prison).
Movement of money is regulated, be sure to consult with the local regulator(s) [there may be more than one] and attorneys who specialize in this field before you dive in.
Diving Into The Money Transfer Business
Most people will literally spend less than 100 hours reading and properly researching this industry and just dive in. They could not have opt for a more easier way to burn their time and money.
Sure, you’re read some reports, done a few remittances yourself, maybe even interacted with the diaspora, but this would not make you a remittance transfer expert. All kidding aside, it takes deep learning and commitment to the game to make money out of it.
Because money-transfer is touted as the low hanging fruit, expect fierce competition. Survival in this business is tough.
Dip Your Toes Into the Water
Before you find out the hard way, it is always better to start small. Everyone wants to be able to do this…
However, the rider you see on that bike, most likely started with the vehicle below and worked their way up…
Yes. Training Wheels! Put them on!
Start small and carefully, else you might see a lot of money and time go down the drain. When you start small, you can make mistakes. You will also be learning a lot. I cannot emphasize this enough. The subtle nuances is what the game is all about.
Knowing where and how you can make money…
- how to have tie-ups
- where to go and ask for help
- how to partner with vendors/suppliers
- how to best leverage your working capital
- how to market and focus your efforts in picking up clients
- how to do A/B testing to see what works and what does not
- understanding compliance
- understanding competition
- being acutely aware of the subtle clues for each remittance corridor you serve
- understanding banking relationships and the hurdles posed in trying to gain access to banking
- understanding how to calculate very accurately all the costs associated with transferring money
- how to grow volumes
- how to have better control over KYC issues
- understanding money laundering and/or terrorist financing and how to avoid your system/setup from being used to funnel funds
- how to build a team
Remember, there is no shame in starting small. It pays in the long run to start small and grow.
It All Starts With Licensing
Because in most countries & territories, money transfer business is licensed, it is best to start understanding how licensing works and take it from there. This is my most suggest path when starting out, looking out at the licensing issue.
The chart below gives a brief of how this works (from a US point of view), though the same could apply (more or less) to other regulated countries as well.
In order of difficulty (from lowest to highest):
- Correspondent / ISO
- Authorized Delegate
- Banking Agent
A more detailed explanation of the route you can take with respect to licensing is explained here: US Money Transmitter License
I always recommend the affiliate route. My reasons for doing so are as follows:
- there is hardly any investment from your side
- you will learn the lingo/nomenclature very quickly
- how money transfer works, you will get to understand nearly all facets (not all is clear in the affiliate route), but it is perhaps the best starting point
- you will have hands-on experience rather than theoretical
- you will find just how easy/difficult it is to amass clients (and retain them)
- if things don’t work out, you can walk away (without writing-off much money)
- you do not have to enter long-term contracts
- the walk away can be done without any further obligations, it didn’t work out, no issue
- you can always enroll with another money transfer operator into their affiliate program
- the MTOs (Money Transfer Operators) you work with, will spend a lot of time explaining terminology and processes to you, free learning!
Once you are confident you’ve just about done enough of training wheels, you can then jump to the next level. It is all about understanding the business, your comfort level and your risk appetite.
You don’t necessarily have to go to training wheels. If you understand the business well, or have interned or worked for a MTO, then you could go directly the Authorized Delegate (Agent) Route or even go ahead and start getting your own licenses.
Players in the Ecosystem
The next thing is to understand the different players in the money transfer business that make up the ecosystem:
The image below depicts more or less a complete model of all the players that will ever be:
The person sending the remittance
The bank that the sender will use to fund the remittance transaction. This can also be funded via cash (at an Agent location) or by using other payment instruments like Credit/Debit Cards, Mobile Credits, etc.
The person who will be receiving the remittance money.
The bank where the remittance money is credited. Alternative methods are a mobile wallet (which also has a bank on the bank end) or COC (Cash-Over-Counter) in which case the beneficiary will prefer to receive cash upon presentment of proper identification at an Agent location or Bank.
Money Transfer Operator (Sending Side)
The licensed entity in the sending country that is the legal owner of the transaction and is facilitating the remittance.
