Cross border remittances has long been a lure for Fintech entrepreneurs. It is also a big enough market to attract the tech giants such as Google and Facebook as well as being a subject that drives conversations among bankers, government policy makers and regulators.
India is the largest inward remittances market, slightly bigger than China, with over $60 billion accounting for around 4% of GDP. This makes India alone about 10% of the global $600 billion remittances market.
In all this big picture analysis, we must not forget the human story. The World Bank, which tracks this data but which also has a social mission, has this to say:
“Remittances are an important source of income for millions of families in developing countries. As such, a weakening of remittance flows can have a serious impact on the ability of families to get health care, education or proper nutrition.”
The “weakening” referred to in that World Bank headline is really a shift in remittance flows due to weakening oil prices (aka less from oil producing countries). This changes fast as humans adapt and it is the human part of the story that this post will focus on.
The World Bank puts this all in context:
“The global average cost of sending $200 remained flat at 7.45 percent in the first quarter of 2017, although this was significantly higher than the Sustainable Development Goal (SDG) target of 3 percent.”
In short: enough already. The famous quote from that World Bank, that if the cost of remittances was cut in half it would do more for poor people than all government aid combined, has been used by every remittances entrepreneur. At over $600 billion total market, getting from 7.45% to 3% means a staggering $26 billion in cash that would go to families that a) desperately need it b) would spend it fast, thus driving economic growth (velocity of money in wonk speak). This is hardly rocket science. We just need to get money from one part of the world to the other, not get a human on the Moon or find a cure for cancer.
In 2014 all the excited Tigger entrepreneurs were saying that digital disruption of remittances will soon change the world. The recent data from World Bank, that in 2017 we are still stuck at 7.45%, prompts Eeyore to say “I told you so, nothing really changes, it was all a mirage”. Humble old Pooh Bear (aka the market) says “just when you think it will never change, the change comes quicker and faster than anybody could have imagined”. I am with Pooh on this one.
The macro picture does drive the regulatory narrative; at 4% of GDP, the cost of remittances becomes a policy level issue; half of 4% (i.e. the World Bank SDG goal of cutting remittances cost in half) is 2% and 2% of one of the world’s biggest economies is a seriously big deal and will drive regulatory change. Entrepreneurs may salivate at huge markets but they take action when regulation enables them to do so. That 2% of GDP will get the attention of policy makers who will then talk to regulators and then change will come.
Although the macro and regulatory picture is critical, the entrepreneurial mantra is to focus on the customer and their needs and experience. That World Bank quote also urges those with a heart to think about that customer/human and those with both a heart and some capital to do some impact investing to help that customer/human. However, all of this is theoretical until you solve real day to day problems for the underbanked (over 600 million in India alone).
This is what brings this story back to a little known company in India called MoneyOnMobile that has a unique position in this market and is poised to win big as the India remittances market opens up. Disclosure: MoneyOnMobile is a client of Daily Fintech Advisers. I am not a financial adviser, please do your own diligence before investing ($momt). I have already written about MoneyOnMobile here and here.
For more on the remittances boom in Asia (including but not limited to India), please see this post by Arun on Daily Fintech.
Today’s post will look at:
- the regulatory drivers both on-ramp and off-ramp
- the needs of the underbanked (what they do with the money)
- the modern digital MOM ATM replacing the clunky old Bank ATM
- the overlooked but critical domestic remittances market
- why Bitcoin as a remittances payment platform is a mirage
- Eeyore was right, cash is not dead
The regulatory drivers both on-ramp and off-ramp
The on-ramp is all about KYC.
To send money, you have to show that you are not a money launderer or other bad actor. That is why the remittances market works through corridors. For example, UK to India, Dubai to India, USA to India are all corridors. Then you have UK to Philippines, Dubai to Philippines, USA to Philippines – or China, Nigeria, Malaysia, etc. Multiply that matrix by every country on earth and you can see how complex this is. So that is why we break down the complexity by looking at fundamental needs of both on-ramp (e.g UK, Dubai, USA) independently of the needs of the off-ramp (e.g India, China, Philippines, Nigeria, Malaysia).
