Why is every fintech doing remittance?
A detailed explanation of why fintechs appear to choose the remittance use case (< 5% TAM share) over the other three cross-border payments use cases
There are two types of people in this world.
Those wondering why:
new startups choose fintech when other essential industries, like healthtech and edtech, demand attention.
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.
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.
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:
⚠️ check that the foreign country is not on their list of prohibited countries which was derived from the mix discussed above. Spoiler: As of the time of publishing, Nigeria is still on FATF’s Grey List, which makes partnerships even harder.
⚠️ check if they have the licence or authorisation to onboard customers, which they might have through passporting rights or reverse solicitation.
⚠️ check if the fintech client is licensed in that market, fit and capable to run this business either through antecedents in other verticals/expansion markets, a strong team (a pedigreed compliance officer familiar with their own country laws and preferably based there), strong capital base etc. This is important because one failed bank partnership can erode all the revenue that the bank might have made from servicing other clients—before now going through the exceptional process of making a case, or figuring out how to offer this service compliantly or within their risk appetition.
Beneficiary-side compliance
Every country likes to bolster their foreign exchange reserve because it can provide a buffer in times of crisis4. Inflows add to that reserve, but outflows subtract from it. Since international trade must happen, currency in and out must occur. Countries, especially those with a balance of trade deficit, try to obsessively skew this dynamic in their favour by encouraging more ins and discouraging outs.
In Nigeria, the CBN has encouraged more dollar inflows through clear guidelines like the IMTO licence for inward remittance. But has discouraged outflows by limiting outbound transactions to just commercial banks, numbering one-third of IMTOs in the country. More on the CBN and the IMTO licence below.
As a result, a fintech putting together their licensing matrix will first look to the remittance use case because it can safely get an IMTO to bring money in while seeking partnerships with the banks in the originating country.
Going for an outbound international payments use case (like B2B payments) first will require them to play very cautiously and often spend years figuring out legal and compliance.
Building trust through live activity
Bank partnerships take a long time to form. Yet, once formed, it’s not one and done. The partnership must be maintained to ensure the going concern of your fintech programme or to unlock more complex use cases with the bank.
Once, the partner bank is comfortable with the:
cleanliness of your flows (e.g. are they having to file STRs all the time),
strength of your operational processes (e.g. do your stop fraud before it happens or are you solely reactive?) and
sanity of your numbers (e.g. are you doing decent volumes while keeping fraud rates lows) — you can start motioning to them about other use cases you might have.
But you don’t get the privilege of discussing more complex flows like issuing bank accounts or cards (if they offer) to non-residents, until you’ve proven to be faithful in the ‘straightforward’ one (remittance).
Thus, many fintechs start with remittance as the beachhead and expand to either B2B services or other aspects of the cross-border payments matrix.
Faster time-to-market
Speed and momentum are everything for startups. You need speed to test multiple hypotheses, discarding 99% of them and focusing on the one that will hit. You need momentum to raise money from venture capitalists.
If you are expanding to cross-border payments as an existing fintech or starting fresh from cross-border payments, you want to know very quickly whether there is something here or not. Whether it can help you scale your revenues by diversifying and earning in a stronger currency.
You are more likely to go for any business option that means you can already get started in the line you want to explore and possibly learn the ropes, now, as you prepare for a bigger future launch.
As explained above, a remittance use case affords fintechs a way to:
land their first international bank partnership
get involved in treasury management, and
start preparing for a multi-country expansion—licensing and compliance in a foreign market, hiring and abiding by payroll laws, etc
Whether you are doing remittance, collections, payouts or business payments, the above will be useful. So, why not start with remittance today?
The subsequent questions will explain where we are today and how we got here.
Where are we today
Acknowledging the situation
Indeed, it seems:
Every Nigerian fintech (local) is launching a remittance (cross-border payments) app, and
Every foreign cross-border payment fintech is launching a remittance app to Nigeria
Both local and foreign fintechs converge when seeking an operating FX and remittance licence from the Central Bank of Nigeria. Today, that licence is called an International Money Transfer Operator (IMTO) licence, with its first official guidelines issued in 2014.
