84% of Western Union's total global revenues of US$5.2bil comes from migrant remitances

Remittance business picks up steam(Star, 19/2/2011)

THE remittance business is enjoying good growth and will march on following the inflow of foreign workers into the country amid the Government's various projects to propel the local economy.

Industry observers feel the Government's open-door policy of bringing in such workers, unskilled and skilled ones, to boost certain sectors of the Malaysian economy will see the remittance business gaining prominence as a revenue generator for remittance service providers (RSPs) despite the competition in this business.

Remittance growth

According to the Malaysian Immigration Department 2009, the migrant workers population in Malaysia totalled 1.92 million of which 80% were from Indonesia, Bangladesh and Nepal.

Currently, there are 62 RSPs in Malaysia of which 22 are commercial banks, two are national saving banks and 38 are non-bank RSPs, among others like Western Union and MoneyGram. The emergence of non-bank RSPs less than a decade ago has made the remittance business more competitive.

RAM’s Dr Yeah Kim Leng says the remittance of migrant funds is expected to rise further by 10%-15% this year.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng says that with the continuous rise in the intake of unskilled foreign workers in response to the needs of the expanding plantation and services sectors, the remittance of migrant funds is expected to rise further by 10%-15% this year.

The stronger remittance, he adds, is also underpinned by the expected rise in the number of skilled expatriates and Malaysian returnees attracted to the country's Economic Transformation Programme (ETP) and accompanying investment activities.

“Remittance flows are the second largest source of external funding for developing countries behind foreign direct investment. A rough gauge of the size of banking remittance business in Malaysia can be gleaned from the country's balance of payment statistics.

“Based on the total inward and outward current transfers and compensation of employees, the remittance business exhibits a steadily rising trend. Over the 2005-2009 period, the total value of inward and outward flows averaged RM30bil annually, a 60% rise over the average for the preceding five-year period, he says.

The estimated total remittances rose by 22% to RM36.5bil in 2009 and recorded a further 12% increase in the first three quarters of 2010.

On the types of transactions performed by migrant workers, Maybank's deputy president and head of community financial services Lim Hong Tat says basically there are two types. The first involves where the fund is credited into a bank account of a beneficiary in the receiving country, and the second one is where the fund is collected in cash over the counter at the overseas appointed agent.

Most of the RSPs, Lim says, are using the Swift system or batch file processing for account crediting remittance service and usually the funds can be received within two to three working days.

The existence of non-bank RSPs like Western Union and MoneyGram in Malaysia has moved the remittance business into a new and higher level of service where the customer may opt for instant cash collection over the counter.

Apart from partnering with MoneyGram, one of the world's largest remittance service provider, it has also launched a new remittance platform known as Maybank Money Express (MME) in September 2010 which is capable of offering both account crediting and instant cash collection service.

MME is the first such service offered by a Malaysian bank that also offers instant cash collection over the counter.

Lim says MME leverages on Maybank's regional presence to provide remittance touch points in seven countries like Brunei, Cambodia, Indonesia, Pakistan, the Philippines, Singapore and Vietnam. It will expand to India and the Middle East by year-end, he adds.

Judging from the number of foreign workers in Malaysia and RSPs in the country, the remittance business is competitive and a profitable one.

Profitable though competitive

Yeah feel the remittance business is a profitable one for banks as margins from transaction charges and exchange rate conversion provides a lucrative revenue line and an incentive for banks to tap the growing remittance and cross-border banking business services.

As banks' interest margins come under pressure this year, remittance services will become an even more important segment of the banks' non-interest income stream, he notes.

Banks which have invested heavily in technology and regional network infrastructure are well positioned to service the banking needs of the ever growing pool of internationally and regionally mobile skilled and unskilled labour, Yeah adds.

United Overseas Bank (Malaysia) Bhd head of transaction banking division Andre Lee agrees. He says migrant workers' remittance business is a profitable business for banks, especially in Malaysia which is dependent on migrant workers for certain industries.

Those working in Malaysia usually commit a certain portion of their wages to support their family back home and this type of remittance happens monthly for most migrant workers during their payroll week, he notes.

Western Union’s Ratheesh Kumar says the remittance market is growing and has strong potential.

For UOB Malaysia, Lee says the bank has seen an upward trend of remittance from a transaction record of 24,000 in 2008 to 95,000 in 2009. On a month-to-month comparison, January 2011 versus January 2010, the bank's remittance figure rose by 25%.

Overall, Lee says the remittance business of migrant workers contribute about 9% of the bank's total remittance business revenue and hope to drive this business further.

Ratheesh Kumar, who is Western Union's regional vice-president for South Asia & South East Asia, says the remittance market is growing and has strong potential.

“While the Western Union service offers our agents including banks an additional fee based income, more importantly it also helps bring in customer footfalls which can be easily translated into incremental business for the bank's portfolio of products. In short, a win-win situation for both the bank and Western Union,'' he explains.

In 2010, Western Union completed 214 million consumer-to-consumer transactions worldwide, moving US$76bil of principal between consumers, and 405 million business payment.

As for 2011, Ratheesh says given the dynamic nature of the remittance industry, it would be too early to forecast the growth of the market for the year.

The company's global consumer to consumer business (migrant remittances) accounts for around 84% of Western Union's total global revenues of US$5.2bil as of last year.

Lim says the presence of a large number of about 1,800 touch points nationwide where remittance services are provided is an indication of the profitability of this business although the high number of RSPs does affect margins for the remittance business.

Maybank is targeting the migrant workers remittance business to increase 10% in 2011 from last year with the introduction of its MME service. Without churning numbers, he says Maybank's remittance business is sizeable and migrant worker remittance business consist a reasonable portion of it.

The need for formal channels

Moving forward, although the remittance business is poised for strong growth in view of the higher demand for foreign workers amid more projects taking shape to steer the economy, there is a need to make the service more efficient.

Yeah says that besides upgrading facilities for funds remittance, the expansion of branch networks of banks or tie-ups with foreign banks is needed to cater to the large number of workers looking for formal banking channels to remit funds.

In turn, this will help to curb the large illicit flows transfers through informal and illegal channels as highlighted in a recent international report, he notes.

Lim says that based on a study from World Bank Conference 2007 in Bali, about 90% of remittance outflows from Malaysia to Indonesia occur through informal channels.

The lack of requisite identification/status documents required to open bank accounts or interact with formal RSPs has been the main reason that some migrant workers opt for Hawala or Hundi (informal channels), he notes.

Hawala is an informal value transfer system based on the performance and honour of a huge network of money brokers, who are primarily located in the Middle East, North Africa, the Horn of Africa and South Asia.

The challenge for commercial banks is to create greater awareness among those who use informal channels to change to an efficient, much safer and reliable remittance services offered via formal channels.

By leveraging on Maybank's presence in the region, Lim says this will provide greater confidence to migrant workers who are familiar with or who may have accounts with Maybank branches or partner banks in their respective countries.

Another approach, he adds, is by offering reward campaigns to attract new customers to use the service.

“Visits to areas with large migrant population, businesses employing migrant workers and the use of vernacular language are some of the campaigns to publicise the service,'' he says.