Money Transfer Operator Bank (Sending Side)
The financial institution(s) that the MTO in the Sending Country uses to aggregate the funds and distribute them.
Money Transfer Operator / Bank (Receiving Side)
Counter-party on the receiving country would either be a licensed MTO or a Bank.
Correspondent Bank (Sending Side)
Usually a correspondent bank would be involved for purposes of either hosting the sending Bank/MTO’s Nostro account, or would be used to channel funds between the Sending MTO and the Receiving MTO/Bank.
A payment processor might be used if using payment instruments like ACH, Debit/Credit Cards, other payment instruments (like PayPal, Dwolla, etc.) The Payment processor works for and is contracted by the Money Transfer Operator (Sending Side)
ID Verification (KYC)
Usually a 3rd party service is employed to authenticate and verify the IDs that are submitted as part of the on-boarding procedure by the Sending MTO.
Agent / Affiliate
An Agent or Affiliate might be used on the Sending side to on-board the transaction and could also be used on the Receiving side to off-load the remittance transaction.
MTOs can utilize various payment network to route the remittance transfer. For example they might use a 3rd party network like Earthport to settle transaction on to various countries where the MTO may not directly be integrated.
Diving Into The Business
Before diving into the business of money transfer, I will suggest that you do two things:
- Attend a Money Transfer Conference. There are essentially only two conference worth looking at: (a) IMTC and (b) IAMTN. There are specialized conferences that also focus on Money Transfer, but these two are the dedicated ones. I would recommend IMTC.
- Find a Mentor. In this field you can use all the help you can get.
No matter how you look at it, even from an Affiliate point of view, you would need working capital. Needless to say, if you are going the Affiliate route, your money would best be spent on landing pages, blog articles, SEO, SEM, running ad campaigns and social media marketing.
If you’re going the correspondent route, then you would need to put up the pre-fund money that the Sending MTO is usually required to put up. Because you want to get into the business, you will be responsible for putting up the MTO’s pre-funding money.
If you’re going the Authorized Delegate route, then you can read up the following articles to better understand:
- Access to US Money Transfer Market
- Should you own a Money Transmitter License?
- FAQs on ISO/Correspondent Relationship
- Correspondent vs. Authorized Delegate
For trying to obtain your own licensing, you can check the amount of money needed from each financial regulator, by visiting their website. The complete list can be found here: List of Money Transmitter License Regulators
Access to Banking
This could be a very difficult proposition for you. Finding a bank (read: MSB Friendly Banks), willing to work with an MSB engaged in the cross-border money transfer business is not easy.
Because of Operation Chokepoint there is a lot of De-Risking of MSBs going on in the banks.
You can read more about this in these 3-series article that I wrote:
- The Sandstorm that is blanketing the Money Services Business
- Can’t find MSB Friendly Banks?
- Banking De-Risking: The Domino Effect Is Now In Full Force.
Most MTOs will not provide you with access to banking (unless you’re 100% purely affiliate). If you are going to come on-board as an ISO/Correspondent, Authorized Delegate, etc. you bring your own banking relationship to the equation.
Anti-Money Laundering Training
A prime reason for MTOs and Banks not to work with small businesses and individuals, is because of their very shallow knowledge about the AML/KYC space.
Everyone in the Money Transfer business has to under-go anti-money laundering training. There is no exception to this rule. This would apply even to Affiliates.
Spend time in getting yourself training. The basic training is not too difficult and be completed usually within a day. However, to really be able to comprehend of the nomenclature in this business, you would need to get advance training. All these trainings can be done online and can last anywhere from 1 week to 3 weeks or more.
Before you dive into advance training, read a lot. There are plenty of books and manuals on anti-money laundering, freely available on the web for you to read. Also, Youtube. Plenty of free material there to explain the concepts.
Other than being an Affiliate, almost every other program/association would require you to have a full-time Compliance Officer on-board in your organization.
Here you are looking for a full-certified officer, that has undergone comprehensive compliance training (AML, KYC, CIP, etc.) and is preferably certified (CAMS – Certified Anti-Money Laundering Specialist).
Don’t penny pinch here. A rock-solid Compliance Officer will give your business credibility that will go a long way.