Analysing the regulators’ recent IMTO list shows a spike in licensees.
By 2016, there were fewer than 15 IMTO licensees in Nigeria; today, there are 100 and counting. This represents a 6.7x growth in the number of approved operators in less than 10 years. This is the first time that the IMTO licensees (108) have surpassed that of the local payment service provider licence (107).
The CBN incentivised more IMTO competition by dropping the shareholders’ fund required for licensing by 92% in dollar terms
Given the sensitivity (impact on the country’s reserves) of the licence, the CBN, through its Trade and Exchange Department (TED), takes a very personal approach to regulating the space. It actively churns out circulars and policies, and experiments with different initiatives to incentivise dollar inflow. It leverages tools like a lag in application reviews and approvals, increasing technical and capital requirements (e.g. application fee, and shareholders’ fund) to keep a leash on the space.
In the revised IMTO guidelines published in January 20245, the CBN increased the application fee to ₦10 million (~ $6,223) from ₦500,000 (~ $312), a 20x increase in today’s dollar terms and a 3.4x increase in corresponding period’s dollar equivalent as of the rate in 2014 and 2024, respectively. Yet, this didn’t deter operators, many of whom are venture-backed, from filing their applications.
But also, the CBN incentivised more competition by significantly reducing the shareholders’ fund requirement from ~ $12.8 M (₦2 billion in 2014) to $1 million or equivalent. The immediate effect was that by the second quarter of the year, it had given approval-in-principle to 14 IMTOs.
So, why are there so many people vying for the right to send money to and fro Nigeria?
How did we get here?
Why do operators want to offer remittance to Nigeria?
The most obvious reasons are the commercial benefits. But the choice of remittance, as a cross-border use case, runs beyond that.
From a commercial standpoint:
Nigeria is one of the top recipients of remittances in the world, averaging $20 billion annually. It’s consistently in the top 10 receiving countries alongside India, China, Mexico, Pakistan and Bangladesh. In sub-Saharan Africa, it accounts for one-third of all remittance inflows. Therefore, it’s always considered in the list of countries to expand remittance capabilities to.
Remittance is resilient, providing a stable base for financial projection, which helps business leaders in decision-making. From 2014 to 2023, Nigeria received a median of $20.37 billion and an average of $20.78 billion in annual remittances. The closeness of these figures suggests the data is symmetrical, giving business leaders confidence to reliably expect around $20.5 billion each year. Similar countries with such stability (i.e. +/- 2% diff between median and average) in remittance inflows include Senegal, Kenya, and South Africa.
Potential for TAM growth as more Nigerians seek to emigrate (japa). An August 2023 poll revealed that 63% of Nigerian Youth are willing to relocate abroad. By the end of the year, the UN International Organisation for Migration (IOM) Chief said that it recorded the highest number of Nigerians looking to leave the country6, particularly to the UK (80%). This means that despite the headwinds of unfavourable policies by key destination countries, Nigerians will still find a way to emigrate to those with more welcoming policies. Who knows, maybe Yakutia, Siberia, is next?
Under-tapped segment, the informal channels. Several studies estimate that about 50% of remittances7 to Nigeria still happen via informal channels. So, founders are betting on their ability to convert non-consumption into consumption for themselves.
Policy tailwinds. Multilateral organisations like the World Bank continue to support remittances due to their ability to reduce poverty and support economies. Likewise, the Federal Government of Nigeria will continue to double down on remittance as oil prices tank, and other sources of dollars like Foreign Aid, and FDI/FPI continue to dwindle. This provides a regulatory and policy-backed tailwind for operators to engage in collaborative discussions to advance their remittance business.
When all is said and done, maybe the future of cross-border isn’t about skipping remittance—it’s about what you do once you're in.
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Link to the Flagship Advisory partners’ estimate and FXC intelligence insights on the cross-border payments TAM and penetration
Why third-party (Fintech-type) deposits at a bank are more risky than direct/core deposits.
Why countries hold foreign exchange reserves
Link to UN IOM Chief statement
Read this report on Remittance to Africa by MoneyGram’s Africa business lead.