Over the past decade, the cost of cross-border money transfer has dropped significantly for many, but for some corridors prices still remain high. With new technologies, business models and infrastructure, could we ever see consumer money transfer costs reaching zero?
In a panel I hosted on Tuesday at Money20/20 Europe, key figures from the industry came together to discuss the issue.
Is zero costs an impossible goal for consumer money transfers?
Reaching zero is an immense challenge, and for many in the industry it seems like an impossible goal.
“It’s very silly to think that cross-border payments can go to zero,” said Prajit Nanu, Founder and CEO of Nium, adding that areas such of compliance would always create costs.
He argued that “there is no such thing as a free lunch”, and that the practical costs associated with delivering cross-border money transfers to consumers meant that although there was potential to lower prices, it would not be possible to eliminate them entirely.
This sentiment was echoed by Elizabeth Rossiello, Founder and CEO of AZA Finance, who said that the friction associated with infrastructure made zero unachievable for companies where cross-border money transfers were their primary source of revenue. Nevertheless, she did argue that it was possible to reach zero in cases where a provider was offering money transfers as part of a suite of products, as it would enable the costs to be offset elsewhere – something that she is seeing in some markets.
However, Dare Okoudjou, Founder and CEO of MFS Africa, believes that zero is reachable for money transfers if a different approach is taken.
“I would say there is a possibility to go to zero in the consumer market,” he said, indicating that it could be offset by costs in the B2B market.
He argued this would require consumer money transfers to be looked at as part of the entire cross-border mix, giving the example of Malawi where the country is a net receiver in terms of consumer, but a net sender overall due to its high level of imports.
“If you think about it in terms of matching flows and look at the consumer business versus the trade business, I can see a pathway for the consumer to be free or close to zero.”
Steve Naudé, Head of Wise Platform, also sees a pathway to zero.
“We talk very publicly about our mission zero, which is the ambition that our cross-border transfers should eventually be free,” he said, adding that this was achieved by incremental improvements on each corridor, making zero still a long way off.
Okoudjou likened the industry to telecoms, a space that used to be heavily reliant on international calls for revenue, but has transitioned away in response to changing technology.
“There is a fundamental question in money transfers: are we able to move from a transactional relationship to a subscription relationship?” he asked. “I do think the idea of zero is not crazy.”
The road to zero: Tackling friction in consumer money transfers
While there are still many areas to reduce friction, Naudé said that significant progress had been achieved over the past decade, with similar promise for the next ten years.
Okoudjou echoed this, agreeing that “we have come a long way in reducing the cost”, which he highlighted was made up of the cost of transaction, compliance and FX.
Some aspects of this have been subject to far greater reduction than others, with Rossiello highlighting that changes in underlying operations can and have reduced settlement costs, but have had no impact on FX.
“Our strategy for a long time has been at first to work with an aggregator, then build adjacent to it and work directly with ourselves. That’s where we’ve seen the payment delivery fee evaporating in a lot of markets,” she said.
However, she sees tackling the FX as far more complex.
“That involves monetary policy; directional flows,” she explained. “For some of our directional flows, the demand and supply is so wacky and some of our markets change so wildly you can have almost negative FX on one side and a very high rate on the other.”
Nanu also highlighted that customer acquisition costs remained a key area of friction, and that a lack of consumer loyalty compounded the issue.
“We see customers flowing from one platform to another on a monthly basis,” he said, adding that many small or new players offered temporary deals to lure customers. “It’s extremely difficult on the customer side, in terms of customer acquisition cost.”
He pointed to Wise, which is over ten years old and has only become profitable relatively recently, arguing that it showed how high the cost of entry was to new players in the market.
Here there are implications for how the industry may be structured in the pursuit of lower cross-border money transfers costs.
Rossiello said she saw the “vertical collapse” of the market. She argued that the removal of middle men and smaller players, even in frontier markets, would be key, and that ultimately the market would be formed of direct, regional players with their own infrastructure.
However, Okoudjou disagreed. He said that as MFS operated in the infrastructure space, the company saw more of the small players who operated niche but vital corridors.
“You can’t move them out of that market,” he said.
“I don’t think that the industry will ever actually consolidate. It’s going to continue to be fragmented, because what drives remittances is people, and people move with what they know and those relationships endure.”
Nevertheless, he did see consolidation of infrastructure being key to the reduction of friction.
“It’s the infrastructure that will need to be able to be built together, and it doesn’t necessarily need to belong to one player.”
Is crypto the answer?
While there is debate about the potential to reduce costs to zero, any discussion of the space wouldn’t be complete without considering the potential of crypto. Proponents of crypto argue that it is always cheaper, faster and better for money transfers, however our own data shows this is often not the case.
“We haven’t really found using crypto to be faster or cheaper at scale for our customers,” says Naudé. “That may change in the future, but today that’s not really the case.”
He added that Wise’s current offering already takes only few seconds for fiat-to-fiat transfers in many corridors, removing the opportunity for crypto to make improvements.
Nanu echoed this, adding that for major currencies, he saw crypto’s biggest challenge as on and off-ramp.
“All the large players are figuring out the right solution,” he said, adding that no one has the answers as yet.
“Crypto doesn’t solve anything,” he added. “Will it solve it in the future? I think so.”
He said that Nium is currently exploring settlement using Circle’s stablecoin USDC, although he added that banks remained highly skeptical about any form of crypto.
However, adoption of crypto for money transfers is gaining ground in some parts of the world. Nanu highlighted some African countries and India as being regions where crypto money transfers were seeing growing adoption. In such regions, traditional methods have different issues to those found in many western corridors, creating opportunities for crypto to solve niche issues.
“There’s perfect corridors like the US and Singapore, but there’s a lot of imperfect corridors,” says Rossiello.
She argued that “there are such good use cases” for crypto in the money transfers space, giving the example of moving large amounts on a Saturday during Ramadan,
“To be able to settle when the US banks are closed is a godsend moment that I don’t think that people talk about.”
Okoudjou agreed that there were strong use cases, arguing that in many areas crypto was being used not because it was cheaper, but because it offered a lower risk profile to other options.
“Is crypto going to be the better tool? Not always,” he said. “But if you trust it more you’ll pay more.”