Despite the deep changes taking place in many areas of finance, the remittance market remains dominated by traditional channels of sending money. Industry giants such as Western Union are looking at ways to ride the digital wave and, increasingly, to the potential of blockchain and crypto to transform their business.
Digital payments are set to upend Latin America’s $128-billion remittance market, and cryptocurrencies in particular promise to reduce costs and streamline transfers. Fintechs are following developments closely, as are the companies that dominate the industry and remain very dependent on physical establishments.
In Mexico, a key market for the industry, three quarters of the remittances entering the country are paid out in non-bank institutions such as shops, pharmacies or supermarkets, usually in cash and denominated in pesos; the remainder passes through banks, being either deposited in an account or collected in cash, according to an analysis of Bank of Mexico data by BBVA Research.
“[Today there is] a consumer who pivots between the retail channel and the digital platform. I would say that above all it’s an omnichannel consumer, which is sort of where the industry is going,” Pablo Porro, general manager for Mexico and Central America at Western Union, told iupana.
“We have seen the adoption rate for our digital products increase, but also, fortunately, we have seen consumers return to the retail channel as the various sanitary measures have disappeared in many places,” he adds.
Western Union reported a US$5 billion profit from its global physical channels last year, compared to US$1 billion generated by its digital media, including account transfers and wallets such as Mercado Pago in Mexico.
However, the company, which has been in existence for almost two centuries and has 100,000 outlets in the region, doesn’t want to be left behind in the shift to digital. That’s why it’s developing an electronic wallet pilot in Europe that will soon include Latin America, Porro said.
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Western Union also sees a latent opportunity with the entry of big tech into the market for money transfers; for example, Meta has made inroads with Novi in the corridor between the United States—the principal source of remittances to Latin America—and Guatemala.
“More than a threat in that sense, we see spaces to collaborate […] There are opportunities there that have to do with the provision of that cash,” says Porro, who adds that recipient families are often outside the banking system, which makes them more likely to use cash.
According to BBVA, 64% of remittance recipients in Mexico are in localities of less than 15,000 inhabitants, which limits the opportunities for financial inclusion.
Meta is using the PAX dollar, a stablecoin that uses blockchain to drastically reduce the time and cost of sending money. Porro said blockchain is also on the Western Union’s radar as a possible means to streamline operations. Clearing payments that currently go through the banking system is also something that must be evaluated, he said.
“This phenomenon of blockchain technology, of distributed ledger, is really interesting. We think it’s very disruptive […] We continue to monitor how the market evolves, the different operators, to see how we can start using a tool that makes sense to us, or complements our platform,” says the executive.
Consumer interest is also evolving. According to a survey last year by Americas Market Intelligence (AMI), 33% of respondents in Peru, 17% in Argentina and Mexico and 8% in Brazil said they were open to receiving crypto remittances, especially given the average fee for wiring cash is a not insignificant 5.5%.
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Digital proposals for remittances
2021 was a bumper year for sending money to Latin America and the Caribbean, with annual growth of 26%, the highest for two decades, according to the Inter-American Development Bank.
Remittances are extremely important for LatAm families and the search is on for easy solutions with low fees. New digital players have come up with some answers.
Global66, a Chilean fintech, doesn’t charge a commission and instead makes money from the exchange-rate differential, Tomás Bercovich, its co-founder and CEO, tells iupana.
The company promises to send money within hours, not days. It offers a multi-currency digital wallet as well as a solution for cross-border company payments. It processed more than one million transfers totaling US$700 million last year. Bercovich says the crypto wave is a “growing market with good results. However, for now we continue to work with fiat currencies.”
Peruvian fintech tranzfer.me has taken a different approach, and aims to serve as a channel to link users who want to send or receive money and complete payments locally, creating networks in its markets of Brazil, Peru and the U.S.
“We are not a collecting agent but rather a facilitator for our clients,” says Alex Zúñiga, the firm’s co-founder.
Tranzfer.me uses instant payment systems such as PIX in Brazil and Zelle in the U.S. for local transfers, although clearing payments in the different markets slows the process down.
The fintech charges a commission of 3% or 1.5% depending on whether the transfer will be made within 24 or 72 hours. It moved US$2.5 million last year, compared to US$650,000 between March and December 2020.
Zúñiga anticipates that in the coming months, Tranzfer.me will start using blockchain technology to evolve its processes and and speed up remittances.
“Soon, we’ll base this peer-to-peer business within a cryptocurrency market on blockchain,” he says.