Although each on-ramp country has slightly different regulations and policy drivers the KYC issue is in common. What everybody wants to know is is this really a migrant worker/expat sending money home to family (good, we want to encourage that) or is this somebody looking to evade tax or finance terrorists or some other illegal activity (bad, we want to stop that). Plenty of entrepreneurs are working on solving the KYC problem; today’s post is not about that.
The off-ramp is all about cash.
The person receiving the cash needs to identify themselves (“I am really Deepika in Bihar, the Aunt of Mohan in Dubai who has just sent me some cash”). India has KYC digital ID for over 1 billion citizens via Aadhaar (the fastest digital growth story on the planet, making Android look like a snail). So the regulatory off-ramp problem has been solved in India. This also makes the on-ramp regulators more comfortable; they may see the sender via KYC checks but they might still worry that the receiver is a bad actor.
Knowing who picks up the cash is important from a regulatory POV, but from an entrepreneurial POV, we want to know what that person does when they get that cash.
The needs of the underbanked (what they do with the money)
You can break remittances into two totally different markets. One is about sending big sums. This is all about capital markets, SWIFT, foreign direct investment and so on. It is a big subject, but not our focus today.
The subject today is sending small sums (the $200 sent by Mohan in Dubai to Deepika in Bihar) which in aggregate is $600 billion globally, and $60 billion in India or 4% of India’s GDP. What does Deepika in Bihar (our prototypical example, because it is often a woman who is looking after a family and Bihar is a very poor state in India) do with the $200 sent by Mohan in Dubai?
In short – she spends it – fast. In wonk speak this is velocity of money and that drives the economy (thus policy makers, politicians and regulators are paying attention).
Deepika can spend it in two ways – digitally and in cash. The difference is key to this story. We understand what digitally means in the Western Banked world. We get a payment into our account (via SWIFT or Credit Card or any other bank payment rail) and then we pay people via those same payment rails. And we also go to the ATM to get some cash – but I am getting ahead of the story.
In the Rest Of the World that is Unbanked or Underbanked, the world of Deepika, it is quite different. She needs to top up her mobile phone prepaid minutes, pay a utility bill and, if she can afford it, pay for DTH satellite TV. She can do those things with a Smartphone via any of the mobile wallets in India, including MoneyOnMobile, but also Paytm, Tez from Google and others. If she only has a feature phone her options are more limited (but she can use MoneyOnMobile).
The Western narrative around feature phone is “this is only temporary, everybody will soon get a smartphone”. Some research shows that soon is a relative term and it is not happening as fast as some would like. Today, more than half of Indians (over 55%) have a feature phone rather than a smartphone and many like it that way.
The modern digital MOM ATM (replacing the clunky old Bank ATM)
MoneyOnMobile recently announced stunning revenue growth numbers – 36% month to month from September to October. For revenue that is a) almost 100% gross margin b) zero credit risk c) almost zero customer acquisition cost, that is a big deal.
The reason is simple – MoneyOnMobile never bought the narrative that cash was dead. The reason they did not buy that narrative was also simple – they listened to their customers rather than listening to market gurus, management consultants or VCs or other experts who cannot relate to the lives of Mohan and Deepika.
The digital MOM ATM is the picture on the left at the top of this post. Yes it is very different to the clunky old Bank ATM on the right.
The MOM ATM explains that stunning 36% month to month revenue growth rate and is why the company is in the cat bird seat as that $600 billion remittances market opens up. So let me explain how the MOM ATM works, because 99.9% of our 20,000 plus subscribers have probably never seen one – we do not live in Deepika’s world of the Unbanked/Underbanked.
Conceptually the MOM ATM is like the cash out services that Retailers in the West offer consumers at checkout. The Retailer gets digital cash in their account without loading up the physical cash truck to take to the bank (an expensive service because robbery is a real risk) and the customer gets a service that saves a trip to the ATM. Now translate that to India where 95% of transactions are still in physical cash and the ATM is a long way away (and maybe broken and/or out of cash) and you can see why the MOM ATM service is so popular with both consumers and retailers.
