#Asia Banks swallow $5 billion out of remittances to India. Fintech startups are out to disrupt this

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India gains the most from its diaspora among all countries. The World Bank estimates that Indians abroad will send US$72 billion home this year. China comes second with US$64 billion in remittances, and the Philippines is third at US$30 billion. Pakistan and Bangladesh also figure in the top 10.

Remittances to India will grow 2.5 percent this year, up from 0.6 percent in 2014. This is expected to rise further next year and contribute significantly to economic development.

But the cost of sending money home remains high, averaging 7.7 percent globally, according to the World Bank. The hidden costs in FX spread – the difference between an inter-bank currency conversion rate and the rate quoted to you by a bank or money transfer company – will thus eat away more than five billion dollars from the remittance money coming to India this year.

See: Banks are bleeding you dry on your money transfers

The rise of Instarem

A number of startups are out to disrupt this space in different ways. And some of them are seeing quick traction too on the back of rising remittances to India and the Philippines.

Instarem, which got a licence to do remittances from Australia in November last year, saw its transfers to India cross a monthly volume of A$2 million (US$1.43 million) in September. Last month it opened up new corridors from Australia to the Philippines, Indonesia, Sri Lanka, and Singapore. It aims to be in Vietnam and Bangladesh by the end of the year.

The Australia-Singapore corridor is mostly B2B (business-to-business) with a number of startups registered in Singapore using the channel to receive small ticket payments ranging from A$1,000 to A$10,000 the same day. The other corridors are mostly for individuals.

Mumbai-based Prajit Nanu, co-founder and CEO of Instarem, says it hit a weekly remittance volume of A$1 million (US$714,000) in October. “Our average transaction size is A$2500 (US$1784), and nearly half of our customers transfer money every quarter,” Prajit tells Tech in Asia.

The startup has applied for a licence to do remittances from Hong Kong, which is expected in January, and is in the process of applying for one in Singapore. This will allow Instarem to start sending money from Hong Kong and Singapore, where many Indians are based. It also has a licence in Canada and will soon open up corridors from North America to Asia and Australia.

The expansion of Remitly

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Instarem charges a flat fee of 1 percent of the amount transferred, which is significantly lower than the 2 to 3 percent FX spread that banks cut from the inter-bank rate in addition to transaction and other charges. It is able to do this by tying up with local banks. For instance, if Instarem receives the money in Australia to be transferred to India, a local bank in India will transfer an equivalent amount in rupees to the receiver minus the 1 percent fee.

In other words, the money received in Australia remains in the Instarem account there, and the actual transfer happens locally in India. Instarem has a proprietary algorithm and network to perform this magic, which also enables a money transfer within hours irrespective of the amount.

While Instarem is growing fast Down Under and expanding in Southeast Asia, its counterpart in the US has been equally active. Seattle-based Remitly, whose investors include Amazon founder Jeff Bezos, opened up a lucrative corridor to Mexico last month. Mexico will get US$26 billion in remittances this year – almost entirely from the US – which makes the US-Mexico corridor the hottest in the world. Remitly, which had so far been operating only in the US-India and US-Philippines corridors, claims to have transferred over US$500 million in the past one year.

This startup too is gaining ground by lowering the cost of transferring money for Indians, Filipinos, and now Mexicans. However, unlike Instarem, it does have an FX spread component. “We are not disclosing the spread at this point of time,” a Remitly spokesman told Tech in Asia at the time of its US$12.5 million funding earlier this year.

The FX maze

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The FX spread and other charges together make up the difference between the remitted amount and what is received, if the currency conversion is calculated at the inter-bank rate. Usually, only a transaction charge is mentioned and users are unaware of the FX spread in the conversion rate.

But even if Remitly does not reveal its margin, at least you know what you’ll get upfront. This is not the case with some other remittance startups as well as banks where the FX spread (and therefore, the conversion rate) can change in the time between making a remittance and receiving it. For example, the conversion rate quoted to you may be INR 45.50 to an A$1, but by the time the transfer is completed you realize the rate has changed to INR 45.20 to A$1.

This is where tech startups like Instarem and Remitly are trying to disrupt the market with money transfers that are cheaper, easier and more transparent. The main challenge they face is resistance from the incumbents – mainly the banks and big operators like Western Union and MoneyGram. Licences can be hard to get for the newbies.

Blockchain, the technology behind Bitcoin, therefore is another potential disruptor in this space, although the volume of users and transactions using bitcoins for remittances is miniscule currently.

The United Nations Sustainable Development Goals adopted in Addis Ababa, Ethiopia, a few months ago included for the first time an agreement on reducing remittance costs as part of its action agenda, recognizing its importance for developing countries to gain from their diaspora. Tech startups can play a big role in fulfilling this agenda – if they’re allowed to.

How transparent do you think banks are in money transfer? Should regulators enable tech startups to reduce the cost of money transfer? How should governments balance concerns over money laundering with encouraging disruptors in this space? Drop your comments in the section below

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