By: William Cain

VRL provides independent incisive analysis and insight for the global cards and payments community.

Remittances to developing countries will exceed USD351 billion in 2011, an increase of 8 percent on 2010, according to World Bank estimates.

All of the major developing regions showed growth for the first time since the financial crisis and worldwide remittance flows increased to an estimated USD406 billion.

The report, Outlook for Remittance Flows 2012-2014 , looks at the levels of remittances by global region and highlights a number of areas of opportunity and challenges which have implications for the growing number of prepaid card remittance initiatives.

The first and most obvious opportunity is that remittance flows are showing renewed growth following a contraction in 2009 attributed to the financial crisis and economic weakness in the global economy. Remittance growth in 2012 is expected to grow broadly in line with the growth in 2011, with increases of 7.3 percent, 7.9 percent and 8.2 percent projected by the World Bank for the years 2012-2014.

The volume and year-on-year growth of remittances to developing regions in 2011 were:

• East Asia and Pacific: USD101 billion volume (7.6 percent)


• Europe and Central Asia: USD40 billion (11 percent)


• Latin America and Caribbean: USD61 billion (7 percent)


• Middle East and North Africa: USD36 billion (2.6 percent)


• South Asia: USD90 billion (10.1 percent)


• Sub-Saharan Africa: USD23 billion (7.4 percent)

The figures are a positive sign for prepaid card businesses, which are playing an increasing role in the development of remittance services.

At the end of November, MasterCard announced a partnership with Western Union which it says can "help build bridges to provide consumers with reliable, convenient and affordable financial services", specifically through the use of prepaid cards for money transfers. The agreement involves making the MasterCard and Western Union electronic payment systems interoperable so that senders can arrange for money transfers to go direct to a recipient who holds a MasterCard prepaid card.

Last week, I spoke to Jef Rowlison, Chief Operating Officer of Connect2Family which launched a service this year to allow migrant workers in the US to make card-to-card transfers in either US dollars or dong directly and instantly to Vietnam. It is also in talks to expand the service to Vietnamese, Taiwanese, Korean and Indian expatriates working in the US and Australia.

Middle East

In the United Arab Emirates (UAE), another economy which relies heavily on migrant workers, the Al Fardan Exchange remittance house has been offering a prepaid card with a remittance facility since September 2010. The card is aimed at the four million or so workers which are impacted by regulations to abolish salary payments by cash or check—a payment method particularly popular among companies employing migrant workers. The remittance feature allows cardholders to make transfers at point of sale devices in Al Fardan Exchange branches

Prepaid card remittance initiatives, as well as adding to the range of options available to remitters, may also have a role to play in reducing the fees associated with sending money abroad. The G8 and G20 countries made a commitment at the L'Aquila, Italy, summit in 2008 to reduce the cost of remittances by 5 percentage points in five years, the so-called 5 by 5 objective. This reduction in costs would translate into an additional USD15 billion annually for those receiving funds in recipient countries.

One of the key means of achieving the target is through the promotion of greater competition among the providers of remittance services, which new prepaid entrants are starting to provide. Prepaid is also involved in the development of cheaper and more convenient remittance technology, another important means of reducing costs, according the World Bank report. Connect2Family, for example, has developed a system which charges lower fees than typical remittance houses and also does not include foreign exchange mark-ups as a primary revenue item.

Evidence of the effectiveness of the 5 by 5 initiative is not entirely clear. The report shows the weighted average cost of remittances declined from 8.8 percent in 2008 to 7.3 percent in the third quarter of 2011 but the 'simple average' of remittance costs have been rising for the last three quarters and is over 9 percent. The difference between the two is because of the difficulty of estimating total remittance costs due to the lack of data available, particularly for large bilateral remittance corridors.

The weighted average costs of sending USD200 in the third quarter of 2011 was lowest when remitting funds to South Asia, with an estimated cost of 9.6 percent. The highest was the Middle East and North Africa region, with costs as high as 19 percent.

