This post is written by Anna Fogel, SBI Associate Consultant.
With more than 215 million people living outside their countries of origin, remittances play a major role in the economic development, GDP and poverty alleviation efforts of many countries. An estimated $350 million in remittances was received by developing countries last year, according to the World Bank, which is three times the amount of official development assistance and exceed foreign direct investment in many countries. The trend of increasing remittances continues to grow and is projected to reach $1.5 trillion by 2016. This impressive volume has attracted attention from mobile banking operators, whose business model depends on high-volume, low-cost transactions. CGAP’s Chris Bold, in December 2010, dubbed remittances the “final frontier” of mobile banking.
In Europe and Central Asia, remittances have a particularly prominent role in the regional economy. Many of the top remittance recipients in the world, measured as a percentage of GDP, are in this region, including Tajikistan where remittances were equal to more than 35% of GDP in 2009 and Moldova where remittances equaled 23% of GDP in 2009. According to World Bank calculations, which measure official flows and therefore are generally undercounting, remittances equal more than ten percent of GDP in six countries in the region (Tajikistan, Moldova, Kyrgyz Republic, Bosnia and Herzegovina, Serbia and Albania). IFAD estimates than 30% to 40% of remittances flow to rural areas, critical in many Eastern European and Central Asian countries which have agrarian-dominated economies and high percentages of rural populations.
The business case for mobile banking in Eastern Europe and Central Asia differs from the case in other parts of the world where mobile banking has excelled, such as urban Africa and South Asia – where high-density, high-volume populations allow for an efficient operating model. Countries in ECA generally have relatively small populations with much lower density and high rural populations. However, remittances present an opportunity to develop a compelling business case for mobile banking in the region, allowing companies to establish the infrastructure for mobile banking and financial inclusion and expand services from remittances to other financial services. There are a number of examples of commercial and development-led mobile banking initiatives throughout the region: Russia has one of the largest mobile banking services in the world with more than 100,000 automated payment terminals, with many major banks, such as CitiBank and Russian Standard Bank, and mobile companies, offering mobile banking services; services use advanced ATMs that allow cash-in as well as cash-out; in Georgia, IFAD’s Financing Facility for Remittances is working with the International Organization of Migration to establish a favorable regulatory and policy environment for remittance transfers through mobile banking, lowering the transaction cost in particular for transfers to rural areas; and in Romania, a number of commercial banks and microfinance institutions began offering mobile banking services over the last few years. Other countries in the region have shown increasing interest in creating an enabling environment for mobile banking, including Tajikistan, whose National Bank visited Pakistan in December to visit the National Bank of Pakistan and many of the major commercial players – including Tameer, UBL and State Bank of Pakistan – to understand the regulatory and commercial environment necessary to promote mobile banking.
There are a number of challenges to offering remittances through mobile banking platforms – regulatory environments that restrict remittance providers; a lack of trust in the financial sector, exacerbated by the recent financial and economic crisis; and limited financial institution infrastructure or capacity on the receiving end allowing recipients to withdraw their remittances in cash. However, the potential is continuing to grow: according to a study from Juniper Research, $55 billion in international remittances will be transferred via mobile devices by 2016. In ECA, offering remittance services through mobile banking offers the opportunity to financially include large populations of unbanked, rural communities. Currently, according to the GSMA mobile money deployment tracker, out of more than 120 services, fewer than 15 offer international money transfer. In the coming years, remittance flows in Europe and Central Asia are a critical area in which mobile banking could add significant value.