“The dogs bark, but the caravan moves on.”
– Arab Proverb
The premise of money transfer startups’ PR pitch revolves around a relatively intuitive notion when it comes to the role of banks: they are sleeping giants with bureaucratic culture, awful customer service and backward digital capabilities, so it is just a matter of few years before banks will be disrupted out of cross-border money transfers, also known as “remittances.” Paradoxically, this premise is not wrong. Moreover, most banks don’t view money transfers as strategic business or care which flavor-of-the-month startup is bragging about their imminent disruption. However, while some of those remittance startups would disappear in few years, the leading role of banks in this space will remain forever. How could that be?
Why Banks Don’t Take Money Transfers Seriously
It is naive to think that banks are not worried about competition. Just in USA, there are 6,000 banks whose executives are obsessively comparing their strategies to local and national competitors. However, banks naturally view competition via pragmatic lenses, for example, “what are the top-10 sources of our revenue leakage?” or “which trend could jeopardize 10+% of our profits?” In tha context, lets recall that in the analysis of remittance startups (read this SaveOnSend article) we also estimated the market size in 2015 and 2025:
Let’s now compare those revenue figures with the overall and consumer-only revenues of four largest USA-based banks (all are among top 25 global banks):
And how much the largest banks make on ALL cross-border transfers including B2B and Correspondent Banking? $0.5-1 billion. Courtesy of Guardian, you could see such data for Santander where ALL cross-border-related revenues represent around 1.5% of company’s total (disregard sensational-erroneous point about “10% of the Group’s profit”):
Of course, these largest banks make far less than 1.5% of total revenues if we only focus on C2C cross-border transfers. Even if any of these large banks becomes the world’s only provider of remittances, miraculously displacing 10,000 competitors in the process, it would gain about the same revenue as its existing consumer business. Let’s now compare revenues of banks vs. remittance specialists also known as MTOs:
Western Union, by far the world’s largest provider, generated less than $4 billion in revenues from remittances in the last four quarters. How meaningful would this amount be for a large bank? It would only add about 10% to its consumer business or around 5% enhancement to its total revenue.
But what about all those disruptors, well-funded Fintech startups with supposedly much better digital capabilities and more customer orientation than banks? After six-plus years since launch, their revenues remain tiny in comparison, with only TransferWise approaching $0.2 billion annually (see bottom four lines in the graph below):
You can now start to appreciate why banks’ executives might be unaware of remittance startups like TransferWise or Azimo:
That is also why, you will not find “remittances” mentioned in banks’ annual reports: this standard service offering while being core for MTOs is simply too small to matter to most banks. In terms of importance for a large bank, remittances stand somewhere between a travel insurance and overdraft products and executives in charge tend to be three-four levels below heads of retail banks.
What Banks Don’t Like About Money Transfers
Besides being a relatively minor service offering for a bank, remittances have been increasingly difficult to manage. As we describe in another SaveOnSend article, regulations that were meant to minimize terrorism funding, money laundering and tax evasion, while justified are also requiring providers to make an extraordinary investment in resources and systems. For a large bank, this burden is two-fold: offering remittances to its own customers AND providing banking services to remittance companies. The latter has grown so complicated that banks en masse have been closing accounts of remittance providers (a global trend also known as “de-risking“) – in other words, whatever money banks make of remittance providers does not justify additional investment requirements and liabilities created by new regulations. Here is how a senior banker describes the risks of holding a correspondent account for a large remittances company (“XYZ” to preserve 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. “
So far, de-risking has affected the smallest remittance providers or few high-risk destinations like Somalia or The Cayman Islands. But it is a top concern for the largest remittance specialists as well. Most of them have a primary banking partner, but are always maintaining some business with another large bank just in case. To minimize the regulatory exposure, banks are conducting periodic audits of remittance providers that use banks’ services. As the result, there are plenty of bank executives and staff out there who know exactly, inside-out, how remittance specialists work, whether it is Western Union, Transfast or TransferWise. So if bank’s senior leadership cared, it would be simple for their money transfer managers to copy “best practices” and just take over global consumer remittances, but they don’t.
Banks Approach to Money Transfers
There are 3 go-to-market models for banks in remittances
Ignore: most banks only offer wire transfers
Prioritize: build a separate remittance business
Partner: rely on a specialist to serve your customers
At this time, partnerships are in a very early, pre-hype phase. For the sake of experimentation, TransferWise signed up two inconsequential banks, and we are not expecting any breakthroughs in the upcoming years.
Even banks on “ignore” path are already a major force in remittances. Although smaller than few top global specialists, top banks’ transfer volume is naturally limited to the countries of its retail operations:
Within a specific country, top banks’ position in the remittances market is even more impressive considering how little they care about this service line. For example, in USA, the world’s largest outbound country representing 20% of all global remittances, only 10% of around 6,000 banks offer remittances. A wire transfer is the primary method for 90% of those banks. Out of that group, top four US banks are responsible for almost half of total remittance volume, with JP Morgan Chase and Bank of America transferring more remittances from USA than MoneyGram, and TransferWise starting to catch up:
Looking closer at the above graph, you might notice that JPMorgan Chase’s volume went up 30+% in the last year while Citibank’s volume declined by almost same percentage. Those swings might seem significant until we consider how little they represent in these bank’s bottom line.
Across ALL banks in USA, transfer volume and transactions have been increasing around 5% annually over the last few years: