Why is every fintech doing remittance?

There are two types of people in this world.

Those wondering why:

1. new startups choose fintech when other essential industries, like healthtech and edtech, demand attention.

2. fintechs don’t tackle real issues. Rather, they converge on a narrow set of problems, e.g.

   • a faster transfer app vs. more accessible credit-based solutions, or

   • another remittance app vs. enabling seamless business payments to China.

This article is focused on group two.

By asking “Why fintechs don’t tackle real issues?” they are expecting fintechs to deliver “transformative” (10x) solutions.

However, it’s hard for fintechs to do “10x” things because they are in financial services and are constrained by the same regulations and nuances governing the industry. For instance, I can’t help you do a hitch-free outbound to China if the CBN says only banks are allowed. The best I can do is find workarounds that help smooth or hasten an existing process within compliance boundaries.

In his article on why there are no 10x solutions in fintech¹,

Kunle

, a co-creator of Cash App’s Card at US fintech Square, says,

“My answer at the time was that we weren’t going to be 10x better at one thing, because it just wasn’t possible. But we could be 2x better at 10 things…[emphasis mine].”

Let’s explore why remittance, of all the cross-border use cases like business payments to China, is the go-to for fintechs.

Remittance: an inroad to cross-border payments

For alignment, cross-border payments refer to the movement of money from one country to another and vice versa. There are many reasons to move money across borders. Those reasons can be broken down by who is sending (individual or business) and receiving (individual or business) the funds, as shown in the 2x2 matrix below.

Cross-border payment use-cases

Globally, remittance makes up only a small portion (< 5%) of cross-border payments².

So, why does it have the highest amount of fintech penetration? When there are other segments like B2B payments, with 80% of the volume that is mildly penetrated by fintechs.

Cross-border payments are dominated by Banks (~ 75%) and their SWIFT network. For fintechs to operate their “front-end” applications compliantly, they need to:

• obtain regulatory licence(s), and/or

• partner with a bank, for a plethora of services like account issuing, access to national or regional money movement rails, clearing and settlement services

Getting a partner bank, even in your local market, is tough. This is because third-party/brokered deposits to a bank are deemed risky because they are volatile³. Unlike direct/core deposits, which are more stable. As a result, regulators look upon it unfavourably. In addition, deposit insurance for monies placed at a bank on behalf of consumers (which is what ‘neo-banking’ fintechs do) is more complicated.

Now, imagine doing this in a foreign market with no track record there, and are lightly-staffed or licensed.

This is why an established compliance framework, building trust with partner banks, and a faster time-to-market are the three main reasons why fintechs tend to launch remittance products when thinking of expansion to cross-border payments.

Straightforward compliance

Financial services are all about risk management and regulatory compliance.

Factors that influence a financial institutition’s risk appetite

Banks and other financial institutions (OFIs) determine their risk appetite through a combination of factors like:

• International and/or local regulations applicable to their licensing category, e.g. Community bank / Micro-finance banks, and National Charters / Commercial banks

• Industry rules and expectations, e.g. Card scheme rules on acceptable fraud rates and PCI DSS certification for acquirers collecting card data

• Own operational set-up (people, process and tech) usually commensurate with their current licensing tier

Thus, some activities are less risky than others. An activity’s risk level will be inversely proportional to the number of players in that space. So, the higher the risk of an area, the fewer the players there and vice versa.

One reason why remittance fintechs aplenty is because it’s easier to find partner banks that support that use case.

Unlike domestic payments, banks and FIs in cross-border payments have to think about compliance on both sides: the originating country and the receiving country.

Origination-side compliance

Compliance on the origination side is quite straightforward because it mirrors what happens in their domestic market, where the sender of the funds is a resident of the local market where they have their licence.

Thus, asking a bank to provide accounts for migrants residing in their country is usually an easier sell vs. asking the bank to provide their local currency accounts for non-residents or internationals. In the former, the bank:

✅ can onboard the migrant because they are residents. Thus, will have the necessary and familiar ID and KYC documents needed to open an account with a bank.

✅ can more readily answer to other DD questions like source of wealth as most migrants are workers earning salary/wages from local business entities or students with pocket money — this might be a little trickier, cause the source of the pocket money is usually from their home country which could be on some FATF list.

✅ can safely accept their pay-in method (e.g. transfer from their other local bank account, perhaps, which they might have used to receive their wages)

✅ can fill out the purpose of the transaction. A migrant’s purpose of remittance transaction is usually to “support family back home”, make “self-payments or investment in local vehicles” which are understood to be legitimate transactions.

While in the latter, the bank will have to: