What’s holding back digital disruption in remittances in Southern Africa?

In a new World Bank report on the Market for Remittance Services in Southern Africa, we outline the binding constraints that appear to be holding back the digital remittances revolution in the countries that make up the Southern African Development Community (SADC).

Digital disruption in international person-to-person remittances is well underway. New research estimates that international digital remittances will exceed US$300 billion globally by 2021, making up 44% of total formal international remittances, and up from 36% in 2018. Thanks to high rates of mobile phone penetration and growing internet access, digital players are not only gaining ground, but they are also forcing “traditional” incumbents to expand their digital footprint.

Despite this encouraging trend, the combined global market share of digital disruptors remains small; and in Southern Africa, their presence has not yet placed significant downward pressure on remittance costs. In fact, the costs to send remittances to, from and within Southern Africa are among the highest in the world. As shown in the figure below from the World Bank Remittance Prices Worldwide, in Q3 2018, the average cost to send US$200 to SADC countries was 11.94%, compared to 8.96% in Sub-Saharan Africa (SSA) and 6.94% globally.

Since the early 2010s, a series of regulatory reforms in the region have sought to enhance competition in the market for remittances, with the hopes of bringing down remittance costs. In South Africa, a key “sending market” for other countries in the region, reforms included the removal of foreign ownership restrictions for money transfer operators (MTOs), as well as the creation of independent MTO licenses–which allowed MTOs to operate independently of banks and other authorized dealers of foreign exchange. These reforms, along with the banning of exclusivity agreements between international MTOs and their local partners, have contributed to reducing barriers to entry in the South African remittances market. Yet, their impact on remittance costs has been limited.

In addition, several initiatives have been introduced to enhance the efficiency of cross-border payments in the region. In 2013, the SADC Interbank Regional Settlement System (SIRESS) was launched to facilitate inter-bank settlement of cross-border payments, and the development of a SADC Regional Clearing House (RCH) is currently underway. Ongoing national initiatives to promote mobile money, electronic payments, and interoperability within and across payment networks are also starting to change the landscape for international remittance services in the region. As a result, several new digital players – including Mukuru and World Remit – are leveraging mobile phones to offer digital remittances; while others are leveraging existing widespread physical networks across the region to deliver low-cost cash-based remittances.
Despite these positive developments, several bottlenecks remain. The top three constraints include:

1. Cash is still king. Cash-based remittance services continue to dominate the remittances market in SADC, largely due to low levels of financial inclusion and a reliance on cash for domestic retail payments and transactions. As a result, even where digital origination takes place in sending countries, MTOs must develop and maintain costly agent networks to disburse remittances in cash in receiving countries. While shifting remittances from cash to digital channels will have a considerable impact on costs, more needs to be done to encourage access and usage of transaction accounts and e-wallets, to broaden digital payment use cases beyond P2P money transfers, and to build awareness of new digital remittance services. 
2. Use of regional payment infrastructure for low-value remittances is yet to reach scale. To date, SIRESS has been used mainly for the settlement of high-value, low-volume payments associated with cross-border trade. While work is in progress to also allow settlement of cross-border retail payments through SIRESS, as of today low-value payments, such as remittances, continue to rely on correspondent banking arrangements which are expensive and slow. Nevertheless, international remittance hubs–i.e. switching platforms that connect different remittance service providers–are emerging to provide faster and cheaper clearing and settlement of cross-border remittances in the region. 
3. Regulatory requirements remain costly and burdensome, given the lack of harmonization across the region. Regulatory requirements associated with AML/CFT and foreign exchange reporting remain a key bottleneck for the efficiency delivery of remittance services in SADC and elsewhere. While shifts to the risk-based approach to AML/CFT has allowed for simplified customer due diligence (CDD) for low value remittances in some SADC countries, monitoring and reporting requirements remain burdensome. Furthermore, the lack of harmonization with regards to licensing, compliance and other regulatory requirements creates further hurdles for digital players looking to scale low-cost remittance services within the region. 

Digital remittances have potential to disrupt the remittances market in Southern Africa, bringing down costs and facilitating the transition away from unregulated and cash-based remittance channels towards regulated, digital channels. However, enhancing financial inclusion, building consumer awareness and trust in new digital channels will be key, and adopting regulatory approaches that balance innovation and risk will be critical to this transition. Continued development of regional retail payment and settlement systems, alongside stronger mechanisms for coordination between public authorities and private sector remittance service providers, will be equally important to boosting digital remittances in the region.

For more information, read the full report.