How digitization improves remittances to Africa

They pay school fees for nephews and nieces from abroad, pay their mother’s doctor’s bills or contribute to the old-age provision of siblings at home: in many families, relatives abroad provide a little more financial peace. Remittances are called their one-time or regular payments. According to estimates by the United Nations, around 200 million people worldwide make such remittances – for the benefit of another 800 million people. The World Bank calculated that around 626 billion US dollars were sent worldwide last year.

But the system to which these roughly one billion people are connected is expensive: Hundreds of thousands of deposit and withdrawal points in almost every corner of the world need to be maintained, and companies charge dearly for their services: the fees are still the global average at 6.5 percent of the monetary value. For East Africa, the Remitscope database even gives a value of 9.4 percent – of 100 dollars sent, only just over 90 arrive at home. However, the fees have been declining for years.

The cheapest (3.5 percent on average) are transfers using digital services – but according to the World Bank, they are only used in around one percent of all transactions. “The market simply doesn’t allow us to say that cash is dead,” says Pedro de Vasconcelos of the UN subsidiary IFAD. “The figures clearly show that we are not there yet. However, compared to four years ago, the digitization of remittances is increasing much faster than we thought.”

Digitization in the slipstream of the pandemic

An important reason for the accelerated pace is the corona pandemic – although at the beginning the remittances collapsed briefly: the sometimes very strict contact restrictions have led many people around the world to overcome their fear of contact with the digital world – and made them the target group of Video calls, streaming and digital financial services. In the first year of the pandemic, 2020, the remittance service provider Azimo, which operates primarily in Nigeria, Ghana and Kenya, reported that almost 200 percent more new customers than expected had registered between April and June.

So the demand is huge – and the market is on the move. “When it comes to remittances, we keep a close eye on the costs,” says Sitoyo Lopokoiyit, Managing Director at Kenyan fintech pioneer M-Pesa. For a decade and a half, the subsidiary of the mobile operator Safaricom has been offering a mobile payment model that worked before the smartphone era and has been continuously developed ever since. Today M-Pesa has 56 million customers – mostly in Kenya, but also in countries like Tanzania, Ethiopia and Mozambique. M-Pesa therefore works with around 30 remittance partners: money deposited with them can also be received at M-Pesa’s more than 700,000 payment points, or sent on from the digital wallet.

“With the advent of new technology – you can deposit from online banking directly into the M-Pesa account and no longer need branches in the US or London – everything has gone digital. This has changed the cost of remittances a lot,” says Lopokoiyit im DW interview.

On the way to the three percent target

The United Nations have set a target value in their Sustainable Development Goals (SDGs): by 2030, the fees for remittances should only amount to a maximum of three percent of the monetary value. According to Lopokoiyit, M-Pesa is also committed to this target.

“In some countries, this goal will probably not be reached, I can already say that,” Pedro de Vasconcelos, coordinator of the remittance department at the UN organization IFAD, told DW. IFAD focuses on agricultural development. “In other countries, on the other hand, we have already achieved it. So was it the right goal at all? Yes, because it gave a direction in which we have to move.”

From de Vasconcelos’ point of view, it is even more important that M-Pesa and the other market participants continue to develop their offers – and thus, as it were, promote the financial inclusion of their customers: “They can connect loans, insurance, pensions and other things to their system. From their It can be worth it – and change the lives of your customers.” This trend is inevitable, believes de Vasconcelos.

What that can mean in concrete terms can be guessed from M-Pesa’s future plans, which Sitoyo Lopokoiyit outlined in an interview with DW: “We are currently looking at payments from customers to companies. In the next phase, for example, it should be possible for someone from UK paid a hospital bill in Tanzania directly through M-Pesa.” The growing e-commerce is also to be better integrated via app.

Remittances are increasing – especially in times of crisis

However, the brave new world of digital payments also harbors the risk that the channels will be used for criminal activities. At M-Pesa, all transactions are checked in real time, says director Lopokoiyit. A partnership has been concluded with the World Wildlife Fund so that M-Pesa is not misused for the prohibited ivory trade. Other providers such as Western Union also carry out real-time screenings – also to ensure that international money flows are not used to circumvent political sanctions.

In principle, it can be assumed that remittances will continue to gain in importance in the future: Pedro de Vasconcelos says they have only been systematically observed for 20 years – and have grown considerably since then. This is particularly true in times of crisis: “While investments and sometimes even aid payments are declining, remittances are increasing. Migrants do not make investments, but take care of the needs of their families. And because they are in closer contact with them than ever, they experience this every day how their families are.”