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Banks And Money Transfer: Sleeping Giants

Caravan as a symbol of banks for remittances

“The dogs bark, but the caravan moves on.”

Arab Proverb

The foundation of money transfer startups’ PR pitch centers on a fairly intuitive concept concerning the role of banks: they are massive institutions with bureaucratic cultures, subpar customer service, and outdated digital capabilities. Consequently, it’s only a matter of time before banks are displaced from the cross-border money transfer industry. Ironically, this premise holds true. In comparison to the leading fintech startups, a typical bank is notably behind in service quality and pricing. Furthermore, the vast majority of banks don’t even consider a money transfer business as strategic.

Why Banks Don’t Take Money Transfers Seriously

It would be naive to assume that banks are not concerned about competition. In the United States alone, there are 4,000 banks, plus, countless credit unions, whose executives are obsessively comparing their strategies to local and national competitors. However, banks naturally view their competition via pragmatic lenses, “What are the top-5 reasons for revenue slowdown?” or “Which new business trend could jeopardize 10% of profits?”

You probably heard that the market size of consumer cross-border money transfer services is substantial. Remittances alone amount to close to $0.9 trillion, as reported by the World Bank, and the overall cross-border C2C volume is about twice as large.

Source: Knomad (World Bank)

However, given an average margin of less than 4%, even $2 trillion in volume would translate to approximately $70 billion in global revenues for the consumer cross-border money transfer industry. Since banks predominantly generate their revenue domestically, the portion of money transfer revenues relevant to banks is considerably smaller. In the case of the United States, the world’s largest outbound market for consumer money transfers, it contributes to about 20% of the global revenue, which amounts to around $15 billion.

How does that $15 billion compare to the current revenues of the four largest US banks? Let’s examine the overall, consumer, and cross-border business revenues of these banks, all of which rank among the top 25 global banks:

If the above chart is magnified, the banks’ current remittances revenue becomes barely visible. It represents approximately 0.5% of the banks’ overall revenue or around 1.3% of their consumer banking revenue.

Courtesy of The Guardian, you can observe similar data for Santander, where all cross-border-related business represents around 1.5% of the bank’s total revenue (disregard the sensational and erroneous point about “10% of the Group’s profit):

Santander Internal Presentation via Guardian April 2017
Source: https://www.theguardian.com/money/2017/apr/08/leaked-santander-international-money-transfers-transferwise#img-2

For Wells Fargo, cross-border money transfer fees are so minimal that the bank separated them out for the last time in 2019.

WF 2018 Consumer Revenue Breakdown
Source: Wells Fargo Annual Report 2019

Even if one of these banks were to miraculously become the sole provider of remittances in the country, displacing hundreds of competitors in the process, it would only gain an additional 10% on top of its consumer business.

Banks competitive position

Now, let’s compare the size of cross-border global money transfer volumes between the banks and the cross-border specialists, also known as Money Transfer Operators (MTOs):

It appears that banks lag behind the top players, but it is primarily because they lack a retail presence in many countries. Within a single country, such as the US, the largest banks are among the cross-border leaders:

Notice on this chart that in less than a decade, the four largest banks in the US have doubled their collective transfer volume, growing 22% in 2022 alone. The reason for showing only these four banks is their dominant role in handling the majority of transactions and contributing to half of the transfer volume out of the country:

The banks are not only remaining a dominant force despite the growth of fintechs, but they are also becoming more digitally mature. Between 2021 and 2023, bank mobile app usage for remittances grew the most compared to wallet and money transfer apps, making it the most used app among these three groups.

Source: Mastercard

The annual cross-border consumer money transfer volume of all US banks totals approximately $100 billion, which accounts for about half of the overall USA outbound volume. This figure encompasses all types of consumers, including the affluent clients of banks’ Private Banking groups. Such a significant market share of banks is not exclusive to the US. For instance, in the case of transfers from the UAE to India, a single bank, Axis, commands a 20% market share. In Korea, the top 5 outbound money transfer providers consist of the country’s four largest banks and Western Union.

