Ulysses de la Torre

NEW YORK, May 26 2005 (IPS) — The cost of transferring money across borders continues to fall, giving millions of migrant workers in the United States new options for sending home billions of dollars in earnings.

The entry of a variety of new businesses providing money transfer services – commonly referred to as ”remittances” – threatens to shake up an industry long dominated by such household names as Western Union and Moneygram through a variety of strategies involving convenience, price, and product tie-ins both here and in the developing countries where the migrant workers send money to support family or friends.

Since December, two such organisations have broken new ground by offering remittances for free, although on a limited scale.

No Borders, Inc., a Nevada-based provider of prepaid stored-value cards, established partnerships with microfinance institutions in Mexico, El Salvador, and Ecuador allowing migrant workers in the United States one monthly free remittance of up to 350 dollars. Bank of America announced in January that its account holders could send money from Chicago to Mexico for free, with plans to roll out the initiative nationwide by the end of the year.

Just above the zero-cost threshold, various other providers of prepaid stored-value cards, which function similarly to prepaid debit cards, charge fees of 3-5 dollars to send up to 1,000 dollars, significantly undercutting the average 14.99 dollars fee that Western Union charges for a 300-dollar money transfer from the United States to Mexico.

Despite entering the market four years ago, commercial banks only command five percent of the market but the real potential lies in partnerships they can form with card providers, from well-known brands like Visa to newer start-ups like No Borders. This has prompted several Wall Street analysts to downgrade their outlook on First Data Corp., the parent company of market leader Western Union.

”We think it’s going to be difficult for First Data to build out an even network under the same formula they’ve used historically,” said Chris Mammone, a Deutsche Bank analyst covering the industry. ”They’re definitely going to gain significant share because they are who they are but it’s not going to be at nearly the margins they’ve enjoyed historically and the growth probably will have a shorter ramp, too.”

Mammone added that he expects the U.S.-Mexico remittance corridor to be the prototype for the rest of Latin America as well as for India and China, but that competition will become fiercer as technological advances continue.

A February research report from investment bank UBS went even further in suggesting that because existing use of credit and debit cards in Europe and Asia is much greater than in Latin America, customers in those regions should have a much quicker learning curve in adapting to card-based technologies to send and receive remittances.

”Banks in and of themselves are probably not that big a threat. Banks teaming up with their card associations like Visa and MasterCard to go after this market would be a much more serious threat to the First Datas of the world,” UBS analyst Adam Frisch told IPS.

Apart from allowing senders and recipients to share the same balance, prepaid cards have a much larger distribution network: 22 million merchant locations or 945,000 automated teller machines (ATMs) linked to Visa and similar numbers for MasterCard. Western Union, by comparison, only has 220,000 locations worldwide.

The UBS report also estimates that of the approximately 150 billion dollars sent globally last year, remittances channeled through prepaid cards represent a 16-20-billion-dollar revenue opportunity worldwide for receiving countries.

A separate report released by Aite Group, a financial services consulting firm, estimated that there were 145,000 prepaid money-transfer cards in the United States last year, a figure which it expected to grow to 1.1 million in 2006.

Lilia Alvarado, vice-president of Hispanic banking at Chicago-based Harris Bank, said Harris used to offer stored-value cards but found that they weren’t popular among customers.

”It’s probably a lack of marketing,” she said. ”Once people realise what the benefits and features are, I’m sure it will increase, but it’s going to take them a while to get them to that comfort level and learning curve.”

The extent to which a remittance service becomes a commodity like milk, coffee or tobacco lies at the heart of how the industry will shape up in years to come. Several researchers and finance professionals agreed that while there is no unique skill required to transfer money across borders, what differentiates one service from another will increasingly be determined by, as Alvarado put it, how the service is portrayed to customers.

One of the biggest obstacles traditionally facing U.S. banks in this market has been a perception among migrant workers that banks are crisis prone, exclusively for the wealthy, or both.

Sergio Bendixen, president of Bendixen and Associates, a Florida-based public opinion polling firm specialising in Latin American issues, said that this perception is now waning.

Greater challenges include a scarcity of Spanish-speakers in non-urban bank branches, inflexible minimum balance requirements to open a bank account, and persistent documentation difficulties despite increasing efforts to expand acceptability of identification alternatives such as Mexico’s matricula consular identity card, Bendixen said.

Meanwhile, the fragmented market of prepaid stored-value card providers is increasing its reach through targeted marketing efforts. Amigo Money, a competitor of No Borders, plans on marketing its prepaid cards to the Mexican population via popular musicians and radio stations, while No Borders is in the process of organising teleconferencing events in which migrants can communicate with their families back home.

The immediate effect such strategies will have remains to be seen, but the various movements – and the zero-cost initiatives in particular – have prompted a widespread re-evaluation of the industry’s cost structure. Several people interviewed voiced scepticism about the sustainability of a zero-cost model. Daniel Ayala, Wells Fargo’s senior vice-president of cross border payments, said he thought costs are actually bound to increase due to tighter disclosure regulations.

While players and analysts pondered what changes sweeping the industry would mean for them, one spoke about the potential impact he saw for the global fight against poverty.

Raul Hinojosa, president and founder of No Borders, said his company’s model has at least as much potential as increased foreign aid in achieving the Millennium Development Goals. Launched in 2000, the U.N. statement of ambitions commits nations to halving world poverty and hunger by 2015.

”What our product allows you to do is attach this whole bottom of the pyramid, the unbanked population in the United States, to the bottom of the pyramid around the planet, and the key thing is the microfinance institutions,” said Hinojosa, referring to migrant workers in the United States and their counterparts, roadside vendors, and others back home who lack access to traditional banking services.

He said his company’s partnerships with small-scale, community-oriented lending institutions in Mexico is aimed at ”making sure that the remittances go directly into the microfinance institutions that can then reinvest that money in other families that don’t have access to capital.”