How Well Equipped Are MFIs to Process Remittances?
The Latin America Advisor, April 2, 2008
Like many banks, microfinance institutions (MFIs) in Latin America are moving quickly to capture market share in the profitable money transfer business. How well equipped are MFIs to process remittances? How do you think the expansion of MFIs into the remittances business will play out going forward?
Board Comment: Manuel Orozco:
"Currently, one out of every three MFIs are participating in remittance payments in Latin America, compared to only a handful in the early part of this decade. These MFIs exhibit important characteristics: they have more branches, a greater rural presence, and more assets than other MFIs. Moreover, they are partnering with larger money transfer operators (MTOs) and competing in some places where banking institutions have less of a presence. There are two good examples. AMUCSS, an association of small Mexican banks in rural and indigenous areas, not only provides remittance services but also sells a range of financial products to women remittance recipients. In the last year, it has more than doubled its rate of converting remittance recipients into banking clients from 18 percent in January to 42 percent in December. In Paraguay, the rural bank Financiera El Comercio has become a formidable competitor to banks, now accounting for 50 percent of Western Union transfers to the country and aggressively converting recipients into bank clients. In three years, it increased the number of clients applying for savings and loan products by 79 percent. These cases exemplify the growing trend of MFIs expanding into the remittance business as part of their core services. And, as MTOs try to improve their competitive capacity in the payout areas, they are seeking to partner with MFIs in an effort to enhance their service delivery to migrants. Moreover, the number of MFIs paying remittances will increase over time as they gain greater awareness of the market. However, as many as one-third of MFIs cannot participate in this market because they may not meet certain minimum thresholds, such as cash flow, trained personnel to perform transfers, capacity to comply with international payments, and adequate technology, financial strength, and extent of coverage."
Guest Comment: María Jaramillo:
"MFIs that have thekey requirements needed tooffer this service effectively arewell equipped to process remittances.These requirements include: a largebranch network and strong presence at anational level, strong data managementsystems and systems teams to set upinterfaces with several money transfersystems, the ability to offer directdeposit into savings accounts or cards,being well known in their local markets,and not operating in markets thatalready have a large participation ofbanks as payers. Increased competition,regulation, and political pressure toreduce remittances fees are making theuse of technology innovations increasinglyimportant to stay competitive inthe industry. Going forward, the abilityto implement technology solutions suchas pre-paid cards or cellphones to payremittances will be key for MFIs to staycompetitive as paying agents. Newactors such as retailers, who offer moreflexible hours and in cases likeElektra/Banco Azteca compete withMFIs to bank recipients, are increasinglygetting involved in Latin America asdistribution points. In Africa and Asia,mobile phone companies are increasinglypiloting remittances services andin some cases leaving the participation of financial institutions out of theirmodels. In this context, MFIs will haveto stay competitive by expanding therange of services offered and adapting them to recipients' needs to create customer loyalty and be able to differentiate themselves as effective payers."
Guest Comment: Romi Bhatia:
"Given the enormous size of remittance flows worldwide, which has been well documented, MFIs in Latin America may be well positioned to enter the money transfer business if certain conditions and conducive factors are present. First of all, depending on a country's regulatory environment, MFIs need the legal authority to transact remittances, which may require them to be regulated or undergo a level of compliance that they are not yet accustomed to. This may result in a compliance and operational burden that smaller MFIs cannot bear. In MFIC's remittance distribution network, we have observed that many MFIs lack a clear understanding of the remittance market with regards to market competitors, the prevailing fees charged for money transfers, or the patterns of migration flows. On the other hand, many MFIs are well equipped to handle remittances in terms of cash management, security, and the depth of their market reach, especially in rural areas. It is critical to support MFIs in capacity building in order for them to gain market
share in an increasingly more competitive money transfer business. Moving forward, MFIC is undertaking a broad-based project to prepare MFIs to enter and compete in the inter-regional remittance market in Central America by identifying the corridors where competition is still lacking."
Guest Comment: Robert Wilke Meins:
"Of the $66.5 billion'sent home' to families inLatin America and theCaribbean in 2007, only about 20 percentis estimated to travel throughfinancial institutions. In most countriesMFIs pay out only 1-3 percent of remittancetransfers, but at 18.6 percent and9.7 percent, respectively, the experiencesof Bolivia and Nicaragua prove thatMFIs can play a significant role. MFIsare uniquely positioned to offer financial
services tailored to those who are often overlooked by larger financial institutions. Providing financial education and an expanded set of financial services, MFIs can play a pivotal role in broadening the options available to recipient families. At the same time, the revenues gained from transactions and cross-selling bolster the funds for traditional lending programs. Offering remittance services remains a challenge for many smaller MFIs, however. To provide reliable service, an MFI must be capable of paying out about $2,000 a day (about 10 remittance transfers), often surpassing the cash flow from other business activities. Working together to achieve economies of scale, MFI networks are better positioned to play an important role in the remittance market, especially as their bargaining power is increased in a market that often suffers from exclusivity contracts. MFI networks will be more capable of investing in new technologies, such as internet, card-based, and mobile transfer systems which offer the potential of further reducing the cost of sending money home. In each of these areas the Multilateral Investment Fund hopes to work together with MFIs to expand access to finance and provide migrant workers and their families the tools to achieve financial independence."
Manuel Orozco is a member of the
Financial Services Advisor board and
Executive Director of the Remittances and
Rural Development Project at the Inter-
María Jaramillo is Senior Director for
Remittances in the Marketing and
Product Development Unit at ACCION
Robert Wilke Meins is a Remittance
Specialist at the Inter-American
Development Bank's Multilateral
Romi Bhatia is Vice President of
International Operations at Microfinance