At an estimated USD 66 billion in 2015, formal remittances to Africa are three times larger than overseas development assistance and more stable than most other sources of finance. Remittance flows have become one of the largest sources of external finance to African countries after foreign direct investment and are attracting increasing attention because of their rising volume and impact on the receiving countries. Yet, despite the ever-increasing attention on them as a potential development tool, sending money to Africa is more expensive than sending to any other region in the world.
The increasing focus on remittances to Africa is seen in a growing body of literature that analyses their development impact along various dimensions including: financial development (Aggarval et al., 2011), poverty (Gupta et al.,2007), inequality (Akobeng, 2016), economic growth (Nyamongo et al., 2012), the Dutch disease effect (Acosta et al., 2009), how they support democracy (Konte, 2016) and whether they improve political institutions (Williams, 2017). My criticism of these studies, however, is that they pay little attention to transaction costs of sending money to Africa. They lack a focus on scaling and creating a conducive regulatory environment for access to technologies and on changing consumer behaviour to make sending money to Africa ‘end-to-end’ digital.
New research shows that, digitising the remittance value chain from the sender to the receiver and removing dependency on counter staff and agents will help reduce the transaction costs of sending money to Africa. Importantly, mobile phone technology, mobile money, digital currencies and cryptocurrencies (like Bitcoin), distributed ledger technology (like blockchain), electronic identification, verification (using biometrics) and cloud technology etc., have the capacity to technically make cross-border payments negligible in cost, instant and auditable. Digitising the value chain from the sender to the receiver, is the key to reducing the transaction costs of sending money to Africa.
At the moment, it is estimated that over £400 million a year is being paid in transaction costs (fees and margins made on the foreign exchange) by Africans living in the UK sending money to friends and family back home. In the UK, it is estimated that nine out of ten send money through agents and just one in ten send money digitally. The average cost of sending £120 from the UK to Africa is 9.4% of the send amount, significantly higher than the global average for sending money at 7.5% (Q1, 2017). However, the cost of cash-to-cash transfers averages 10.7% of the send amount compared with 7.8% for transactions initiated digitally. By people switching to sending money digitally to Africa, £100 million could be saved a year in transaction costs. If the cost of sending money to Africa were to meet the UN Sustainable Development Goals (SDGs) target of 3% by 2030, then over £300 million a year would be saved. That said, we won’t be able to achieve SDG 10.c if we don’t scale existing technology such as international transfers via mobile money.
The cost of sending money to Kenya from the UK is cheaper than sending it to any other country in East Africa. Yet, just next door, Tanzania is the second most expensive country in Africa to send money to from the UK after Eritrea, costing twice as much as Kenya. The lower remittance fee to Kenya is in large part due to the country’s vibrant mobile and digital money transfer platforms like M-Pesa, PesaLink, mVisa and other bank applications. The World Bank’s Global Findex 2014 data indicates that at 58%, Kenya has the highest level of mobile money ownership in sub-Saharan Africa. While higher volumes help bring down the cost of remittances, so too do digital pathways that remove the need for agents in both the UK and Africa.
The development of regional automated clearing houses in Africa also presents a channel for improving the efficiency and reducing the cost of low-value cross-border transfers into Africa. Extending the use cases of this infrastructure to include mobile wallets and providing access to UK-based remittance service providers will improve interoperability between payment systems and across borders. But improved trust and comfort with digital money will be required before new technology can reach its full potential and reduce costs.
All things considered, it seems reasonable to point out that no single technology can be applied to fix the remittance challenge in Africa. It would be difficult to imagine progress without corresponding financial sector reform, corporate governance and anticorruption efforts. African governments, development agencies and service providers must collaborate to create complete systems that reduce both the risks and costs associated with money transfers. Africa should be a high global priority to bring down the cost of remittances which can be achieved by committing to the SDG target of 3% by 2030. African regulation need to keep up with technology and create enabled environments. Fragile and conflict-affected states should not be left behind, given the importance of remittances to livelihoods and post-conflict development.
In the long term, aid will decline while remittances will grow. African’s path to self-sufficiency and the end of aid dependency has begun. But bringing down the cost of sending money is a crucial next step on that important journey.