One can now begin to understand why bank executives were initially unaware of cross-border disruptors like TransferWise:

Survey of bank executives about fintech

What Banks Don’t Like About Money Transfers

Apart from being a minor revenue source for banks, cross-border money transfer has become an increasingly challenging service to manage. As outlined in another SaveOnSend article, regulations designed to combat terrorism financing, money laundering, and tax evasion, while necessary, have also imposed significant resource and system investments on service providers.

For a large bank, this burden is twofold: offering cross-border money transfers to its own customers and providing banking services to Money Transfer Operators (MTOs). The latter business has become exceedingly complex from a compliance perspective, leading banks en masse to close accounts of money transfer providers, a global trend known as “de-risking“. In essence, the profits banks earn from serving MTOs do not offset the additional investment requirements and legal exposure created by regulations. Here’s how a senior banker privately describes the risks associated with holding a correspondent account for a large remittance company (“XYZ,” to maintain anonymity):

“We have an acute concern with a regulatory actions against our bank if XYZ’s x-border client commits an illegal activity. To manage risk exposure, our bank conducts an annual two-full-day dedicated compliance due diligence on XYZ with AML, Compliance, Payments committee members and stakeholders from Risk, Banking and Cash Management teams. One of top priorities is to ensure that we are only enabling business accounts transfers for XYZ and that those transfers are done for a specific purpose (not gambling, drugs, etc.) – as providers, at times, knowingly or unknowingly, misrepresent types of accounts and their purpose.  Even when discussing a renewal of  credit commitments for XYZ, a topic seemingly far away from a nature of cross-border transfers, about a third of our banking peers decline to join our bank due to potential regulatory concerns.”

Up to this point, de-risking has primarily impacted the smallest MTOs, cryptocurrency exchanges, and a handful of high-risk destinations such as Somalia or The Cayman Islands. However, it remains a significant concern even for the largest money transfer specialists. Most of them have a primary banking partner but also maintain some business relationship with another major bank as a precautionary measure.

To mitigate regulatory exposure, banks are carrying out regular audits of remittance providers using their services. Consequently, many bank employees have an in-depth understanding of how remittance specialists operate, whether it’s Western Union or Wise. If the senior leadership of the banks was inclined to do so, it would be relatively straightforward for their money transfer managers to replicate “best practices” and concentrate on consumer remittances. However, this isn’t the direction they choose to pursue.

Banks’ Strategy for Money Transfers

There are three go-to-market models for banks in remittances:

  1. Ignore: most banks only offer wire transfers.
  2. Prioritize: build a separate money transfer business.
  3. Partner: rely on a specialist to serve your customers.

Banks’ partnerships with incumbent MTOs or fintechs have existed for many years. In 2016, claiming that it was a minor bottom-up experiment, TransferWise signed up two inconsequential-at-the-time banks, N26 and LHV. It signed just one more in 2017 (Starling). In 2018, Transferwise raised stakes and created a stand-alone global partnership team while launching an API portal. That year, it lost Starling and gained Monzo:

TW Monzo Partnership 2018

Also in 2018, in July, Transferwise signed its first partnership agreement with a large bank, BPCE, but it never went into production. In 2019, Transferwise signed up a few more tiny banks in the US and Australia. Afterward, the pace started to pick up and by early 2023, Wise Platform had agreements with 60 partners representing 10 million customers and businesses (N26 and Monzo got much bigger since the signature days). Some partners even claim a 15% penetration, but assuming an average 5% penetration, this line of business might be already contributing 5-10% of Wise’s active customers. Wise expects the majority of its volume will one day come through its API business.

It is not surprising that the world’s largest banks have been ignoring such partnerships because they are not concerned about disruption. For example, in the US, only about 10% of banks offer this service. Among those banks, 90% offer only a wire transfer method. Wise, with its superior value proposition, has already surpassed Citi, Wells Fargo, and Bank of America’s cross-border volumes and is catching up to JP Morgan Chase. However, despite all these competitive pressures, all top banks have been growing their transfer volumes, doubling them in the last decade.

