For many currency routes, FX costs have been slashed in recent years by a number of industry-disrupting fintechs, allowing such firms to slice great chunks from the banking sector’s lucrative remittance markets. Banks are fighting back, though, by developing low-cost, digital offerings of their own.
Remittances, more simply known as money sent by individuals across borders, are a big deal.
In countries like the Philippines, where personal remittances sent home from overseas workers are worth an annual US$2.8 billion, these money transfers make up 10 percent of GDP.
Globally, money sent internationally by individuals is nearing the US$700 billion per annum mark, and this value is ever-increasing as a result of economic migration and the digital age.
Yet the cost of remitting money remains stubbornly high, with the World Bank’s recent estimate being 7 percent for a $200 payment to low or middle-income countries. That’s the average total cost across all remittance channels as a percentage of the transferred amount, but this can be much higher with banks, who charge consumers an average of 11 percent for transfers to those same countries.
Worse still, by some measures, as much as 70 percent of FX costs are hidden by banks and traditional money changers within the exchange rates offered. This unscrupulous practice of “padding” the exchange rate will be familiar to anybody who has ever bought foreign currency from a “no commission” Bureau de Change. Of course there’s a commission! And probably a big one! The money changer’s markup is included in the exchange rate — a rate that bears no resemblance to the real, interbank rates you’ll see on BER’s mid-rate converter page.
Enter the fintechs and other payments specialists, who have slashed upwards of 80 percent from the cost of sending money overseas.
Whether it’s with the likes of Revolut, which offers free money transfers on amounts less than £5,000 per month (yes, transfers at the interbank exchange rate), as well as a mobile banking experience complete with budgeting tools and pay-per-day travel insurance; or WorldFirst, a longstanding payments specialist that charges only 1.0 percent for sending £10,000 to the Philippines; or TransferWise, an innovator in the peer-to-peer payments space with über low FX costs and which processes a fifth of its transfers in less than 20 seconds, readers have it all to gain by bypassing the banks and going online.
With the emergence of such companies, not to mention a host of successful payment apps, e-wallets and crypto possibilities, the banks risk falling a long way behind unless they embrace digital payments and technology.
Although unwanted, it is perhaps the best compliment a business can receive when its services are copied by the mainstream establishment. This is, of course, what’s happening.
NatWest, for example, has begun trialling a new personal finance app it calls Mimo. Spain’s Santander has announced a €20 billion investment into a 4-year digital transformation plan. For its corporate customers, JP Morgan is already partly successful in reducing FX costs by way of its own cryptocurrency, JPM Coin. Citigroup is developing a platform that accepts payments from many of the world’s most popular digital wallets. HSBC has signed up 300,000 users to its new money management app and is exploring digital-only banking. And so on.
One area where banks retain control is in the market for business payments. Although large corporates are unrealistic targets for the fintechs, small and medium-sized businesses are ideal customers, and such businesses send US$6-7 trillion each year. Per Reuters, “many small firms accuse [big banks] of using slow, outdated technology and charging fees as high as those for retail clients.” This is where TransferWise and co. are hoping to step in.
Already, in some countries, the barriers to entry into lucrative business-payments markets are coming down. Earlier this year, the Japanese FSA, for example, announced it would remove a longstanding ¥1 million (US$9,000) cap on cross-border money transfers handled by non-banking entities — a cap that had prevented businesses from making use of cheaper FX services.
The race towards the perfect digital offering will continue, and although the banks can copy the services offered by their smaller, nimbler competitors, the fintechs remain confident.
“[Big banks] cannot copy our cost base,” Starling Bank, a digital-only challenger bank, said in a recent statement. “They have to contend with legacy technology, not to mention the massive costs of maintaining a branch network and the slowness to action that is inevitable with large bureaucracies.”
TransferWise is also optimistic: it expects business transfers to account for a quarter of its overall volumes within 3 years, up from a sixth in 2018.
Not all are believers, however.
“I am more pessimistic than ever for these startups,” says Mark Tluszcz, experienced venture capitalist and partner at Mangrove Capital. “Even though we all love to hate our bank, we still fundamentally trust the bank that, if we put our money there, it is not going to disappear overnight. And the fintechs have struggled to win that trust.”
The war between banks and fintechs will rage on.