The Dark Secret of the Money Transfer Industry

Within the current climate of cut-backs there has been major debate about foreign aid, and how much or little we should be giving to developing countries while we are facing financial uncertainty at home.

Within the current climate of cut-backs there has been major debate about foreign aid, and how much or little we should be giving to developing countries while we are facing financial uncertainty at home.

But what many people don't realise is that there is another issue that prevents significant amounts of money flowing to the world's least-developed countries. I'm not talking about a few pounds here and there - this is an issue that, if resolved, would have resulted in $6bn entering the economies of sub-Saharan Africa in 2010 alone. To even talk of 'economies' detracts from the very human impact of this - this is money that would have ended up in the pockets of those families who need and rely on it the most.

The issue in question is that of remittance; more accurately, the extortionate fees, sanctions and poor customer service being imposed upon migrant workers transferring money back to their home countries. And this status quo is perpetuated by major players in the remittance industry such as Western Union and MoneyGram.

Remittances - money transfers from migrant workers back to their home countries - are vital to the populations of many developing economies. India, for example, received $70bn in remittances in 2012. The money earned by relatives abroad helps individual families in the migrants' home countries achieve a better standard of life, enabling access to education and vital healthcare.

The problem

They may not make same the headlines, but all of the problems often associated with the big banks - the inflated fees, poor compliance culture, fat cat pay structure and generally poor customer service - are equally true of the largest global money transfer companies.

Take the case of Western Union. As one of the first-movers in the remittance industry, it set up exclusive relationships with banks in many of the developing countries. This put the company in a position where it could set commission fees far higher than that would be found in a more competitive industry - fees which even now can account for as much as 30-40 per cent of the amount sent by the poorest migrants, who can only afford to send small amounts of money. Although there have been major campaigns to stop these practices, they continue to affect prices because those with the power to change the system also benefit from maintaining the current status quo.

One problem at the heart of the excessive fees is a fat cat pay structure similar to those of the banks prior to the pre-financial crisis. The remuneration of Hikmet Ersek, the president and CEO of Western Union, in 2012 was $7.8 million - more than all the CEOs of UK banks except Bob Diamond!

It is not only fat cat salaries that keep the cost of sending money markedly high for poor migrants. Just like banks, large money transfer companies like MoneyGram and Western Union have poor compliance cultures that often result in hefty fines. In 2010, Western Union paid as much as $94m in a legal settlement between the company and four states along the Mexican border to settle money laundering charges. In November 2012, MoneyGram also agreed to forfeit $100 million and enter into a deferred prosecution agreement with the US Justice Department, in which it admitted to having criminally aided wire fraud and failed to maintain an effective anti-money laundering programme.

The solution

In theory, the solution to the problem is incredibly simple; more effort must be made to lower the cost of sending money to the developing world. Doing so enables more money to reach its destination and the people who need it most, rather than the pockets of corporate 'fat cats'.

The only real means of achieving this is by opening the market up to competition. More must be done to challenge the dominance of large money transfer agents and local banks (who mutually benefit from charging high fees) working together to maintain the remittance status quo.

The outlook is good: the last few years have seen the emergence of new money transfer companies challenging the chokehold that Western Union and its contemporaries have on the industry. The rapidly advancing payment technology market is having a significant impact on this - the internet, for example, has enabled companies to take the process of transferring money online, reducing overheads as well as being more convenient. Advances in mobile banking technology mean that companies can offer a range of services, such as transferring to mobile wallets or as airtime top-up instead of the traditional agent model. All of these create a more customer-centric and empowering industry that benefits the migrant worker and their dependents.

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