A well-thought of, pragmatic and continually improving Compliance Program is the cornerstone of any well-established money-transfer company. By any estimation, between 5% to 10% of your human resources would eventually be employed running your compliance program.
Go with the best company you can afford to make your compliance program. Initially, many entrants will startups will work with a compliance speciality company to author their compliance program, which in turn the compliance officer would then implement.
Each legal corridor you operate under and the transaction/financial model under which your business would be running have their own subtle elements that can make or break a compliance program, this is where you need expertise.
Do not penny-pinch on this front.
Choosing Your Corridor
Next is determining which markets you want to work in. Depending on your arrangement, you may already have an established (licensed) Bank/MTO to work with, or perhaps you would need to find one and have them tie-up with your Principal License Holder in the Sending country.
Tie-ups can be a bit or a bore to implement (they are mostly paperwork driven and time consuming), but they would be essential to work in both the markets.
Software & Allied Services
Unless your arrangement is providing you with the software (to run your money transfer business) and the allied services like ID verification, OFAC and other Sanctions list checks, etc., you would need to make arrangements for this. This task should start in parallel at the very earliest as implementing it can take some time.
The goal is to have a system that can provide front-office and back-office functions, while also being able to provide audit logs for auditors. A list of the transaction points can be found here: List of Transaction Data Points for an MSB Audit.
Today, one has many options as far as software is concerned. You can buy it, lease it, rent it, work with the OEMs on a SaaS model, etc. Have a look at the Remittance Table for a brief list of OEMs who provide this (under the category Software): Periodic Table of Remittances.
Put a Plan Together
You should be very clear as to what your transaction set would look like. How the flow of funds will work (or are working, even if you are an affiliate). Many people dive into the business without paying too much attention to the money they would be making. Every single penny must be accounted for. You should know very accurately how this all works out, how much money is being deducted at each step of the way (and why). You should also know who is keeping this money.
A sample flow can look like this:
Some Essential Homework
Things you would need before you start:
- Think of a name for your business. This does not necessarily have to be the same name as your brand name, but you need a name for your business.
- Think about where you will incorporate it? (and why?). Will opt for Delaware or Florida? or the Cayman Islands? or Estonia? — exactly why you are incorporating there, is something that you should know prior.
- Think of a brand name (for your remittance product), even if right now you may be going the ISO/Affiliate route
- Buy a domain name (not only for your business but also for your brand name).
- Get Google Apps, so that you can have a formal email address of your company going (Gmail / Yahoo! and only go so far).
- Get a dedicated number for your business
- Get ALL the social media identities (Facebook, Twitter, LinkedIn, Google+, Pinterest, Quora, Instagram, etc.)
- Get a website up and running at the earliest. Please do not try to put one up yourself (unless you are really proficient in design, UI/UX, coding, etc.). Get professional help. With a great WordPress theme, you can have a kick-ass presence for under US$ 2,000 per year (someone will customize it for you, create content, and host it for you). If you look for bargains, you could possibly do this for under US$ 1,000 per year.
- Hire a professional firm/freelancer to write your content.
- Get a professional logo made.
- Get a Mailing list going, MailChimp is the way to go about it (put up a Launching Soon landing page)
Research and Data is extremely important for you to proceed ahead. Go out into the real-world and interview potential customers. Take notes.
- Learn from them the facilities they would like.
- What their pain points are.
- Who do they currently use?
- Why would they choose you?
- What is the average amount being remitted right now?
- How long does it take to arrive there?
- What can you do to improve the experience?
- What is the exchange rate like?
- What do they hate about the service?
- What do they love about the service?
- If you offered a service today, would they switch?
- How many existing players? Is the field over-crowded?
- What would make you stand out?
- Which cities would you market in first?
- How much would this marketing cost?
If you haven’t written a business plan, do so. I am writing about it at the very end, because people tend to ignore a business plan. It is perhaps one of the most vital documents that will give you a sense of semblance every day to get your bearings right.
There are plenty of templates out there on the web, search for one and use it. It also would give structure to your thinking and overall approach.
With all these tools in your hands, you’re good to go and good luck on your new venture.
If you would like to learn more, why not schedule a call with us and see how we can help you.