The first rung

[Dave Birch] I suppose one of the reasons why I get so excited about digital momey is because I see them as having a real purpose, not just as a business, but as a social force that makes life better for people. So how can it contribute to sum total of human welfare? Well, making it easier for me to buy stuff on eBay is one thing, but bringing efficiency to the international remittance market is quite another. I was invited along to HM Treasury’s seminar on “Remittances and Financial Inclusion” recently and I heard a number of interesting perspectives on the issues.

Gareth Thomas, Minister for DFID, gave the keynote, making the point that remittances to developing countries are far more than aid. There are about £6 billion in annual remittances from the UK (£4 billion through “formal” channels and another £2 billion through “informal” channels). At the destination, remittances are incredibly important — in a country like Ghana, remittances are more than half of household income — so improvements in the system have a major impact. Gareth said that he hoped for improvements from a number of directions.

1. Technology (he highlighted M-PESA) as an obvious driver;
2. Regulation (I was very happy to hear him say that it musn’t have a “perverse impact” on small transactions);
3. Partnerships between banks so create more efficient and accessible remittance corridors (eg, Barclays corridor from UK to India);
4. Learning from EU PSD, creating a single set of rules in regions and eventually global. I thought this was a lot to hope for, but the sentiment is correct, obviously.
5. Better information for consumers, many of whom get ripped off because they simply don’t understand the terms, conditions and costs.

The Exchequer Secretary at HM Treasury, Sarah McCarthy-Fry, made the point that people on low incomes are those most likely to affected by financial exclusion. Fair enough. But she called this evidence of “market failure”, which I think is more questionable (because I think it may be more to do with regulatory failure), and said that widening access to banking is the cornerstone of financial inclusion which I think is simply wrong because, as Sarah herself mentioned later in her speech, pre-paid cards can serve as alternatives to bank accounts.

I don’t want to talk about technology here because we spend a lot of time talking about that and in the particular example highlighted by Gareth Thomas, M-PESA, Consult Hyperion’s role as consultants to Vodafone on this project is well-known. I want to focus on the issue of regulation and, because of the subject matter of the seminar, how it impacts one particular financially-excluded group, which is migrants.

The first step on the ladder of financial inclusion for this group as for many others is not banking, but payments. Banks are expensive things, and bank accounts are expensive and heavily regulated. And in any case, in the UK, according to one of the speakers, 80% of migrants actually have bank accounts but they do not really use them: when they get paid, they draw the money out in cash. About the same number, three-quarters of UK-resident migrants send remittances and half remit on a monthly basis. They don’t all use the Money Transfer Operators (MTOs) that we are familiar with (Western Union, Moneygram) but a very wide variety of providers(they are currently 2,800 MTOs in the UK). If I understood the statistics correctly, they send money by

1. Informal channels for 16% of transactions;
2. What one of the speakers call “Ethnic MTOs”, specialists who address specific remittance corridors, who account for another 48% of transactions; and
3. MTOs who take care of the rest.

Seymour Fortescue from the UK Remittances Task Force, which is funded by DFID, said that their research indicated that migrants rated ease of use as a more important characteristic than costs, but tellingly this may be because it is hard for the migrants to establish just what the charges are! He said it is currently around 9.7% on average and the G8 have “endorsed the target” (I have no idea what this means) of reducing this to 5% in five years. One of the ways they hope to reach this “5×5” goal is technology, again, but they didn’t seem to highlight regulatory change (perhaps this is what is meant by “increased competition”).

Leon Isaacs explained that the biggest costs for MTOs are staff and bank charges, so if we want to cut the cost of remittances substantially then we need to explore a number of different avenues.

1. Explore options to adjust the business model, perhaps by finding ways to provide profitable value-added services and reduce the costs of the basis service.
2. Try and reduce cash handling which drives up the costs both through needing more staff and having to pay bank charges for depositing cash.
3. More competition in banking, which might reduce the level of bank charges (although I doubt this in the case of cash handling).
4. Use of PSD to turn MTOs into PIs so that they can offer more services (and get access to the payment scheme networks).
5. Better monitoring of MTOs, because legitimate MTOs feel that they are losing business to cheaper operators that are not monitored as closely.
6. Improve infrastructure in destination countries (there’s not enough competition at the far end and this keeps prices up)
7. More consistent regulation (the idea of PSD/ELMI expanding along corridors or in regions again).

All in all, I have to say that it was an excellent event (if my volume of tweets is any measure!) and my main conclusion was that I think we need to strengthen the concept of “Payment Accounts”, pre-paid accounts fronted by both cards and mobile phones and the internet rather than investing all of our energy in trying to get the excluded into banks.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]