One number says it all – ATM density is less than 20 (per 100,000 users) in India vs 100 or more in America and Europe.
MoneyOnMobile views physical retailers as partners/distributors/customers, compared to the more high profile e-wallet vendors who view physical retailers as roadkill in front of the e-commerce truck. MOM ATM is one more service to the retailer. This is classic cross selling. Once MoneyOnMobile acquires a retailer, the revenue per retailer goes up as the retailer starts to use new services.
To see MOM ATM in action, watch this short video:
One reason why Western Union has survived all the pundit predictions of demise is that also never bought the narrative that cash was dead. So they have a lot of Western Union outlets where Deepika can get cash.The only fundamental competition I have seen to that Western Union dominance is M-Pesa in Kenya (which is a tiny market) and now MOM ATM in India (a massive market).
One reason why MoneyOnMobile is in the catbird seat as that $600 billion cross border remittances market opens up is that they got established in a corner of the market that others overlooked that does not have regulatory constraints and that is surprisingly big – the domestic remittances market in India.
The overlooked but critical domestic remittances market in India
It is big enough – $10 billion. The market size data is here.
Lets go from the macro to the micro. Deepika – our mythical recipient in Bihar – is the same in both the cross border and domestic remittances story. What changes is that Mohan – our prototypical sender – is no longer in Dubai. In the domestic remittances story, Mohan is in Gurgaon. Gurgaon is not as rich as Dubai but the difference seems minor when compared to Bihar.
Although that seems like a minor difference – Mohan is in Gurgaon not Dubai – it is a world of difference from a regulatory POV. Now both Mohan and Deepika have an Aadhaar card – on-ramp and off-ramp solved in one shot.
The MOM ATM card is being used to today for domestic remittances. Even if Eeyore is right and digital cross border remittances never happens, MoneyOnMobile will have a very good business. If regulations on cross border remittances into India loosen up (which seems likely as policy makers want Deepika to get cash and spend it), then MoneyOnMobile can offer their MOM ATM as the cash out off-ramp to all the big global remittances ventures who have the on-ramp part nailed – their business will go from very good to huge.
Why Bitcoin as a remittances payment platform is a mirage
I am a Bitcoin bull. Bitcoin as a store of value alternative to gold is real. Many Indians are buying Bitcoin along with their global peers. The geeky among us may underestimate the social/fashion value of gold jewelry; the geeky boy at an Indian wedding wearing a sign saying “I own Bitcoin” would be a good part in a Bollywood movie (the movie will end with a kiss from the equally geeky girl). Nevertheless, Bitcoin is a real store of value option around the world, including India.
However Bitcoin as a remittances payment platform is a mirage for 3 reasons:
- The on-ramp KYC issues give regulators major heartburn.
- Deepika cannot spend Bitcoin in her village in Bihar.
- The volatility and fees to convert from on-ramp currency and then to Bitcoin and then to INR may make Western Union look like a bargain.
Some money will certainly flow illegally cross border via Bitcoin into India. But this will be for the big ticket end of remittances and won’t impact the lives of Deepika and Mohan.
Eeeyore was right, cash is not dead
For years Tigger has been jumping excitedly up and down shouting “cash is dead, we will all do everything on our smartphone and that will be so wonderfully efficient and fun, those old notes and coins are barbarous relics of the past”.
Meanwhile Eeeyore was gloomily muttering “no way, cash will always be with us, as will feature phones”.
The market – Winnie the Pooh – loves both Tigger and Eeyore. In this case, Winnie the Pooh was heard telling Eeyore “you were right”
Peter Thiel famously says that to win as an investor you have to be both contrarian and right. For a long time, MoneyOnMobile was certainly contrarian – talking about physical merchants, cash and feature phones. Recent financial results indicate that they may also be right.
Image Source here and here.
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