Why COVID-19 is accelerating the shift of international remittances to digital
For millions of people across the globe, sending money home to family and loved ones is a normal part of life. For the recipients of those transactions, the finances they obtain is often their only source of income and the difference between being above or below the poverty line. Thereby any potential impact of COVID-19 on the remittances market has vast consequences for a significant percentage of the global population.
In this article, we will look at how consumers have pivoted their remittances activity during COVID-19, whether this new trend will be permanent, and why digital remittances hold the key to economic recovery for so many.
Physical cash still dominates the remittances market – for now.
Despite the recent growth of digital remittances methods including P2P wallets, digital money transfer services, and direct bank transfers, at the beginning of 2020, most international remittances were still being completed via physical transactions. Some estimates state that 80% of international remittances are carried out physically, and this is even more pronounced for certain remittances route and particularly lower-income demographics. Which includes sending cheques in the mail, but the vast majority of these transactions are cash-based. Senders either mail cash abroad directly or, in what is much more common, deposit cash at a physical money transfer service where it is then ‘forwarded’ digitally to the recipient.
This is despite the fact that there are many inefficiencies in physical remittances transactions for the consumer. The most obvious of these is cost; due to the overheads involved, as well as other factors, completing an international remittance using a physical operator is more expensive than digital-only competitors. This cost either takes the form of higher fees or a less competitive exchange rate; in both cases, the recipient receives a reduced amount after the transaction.
Digital remittances operators are also often superior to physical store competitors when evaluating consumer experience, security, and speed of transactions. But despite these advantages, cash has remained the most common method for remittances.
There are several reasons that this has been the case. The first is that cash is often the predominant payment method of choice for both the sender and the recipient. Many economic migrants work in the gig economy or have other permanent employment where they are regularly paid in cash and thereby are most accustomed to this payment method. Moreover, recipients often live in countries where cash dominates the economy due to local custom or the lack of banking infrastructure. According to the World Bank, of the 1.7 billion unbanked people in the world, 46% live in just seven countries. Those seven countries, namely China, India, Nigeria, Pakistan, Indonesia, Mexico, and Bangladesh also comprise seven of the 11 countries that receive the largest value of personal remittances globally. It is evident there is a significant correlation between global consumers who are unbanked and global consumers that are recipients of international remittances. For this reason, unsurprisingly, predictions estimate that 90% of remittances currently begin and end with a cash transaction.
A further reason physical transactions were still dominating the international remittances market at the beginning of 2020 is that these methods are much more ingrained into the fabric of everyday life of economic migrants. Historically migrant communities have relied heavily on physical money transfer services to send finances back to their loved ones, meaning these businesses have developed into pillars of the community.
Whilst digital remittance services have multiplied to prominence in recent years, awareness of the benefits of digital remittances was still taking time to penetrate through to the majority of senders.
The impact of COVID-19
However, much like the majority of industries, the impact of COVID-19 on the international remittances market has been dramatic. Much of this fallout is having an adverse effect, to such an extent that the World Bank is predicting a fall in remittances to developing countries of 20% this year. This eclipses the fall in the value of global remittances seen after the 2008 financial crash when global remittances fell from $317bn to under $305bn. There are several reasons for this.
The first is that economic uncertainty and financial instability resulting from COVID-19 are playing a huge factor in people’s disposable finances. The risk to incomes, including pay cuts, fewer hours of work, or total unemployment, is taking its toll on people across the globe. And there is clear evidence that ethnic minority and migrant communities are being disproportionately impacted by the economic consequences of COVID-19 in developed countries, squeezing the source of much of the international remittances market.
So, regardless of wanting or needing to send more money abroad to friends and family, the reality is many economic migrants will be forced to prioritise managing their financial situation.
The second factor impacting remittance volumes is the current volatility of foreign exchange (FX) markets. Currencies such as the Euro and British Pound significantly weakened during the outbreak of COVID-19; this means the value received by the recipient is reduced when a transaction is made from those countries. Where the remittances are not being made due to absolute necessity, this reduction in value is likely leading to a substantial decrease in the sender’s transactional appetite.
On the other hand, any reduction in global remittances isn’t driven by a lack of demand. If anything, it could be argued that the global financial hardship is even more pressing as the global economic impact of the pandemic begins to bite harder. If the fall in remittances does reach the 20% level predicted - millions of people in developing countries will be cast into absolute poverty, both because they are already heavily reliant on remittances and because the economic outlook in developing countries is bleak.