The main challenges facing remittances highlighted in the World Bank paper included economic headwinds and rising unemployment in key migrant worker markets and volatile exchange rates. Many developing country currencies have devalued against the dollar and other developed market currencies in the year-to-date driven by a 'flight to safety' of investors and corporate entities and a repatriation of investments. In the World Bank's figures, this has led remitters to send more money to their home markets to take advantage of favourable exchange rates.

Research: Uncovering the extent of the illegal remittance market

The ability to transfer funds cheaply and instantly between countries seems like it should be a relatively easy task. Yet remittances today are still often expensive when conducted in the smaller amounts required by migrant workers, and they typically take 48 hours to clear.

In addition, traditional channels can lead to the sender losing as much as 25 percent of their total remittance in fees. This causes obvious problems for expatriates earning salaries far away from their families, leaving them with an unenviable set of options: Either they accept that a quarter of their earning are lost in the transfer, delay the remittance (potentially leaving families unable to make ends meet), or they go in search of cheaper, but less stringently-regulated money transfer agents or even the black market.

Arguably, the people most in need of efficient remittance services are those least able to get them

This problem, and the lack of options facing migrant workers has been analysed in research conducted by prepaid card remittance business Remit2Vietnam (soon to be rebranded as Connect2Family).

The company studied migrants working in countries including the US, Canada and Australia, and found that, given the lack of choice, many workers feel their only option is to use unregulated, even illegal, channels for remittance.

The formal market for total inward remittances to Vietnam was USD8.9 billion in 2010, up from USD8.3 billion in 2009. The figure is growing at an annual rate of around 15 percent.

When the black market is considered, the figure is likely to be closer to USD20 billion, according to Rowlison.

Through the use of prepaid cards, he says there is the potential to shift money transfers from the black or grey market into the formal remittance market—and expects to gain a five percent market share—around USD445 million of remittance volume, relatively quickly.

"The reason we'll get a share of that market pretty quickly is because around the world, governments are already clamping down on private remittance houses," says Rowlison

"Already in the US, money transfer houses are being put increasingly under the scrutiny of the FBI and the taxation department."

He adds: "In our system, because we have two banks, one in the USA which is issuing our prepaid MasterCard and a bank in Vietnam [Ficombank] which is issuing their local debit card, we have a compliant system at both ends."

As well as compliance, another key part of the prepaid value proposition is the cost. The Connect2Family system charges a flat fee of USD5 per transaction, regardless of its size. The typical monthly transaction by a Vietnamese migrant is between USD200 and USD500 .

New approach to fees

"It is the technology that has been able to give us price differentiation," says Rowlison. "We only make our money out of the transaction fee, we don't make any money on foreign exchange."

This business model involves setting up a network of merchants—as opposed to traditional remittance house agents—which are able to offer prepaid card loading services, conduct remittance services for cardholders and collect cash.

These merchants are a key part of the infrastructure for the system. When a cardholder requests a remittance transfer, the merchant takes the funds and then registers receipt of payment immediately through Connect2Family's system. It can then instruct the partner bank in the US to remit the funds through the recipient bank in Vietnam to one of the accounts the sender has nominated for family in the country. Three accounts can be nominated, which have been designated 'Mum', 'Sister' and 'Uncle' under Connect2Family terminology.

Using a network of everyday retailers is vital to making the remittance products as widely available as possible, according to Rowlison.

"The only place you can really load a prepaid card is through a bank-to-bank transfer," he says. "In my view, prepaid is driven by people who want to replace cash in their spending with a card. But they need to find somewhere they can load the card with cash."

While Connect2Family has initially been targeted towards Vietnamese communities in the US (where there are currently 1.6 million Vietnamese people), and in 2012 the company plans to expand in Australia (which has a population of 300,000 Vietnamese). Rowlison's team has also been looking at offering remittance services for Korean, Indian and Taiwanese migrants in the two countries.


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