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) . 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 . 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 .
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 .
- 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 .
- 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 .
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 . 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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 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.
 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.
 Remitly website, https://www.remitly.com/us/en/mexico, accessed November 2016.
 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.
 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.
 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.