A new World Bank Development Research Group Report released in August, sponsored by the Bill & Melinda Gates Foundation, shows that digital payments and remittances are playing a key role in increasing financial inclusion throughout the developing world and in particular, emerging economies in Africa.
The report says that the rapid development and extension of digital platforms and digital payment methods are providing the speed, security, transparency, and cost efficiency needed to increase financial inclusion at the scale required to achieve G20 goals.
The World Bank publication comes just months after the Financial Times reported that Facebook is looking at entering the $550bn global money remittances industry.
Serial entrepreneur Michael Kent, CEO of the online money transfer service Azimo, a business which was reported to have been approached by Facebook, says that there is a clear connection between social media and money transfers.
Kent, whose mother is a South African, previously founded Europe’s largest independent remittance business Small World Financial Services and explained that, “remittances are a flow of two keys things; money (that’s obvious) and information. Sending and receiving that information is often the hardest part of the process.”
In a money transfer, if you’re the person sending money, you need your beneficiary’s (the person receiving the money) personal information and bank details. The beneficiary then needs to know where to go to collect the money, how to collect it and what ID and passwords they need to take. There is a flow of information that must be made for a successful remittance.
That is where social media is being touted as a potential solution as it connects senders and beneficiaries, with the World Bank estimating that over 90% of transfers are sent to family members – people who you’re connected with on social media.
Kent explains that, “with the social and information connection already existing on Facebook, it allows you to go from sharing pictures of your weekend to sharing money. For migrants living abroad Facebook is how they stay connected with life back home and now they can send money with just a few clicks on a smartphone.”
It is unsurprising then that many of Facebook’s fastest growing markets are in developing countries. These are traditional receive destinations for money transfers, for example there are already over 13m subscribers in Egypt, 9.2m in South Africa and 5.5m in Nigeria – and unlike the US and UK there is still growth potential for the social network.
The biggest impact the ‘social revolution’ will have is in reducing costs – being exclusively online means a massive reduction in overheads. Traditional banks and legacy players like Western Union operate an old-fashioned business model of stores and agents whereas social media enables online services to cut the cost of physical infrastructure and intermediaries and pass on the savings direct to the customer.
Back in 2011 at the G20, Bill Gates said that, “if the transaction costs on remittances worldwide were cut from where they are today at around 10% to an average of 5% it would unlock $15bn a year in poor countries.” For years African migrants have been overcharged by their providers and in May the Africa Progress Panel, a think tank chaired by Kofi Annan estimated that overcharging on remittances by the likes of Western Union and MoneyGram is costing sub-Saharan African’s alone an average of $1.85 billion a year – money that belongs in the pockets of the families of these hard-working migrants.
The result of concerted pressure from new online businesses is that globally the cost of remittances has begun to fall, down to about 8.4% but remains stubbornly as high as 10-15% in many key migrant corridors. Azimo on the other hand charges less than 3% because being online significantly reduces cost and that means savings for customers.
So is Kent concerned by the thought of Facebook entering the market? Not at all as he explains, “when we founded Azimo our mission was to get prices as low as possible to save migrants money and social media enables Azimo to do that. If Mark Zuckerberg and Facebook come along get the prices down to zero for our customer, then our customers have won and that means we’ve won!”