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Sending money back home. (Current Research).

Money remittances are bic business. Official statistics are unreliable, but we estimate that every year immigrants in North America and Europe send more than $60 billion to their home countries (Exhibit 1), transmitting the funds largely through small and informal neighborhood players. Just over half of all global remittances originate in the United States, and 65 percent of that money goes to Latin America. (1) Our research, which covers the region, suggests that banks and other major financial institutions should consider getting into this high-margin business (Exhibit 2), where they have a better position for serving the needs of customers than do the mostly small businesses that now compete in this market.

Many immigrants are dissatisfied not only with the reliability and speed of the present informal remittance networks but also with the exorbitant fees they charge: 6 to 15 percent of the remitted amount for the transaction, as well as a hefty exchange rate margin of 3 to 5 percent. When sending money back home, most immigrants--often on the recommendation of an elder in their tightly knit communities--take the cash to a neighborhood agent located, for instance, in a convenience store. These agents, mostly representing small remittance companies in the immigrants' home countries or, in a few cases, multinational operators, pocket half of the transaction fee and then deliver the cash to the office of the remitting company, which wires the money, at a previously negotiated exchange rate, through its own bank account to a bank in the country of destination. The beneficiaries there can collect their cash from local agents or local branch offices representing the remitting company or its partners, or they can pay t o have the cash delivered to their front doors. We estimate that remitters collected about $12 billion in fees last year and that the remitters' revenues are growing at a compound annual rate of around 8.5 percent.

One of the few larger players in this market (mostly in Latin America) is Western Union, a subsidiary of the message and money transfer group First Data, a company listed on the NYSE. With more than 100,000 agents around the world and 40,000 in North America (excluding Mexico), Western Union transfers money by wire, mainly to Mexico, El Salvador, Guatemala, and the Dominican Republic. Another leading remittance player--Gigante Express, one of the largest courier agencies in Central America--wires more than half of all remittances to El Salvador.

For those few immigrants and recipients who have accounts at banks, transferring money through them can be at least as expensive because of the high minimum fees and the volumes of paperwork required even for small transfers. Banks have shown little interest in targeting immigrants and their needs in the past, but that is beginning to change in View of the increasing numbers of more sophisticated immigrants with credit cards and checking accounts.

As a result, the market has new entrants, including International Remittance Network (IRnet), which offers an electronic-fund-transfer service linking credit union cooperatives with Citibank in the United States. Credit union members (such as unionized agricultural workers) who have emigrated there can transfer money to local Citibank branches in El Salvador, Guatemala, and Mexico for $6.50 per transaction, one of the lowest fees in the market.

But banks and other major financial institutions still have plenty of room to deliver what customers want: speed, reliability, better products and reasonable prices. Much of the money that immigrants transfer home is used not for groceries or other consumable goods but for land purchases, mortgages, utility bills, personal investments, and even new homes. In fact, many immigrants work abroad to build a future back in their countries of origin. Banks have a good position to develop innovative products together with their own branch networks (or those of partners) for mortgage payments, with utilities for electric, gas, and water bills, and with real-estate companies for land and house payments. One product springs to mind: a system for automatic debits from a wire transfer.

Meanwhile, regulators, concerned about the ability of criminals to use the present informal system to launder money from drug trafficking or to finance terrorism, are scrutinizing the flow of money through remitters. Banks and other major financial institutions, which enjoy more trust among regulators, have the lobbying power, the know-how, and the resources to develop automated money-laundering controls that could put them in a strong position.

To enter the money remittance market, banks should consider building alliances with local partners to share expertise and the cost of branch networks. Those with such networks abroad are very well placed, and a few have made tentative moves to make good on this opportunity. Wells Fargo, for example, accepts the matricula consular (an identity card issued by Mexican consulates) as identification for immigrants who wish to open accounts. In March, the company started a pilot program making it possible for its branches in Arizona and Texas to transfer money directly to Bancomer. Citibank, which last year acquired Banamex, with 1,500 branches throughout Mexico, now also accepts the matricula consular.

Homeward bound

Estimate of remittances sent from North America and Europe by
destination, 2001 (1)

Destination of remittances, percent (100% = $61.3 billion)

Africa         20
Asia           53
Latin America  27

Note: Table made from pie chart
               Value of remittances,  Revenues,
                     $ billion        $ billion

Asia                   32.5              6.5
Latin America          16.5              3.3
Africa                 12.3              2.5

Total                  61.3             12.3

(1.) Estimates based on distribution of 1998 data (most recent available
on country-by-country basis); revenue estimates based on 1990-98 data
and assume revenues = 20% of remittance value.

Source: World Bank; McKinsey analysis

Note: Table made from bar graph

A valuable market

Estimate of remittances sent from North America and Europe to Latin
America by country, 2001 (1)

                    Value of remittances, (1)  Revenues, (1)
                            $ billion            $ billion

Mexico                         7.3                  1.5
El Salvador                    1.7                  0.3
Dominican Republic             1.7                  0.3
Brazil                         1.2                  0.2
Ecuador                        1.1                  0.2
Other                          3.5                  0.8

Total                         16.5                  3.3

                    Net profits, (1)
                       $ million

Mexico                   167.9
El Salvador               39.1
Dominican Republic        39.1
Brazil                    27.6
Ecuador                   25.3
Other                     80.5

Total                    379.5

(1.) Estimates based on distribution of 1999 data (most recent available
on country-on-country basis); assumes revenues = 20% of remittance value
and net profit margin = 11.5% of revenues.

Source: World Bank; McKinsey analysis

Note: Table made from bar graph

(1.) Mainly to Mexico, El Salvador (constituting 11.2 percent of its GNP), the Dominican Republic, Brazil, and Ecuador. We analyzed the industry structure and business models in those markets and conducted focus groups with customers in the Washington Heights neighborhood of New York, one of ten cities that together account for 59 percent of the 34 million-strong Hispanic Population of the United States.

Andres Maldonado is a principal in and Alejandra Robledo is an alumnus of the Bogota office.
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Author:Maldonado, Andres; Robledo, Alejandra
Publication:The McKinsey Quarterly
Geographic Code:1USA
Date:Sep 22, 2002
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