Remitly: Making Remittances Available to Everyone
The burdensome process of sending money abroad to families has historically left low-income migrants vulnerable to the high fees and transaction costs required for cross-border money transfers. Banks, the oldest players in the industry, continue to charge the highest fees for remittances, approximately 11% per transaction made from the United States, and have not yet shown significant improvements in the time it takes to complete such processes (the time lag from when the money is sent to when it is received takes several business days) [1]. This means that a family of a Mexican immigrant who hypothetically earns minimum wage in Texas of US$7.25 per hour will ultimately receive US$6.45, or MX$129.05, once the money is transferred to Mexico. Further impacting the overall cost of the transaction is the time that these people have to set aside during the week to travel to their respective banks. This leads to a loss of hourly income for both parties, an opportunity cost that while difficult to quantify, cannot be left unnoticed.
The lack of transparency in the process, the high costs for the end consumer, and the size of the market (approximately $588B in 2015) have brought newcomers to the industry that are using technology to improve inefficiencies [2]. Among these new players is Remitly, a company founded in 2011, that like banks, provides money transfer services to consumers. However, unlike its competitors, Remitly allows consumers to make person-to-person transfers from the US to over ten countries through mobile devices, reducing the friction on both ends of the transaction. The software allows consumers to choose between making a bank deposit or a cash pickup. Through partnerships with both banks and retail stores in developing countries (12,000+ locations in Mexico alone), Remitly makes it easier for the end recipient to pick up the cash at a convenient time and location, reducing their opportunity cost. The only documentation required to pick up the cash is a government-issued ID and nothing else, which is crucial in a country where the majority of the population does not have a bank account [3].
So how does Remitly make money?
Remitly receives revenues from two sources, transaction fees and foreign exchange rate spreads. On average, the total amount paid by the consumer ends up being approximately two percent per transaction [4].
- The company allows you to choose between an Express or Economy option for each transfer made. While the Express option takes only minutes to process, the company charges US$3.99 per transaction, making it costly for users who prefer to send smaller quantities on a regular basis. The Economy option, on the other hand, is free but results in a three to five business day delay [3].
- Remitly also charges a foreign exchange rate spread. However, the total cost ends up being lower compared to the competition, and the exchange rates are visible on the company’s website, resulting in a high degree of transparency [5].
Should Remitly be concerned about an increase in scrutiny from regulators?
Financial service institutions can serve as a platform in which illicit money is sent from one country to another. The impact from such transactions has resulted in rising scrutiny from US authorities who have worked on improving anti-money laundering regulations, which include a more-enhanced Know your Customer (KYC) process [6]. The KYC onboarding process of any particular client may be time consuming and costly. However, given the strong repercussions of not complying with the newly-established regulations, financial institutions have been incentivized to cooperate.
By forcing users initiating the transfer to link their profiles to a personal bank account, Remitly is able to outsource the KYC process to financial institutions, driving total costs down. This translates to higher margins for the company, allowing Remitly to gain pricing flexibility.
How will Remitly remain competitive in what is slowly becoming an overcrowded industry?
Remitly has done a great job at leveraging technology to gain a competitive advantage over its traditional competitors who continue to charge high fees for similar transactions. However, by exposing inefficiencies in the industry, Remitly has encouraged newcomers to the market. To remain competitive, the company should continue to focus on improving its overall customer experience by increasing the number of partnerships it has with banks and stores abroad, entering new markets, reducing times lags under the Economy service option, and further reducing its fees as it achieves economies of scale.
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[1] World Bank, “The Cost of Sending Remittances: June 2015 Data.” http://www.worldbank.org/en/topic/paymentsystemsremittances/publication/cost-sending-remittances-june-2015-data, accessed November 2016.
[2] Business Wire, “Remitly Approaches $1 Billion in Annualized Mobile Transfers as Company Continues Rapid Growth.” http://www.businesswire.com/news/home/20160112005510/en/Remitly-Approaches-1-Billion-Annualized-Mobile-Money, accessed November 2016.
[3] Remitly website, https://www.remitly.com/us/en/mexico, accessed November 2016.
[4] Mobile Payments Today, “Remitly Plans to Expand Mobile Remittance reach with New Funding.” http://www.mobilepaymentstoday.com/articles/remitly-plans-to-expand-mobile-remittance-reach-with-new-funding/, accessed November 2016.
[5] Geek Wire, “Jeff Bezos-Backed Remitly Announces Free Money Transfers to the Phillipines.” http://www.geekwire.com/2013/bezosbacked-remitly-announces-free-money-transfers-philippines/, accessed November 2016.