Ironically, instead of JP Morgan Chase using Wise as a white-label solution for money transfers, Wise was the first to use Chase for offering interest-bearing accounts.

Who is using banks for money transfers?

Banks are used for international money transfers by all consumer segments, including recent migrants:

Inter-American Dialogue Survey - Channels 2016

Until about a decade ago, migrants relied even more on banks for cross-border transfers. However, providers like Western Union and Xoom began offering digital services. Despite this, the volume of money transfers going through banks continued to increase as more migrants came to the US and opened bank accounts:

Inter-American Dialogue Survey - US Bank Ownership 2016

However, the typical users of money transfer services at banks differ from the customers of MTOs and fintechs. Let’s review the average transfer amounts (in thousands of dollars) among top banks:

Compare this with the average principal amount of remittances sent offline (via a cash agent) – $200-400 and digitally – $1,000-2,000. Even the average amounts for money transfer providers targeting high-end customers are around $5,000-6,000 for CurrencyFair and $2,000-3,000 for Wise:

Remittance providers - Average Send Amounts Dec 2017

Banks’ primary consumer sub-segment is different: less frequent senders who remit much larger amounts and use wire transfer methods for sending money. But why does the average transaction size for Wells Fargo differ so significantly? It is the only US bank that actively targets traditional remittance consumers with a separate landing page launched in 2007:

While performing well overall, Wells Fargo has been particularly successful in the USA-to-Philippines corridor, where it ranks among the top 5 digital remittance providers, despite charging above-average margins:

Comparison or providers - USA to Philippines, $500, bank-to-bank, April 2019
Comparison of providers – the US to Philippines, $500, bank-to-bank, April 2019

Banks’ pricing for money transfers

Traditional bank service for money transfers tends to be on the expensive side. TransferWise even claimed that the banks are 10 times more expensive.

Those claims were misleading (see this SaveOnSend article for more), but the pricing gap between traditional banks and money transfer specialists remains substantial. This is primarily due to the worse foreign exchange rates offered by banks, which can be less transparent to customers compared to fees. However, there is a difference in how banks make money on cross-border transfers in Europe compared to North America. In Europe, banks charge much higher fees, while in North America, they charge more in the FX markup.

Historically, banks have charged fees ranging from $25 to $50 for wire transfers. However, the competition from fintech companies, along with the cost advantages of digital channels, has resulted in considerably lower prices for online transfers when compared to in-branch service.

For higher-volume transfers, banks may not charge any fees. Take JP Morgan Chase, the largest retail bank in the US, for instance; they don’t impose a fee for wire transfers exceeding $5,000.

When banks conduct international money transfers at rates 2-3% less favorable than the market rate, it is easy to eliminate visible fees. With an average transfer amount of $10,000, this translates to $200-300 in revenue per transaction through a low-cost digital channel. Not a bad business.

Do customers like their bank?

What about the quality of service in those banks for cross-border customers? It’s a common belief that consumers have a negative view of their banks, with a cliche suggesting that millennials would prefer a root canal over dealing with a banker. In reality, among millennials, satisfaction with a bank’s branch experience exceeds 80%. On the other hand, a sleek online interface might be perceived as less trustworthy when it comes to sending money.

It could even be argued that consumers have a strong liking for their banks. Just how strong is this affinity? Take Wells Fargo, for example, which was embroiled in multiple public scandals, including the opening of fake accounts and withholding insurance refunds. Did the bank’s customers shift their business to any of the thousand other banks or opt for a trendy fintech startup? Nope, they stuck with Wells Fargo:

Wells Fargo Q2 2017 vs 2016 Community Bank KPIs

Moreover, migrants tend to exhibit a strong loyalty to banks from their home countries that offer services in the host countries. As seen in the earlier comparison table for transfers from the US to the Philippines, PNB is the 5th largest bank in the Philippines and plays a significant role. Similarly, for transfers from the US to India, ICICI and IndusInd banks, ranked, #3 and #10 in India, continue to be active players.