It is not only traditional recipients of remittances that will drive increased demand. In developed countries, increasing the amount of financial aid to loved ones might also be essential due to new financial hardship, displacement, or other consequences of COVID-19. For example, the cost of healthcare in the US for uninsured citizens is so steep that many who fall victim to COVID-19 will be reliant on family support to pay the medical bills that they will incur when recovering from the virus.
Of course the impact of a costly healthcare service affects remittances being sent from a country. For example, in the US, where economic migrants are less likely to have health insurance, the finances involved in COVID-19 treatment would significantly restrict the ability to send money home to loved ones.
People are still sending money, but in a new way
People are still sending money to friends and family, but they are doing so in a new way. Partly this has been driven by a lack of access to physical stores, or cash, or both, but also a desire to find better solutions to the issues discussed.
To better understand these changes, we asked consumers in seven countries (the US, Canada, UK, Germany, Austria, Bulgaria and Italy) about how they were sending money to friends and family as part of our recent research Lost in Transaction: The impact of COVID-19 on consumer payment trends.
Overall, half of all consumers said that they had given money to a loved one in the previous month, and 20% of consumers had done this at least three times. Almost half (47%) of consumers had used cash to make a transaction, but this is lower than similar previous research. 38% had made at least one direct bank transfer and 27% had used a digital wallet or P2P app.
When explicitly asked about transferring money overseas, only 6% of consumers said that they would currently use a physical money transfer service. Three quarters (74%) of consumers said that they would use a digital remittances method to transfer money overseas. The most popular of these was a digital wallet service such as Skrill (32%).
Beyond the pandemic
While we can see that consumers have pivoted to digital remittances methods during the pandemic due to necessity, the question remains whether this will establish a long-term shift in preference or whether we are merely observing a short-term trend. There are compelling arguments that the answer is the former.
The first is that consumers’ general propensity to handle cash is on the wane. When we asked people in April about their attitude to cash, almost half (48%) of consumers globally said that they had safety concerns with cash, and this exceeded 50% in the UK (53%), US (55%), and Canada (56%). This, and the emergence of cash alternatives, will also impact how often consumers interact with cash moving forward. Almost half (48%) of consumers said that they planned to use cash less in the future - regardless of whether they had safety concerns or not, and 53% of consumers said that using contactless payments more during lockdown had made them more comfortable with the concept of a cashless society.
When we asked consumers who had given money to friends and family in the past month but not used cash why that was the case, only a quarter (26%) said that they habitually wouldn’t use cash. The most common answer (43%) was that the person would have used cash, but didn’t due to safety concerns. This is a clear indication that attitudes are changing.
In addition to consumer preference moving away from cash, there may also be less outlets to transact remittances in cash. Many cash-based money transfer operations that have been forced to close during COVID-19 will not have the funds to re-open once social distancing measures are relaxed - this will play a further role in shifting senders online.
The second factor playing a role here is the exposure and familiarity digital remittance methods have seen during the COVID-19 lockdown has meant more consumers and communities are increasingly aware of their advantages over traditional operators. These advantages, namely convenience and especially cost, are more valued than ever in a shrinking economic climate where every penny counts. Even regular senders who haven’t already converted to digital remittances methods during COVID-19 lockdown will inevitably begin researching cheaper alternatives as times get tougher. Once consumers are aware of these advantages, it seems highly likely that the percentage of the global remittances market made via cash deposits will continue to reduce.
The growth of m-PESA as the predominant payment method in Kenya is an example of social need permanently transforming the payments landscape. The need for an alternative to a bank ecosystem that was not accessible for the majority of the population drove Kenyans to use digital alternatives, that then quickly became the preferred method due to its convenience even when cash was a viable option.
A use case for blockchain
One additional potential evolution of the international remittances industry that will enhance its benefits over physical money operators even further is the growth of blockchain technology. Proponents of blockchain have identified international remittances as a potential future use case for the technology, and if implementing blockchain can deliver the safer, faster, and cheaper transactions that are promised this will be a game-changer for how people send finances around the globe, especially to developing countries.
Despite the fanfare, this technology is still at an early stage so it may be a while until we see the full benefits of blockchain make a significant impact on the international remittances. Ultimately it will be people in developing countries who will be the beneficiaries of this evolution. The reduction in the cost of remittances has real potential to pull millions of people across the globe out of poverty, which will be critical as the global economy continues to battle back from the impact of the pandemic.