[6] Harvard Law School Forum on Corporate Governance and Financial Regulation, “FinCEN: Know Your Customer Requirements.” https://corpgov.law.harvard.edu/2016/02/07/fincen-know-your-customer-requirements/, accessed November 2016.
Felipe, thanks for sharing this service – I´d love to try it out but, unfortunately, its not available in Brazil yet. I completely agree when you mention that there are huge inefficiencies in the FinTech industry and by exposing these opportunities, more competitors are encouraged to entry. Including, that´s exactly what´s happening at this moment – Startups such as Transferwise, WorldRemit, Azimo and TransferGo are all focusing on low-cost, quick international transfers.[i]
Transferwise, specifically, has been maintaining low costs by matching senders from two countries with similar transfer amounts. By doing that, they reduce their international transfer costs and therefore charge lower rates to their clients.[ii] TransferGo, on the other hand, has been focusing on guaranteeing next-day transfers by working primarily in the Euro zone.
I wonder how Remitly will differentiate itself from these well-funded competitors that are expanding aggressively and keeping lower prices. Is this a one player global industry? Will Remitly build a strong network in Mexico and other countries in Latin America before more competitors come? Will new partnerships really reduce the cost of transaction processing? As an international student and potential Remitly consumer, I´m curious to see how this industry, especially in Latin America, will develop in the future.
[i] https://www.themoneycloud.com/market-insights/current-events/2015/02/the-top-three-international-money-transfer-startups-to-know-about
[ii] https://transferwise.com/help/article/1570199/good-to-know/member-matching
Felipe,
Thanks for posting this. I think the money remittance space is a fascinating industry since it is critical in alleviating a significant amount of poverty around the world. I think a concern I have about Remitly is that it still relies upon the historical SWIFT payment system along with the correspondent banking network.
The problems I see with this are:
• Security: Recently, there have been significant breaches in the “secure” SWIFT messaging network which has caused large amounts of money to be stolen from the network [1]. This leads people to believe that either the SWIFT system needs serious revamping, or that an entirely new payment system must be created.
• Fees: While remittances conducted over SWIFT between countries such as U.S. and Mexico with large trade balances and close connections can be easily settled, when transferring money between countries that are more distant in the trade network, money transfer often depends on multiple chains of banks through the correspondent banking network, each node of the network which add fees.
In the long term, for Remitly, my questions are:
(1) Are the existing international money transfer systems between banks upon which Remitly depends on secure enough for the 21st century?
(2) Are Remitly’s current product offering be profitable, and if not, can it achieve profitability in the long term? I find that the problem with many of these start-ups is that they are unprofitable with the hopes of one day becoming profitable – hopes that sometimes never fully pan out. Without the ability the become profitable, Remitly is obviously not a sustainable solution (but we should all take advantage of it while we can!)
(A side note to Gustavo’s comment: I’m curious to see how TransferWise manages payment “corridors” where the payments are heavily one-sided. E.g., I would imagine there is significantly more money moving from U.S. to Mexico than vice versa)
[1] May, 2016. The New York Times “Once Again, Thieves Enter Swift Financial Network and Steal” http://www.nytimes.com/2016/05/13/business/dealbook/swift-global-bank-network-attack.html
Felipe, thanks for covering a topic that is important to many people who have family abroad.
I agree that Remitly should worry about competition, particularly since they face threats from both larger players (Xoom , Western Union) and a lot of the startups Gustavo listed in his earlier comment. With limited exception, most of these providers offer consumers the exact same service: the ability to send money overseas at a pre-determined rate. Given the core product is similar across all of the providers, I believe these players will all be forced to compete on price in the long term. Remitly claims to have a structural edge on pricing due to their technology model [1], but I am skeptical their offering is meaningfully different or less expensive than others in the market.
[1] https://www.remitly.com/us/en/home/about_us
Felipe, as a fellow Mexican this issue is near and dear, as I have known many people who depend directly on remittances sent from family members who emigrated to the US looking for better working opportunities. I would be very interested to learn how companies like Remitly are thinking about the expanding popularity of Bitcoin as a “currency bridge”. On one hand, leveraging the fluidity of Bitcoin could help Remitly lower operational times significantly while retaining exchange margins, on the other, it exposes them to further scrutiny and risk from regulatory agencies. As Bitcoin becomes more accepted, and if regulatory bodies ponder the trace-ability and security of bit-coin transactions, companies like Remitly should think of partnerships with budding Bitcoin startups, such as Bitso, now the largest Bitcoin exchange in Mexico, which was started by an HBS Alum just a couple of years ago. Here is a link to their website if you are interested in learning about them!
http://www.bitso.com