Comparison of Providers - USA-to-India, $1,500, bank-to-bank, March 17 2018
Comparison of Providers – USA-to-India, $1,500, bank-to-bank, March 17 2018

Banks’ service quality

Similarly to US banks, the remittance portals of many non-US banks (PNB, ICICI, IndusInd) appear to be outdated by ten to twenty years. It can be perplexing to some that these banks continue to attract remittance business, given the superior digital capabilities and pricing offered by MTOs and fintech players. However, for some of their customers, this backwardness may evoke a sense of tradition and stability.

While Wells Fargo stands out among the largest US banks for its comprehensive approach to targeting typical remittances, other banks may also engage selectively. For instance, India is not only the world’s largest inbound country for remittances but also its citizens in the US tend to be more digitally savvy compared to other large migrant groups. Consequently, Citibank has created a dedicated global landing page tailored to this niche.

Citibank Global Remittance India Landing Page

Banks’ attempts to build money transfer fintech

Only a handful of banks have ventured into establishing separate fintech subsidiaries dedicated to cross-border money transfers. This approach allowed them to explore digital technologies without risking their primary brand. A case in point was BBVA Compass in the US, formerly a subsidiary of BBVA. It placed a strong emphasis on Latin American markets and ranked among the top thirty US banks in terms of consumer cross-border volume. However, a notable decline in cross-border volumes in 2016 prompted the bank’s executives to prioritize the cross-border consumer business within their overall strategy.

Renowned for its innovative culture, BBVA made a significant move in October 2017 by launching a dedicated mobile application for remittances. It commenced with the USA-to-Mexico corridor and named the app, Tuyyo, which translates to ‘you and I.’ The app offered a basic user interface and had limited features.

Tuyyo UX Feb 4 2018

The bank continued to charge an above-average margin, approximately 3% in total, with half of it coming from a fee and the other half from a foreign exchange markup. Despite an extensive PR campaign, six months after its launch, the app had minimal downloads:

BBVA Tuyyo app on Google Store Feb 4 2018

Less than two years after launch, it became obvious that the application couldn’t compete with the leading fintech players in this space, and BBVA announced the shutdown of its services.

BBVA announcement of shutting down Tuyyo June 1 2019

The same fate awaited another Spain-based bank with a global reach, Santander. In April 2020, the bank launched PagoFx, a Wise wannabe:

Santander took only 15 months to shut down PagoFx for remittances and pivot to business payments as PagoNxt. Banks repeatedly failed to grasp that taking market share from specialists is a magnitude more challenging than satisfying existing customers with enhanced digital user experiences.

In 2020, it looked like HSBC learned from the failures of others when it launched its version of Revolut’s multi-currency cross-border wallet, only for existing customers and without a separate branding.

But no, HSBC also couldn’t resistant making the same mistake, in 2023 launching a different brand, Zing, to target external consumers:

And why would consumers happy with Wise and Western Union or their bank’s money transfer flock to HSBC? Apparently, those young professionals are dreaming of becoming “Founder Members” of Zing and getting a limited edition debit card.

Source: AltFi

Conclusion

Banks, as a class, will continue to play a major role in cross-border money transfers. While they may not view remittances as a strategic product that warrants a fight for a bigger market share, banks will always remain attentive and invest just enough in their money transfer services to satisfy customer needs. In rare cases, they may proactively target niche markets where they perceive a significant growth opportunity. Instead of banks worrying about competition from money transfer specialists, including fintechs, it is these players who have major concerns if banks were to discontinue offering them correspondent banking services.

Thank you for taking the time to read our analysis. We continually update our articles on our blog, so we encourage you to return regularly. If you have any concerns about the accuracy or objectivity of our facts and conclusions, we welcome your feedback in the comments section below.

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