The remittance market in Africa has for too long been monopolised by companies imposing inordinate fees that are, on average, three times those charged on remittances to Asia. They combine a pricing structure that imposes extortionate minimum charges with consistently poor services.
This has its roots in Western Union's early activities on the African continent. As the first formal mover in the money transfer market, it worked to establish long-standing exclusivity agreements with all major African banks and money transfer agents, barring them from working with competitors.
Such exclusivity agreements have propelled Western Union to a near monopoly-like position, in key African corridors, and have prevented competitiveness within the industry. In spite of successful campaigns, on the part of African Diaspora groups, which have resulted in the banning of exclusivity clauses by African governments, progress has generally been very slow.
In West Africa, for instance, regulators have been particularly successful in breaking down the barriers, created by Western Union's near-monopoly position. Despite signs that the markets are opening up, however, and that competition is finally beginning to flourish, in some African remittance corridors, banks and other financial service providers have been slow in entering into new relationships with money transfer companies offering lower fees.
This is hardly surprising, given that the existing arrangements benefit both Western Union and their correspondent banks.
This long-term remittance malpractice has meant the cost of sending money to Africa has remained high. According to the World Bank, in 2011, the average cost of sending money from Ghana to Nigeria was 38.94pc of the send amount, and it was as much as 47.24pc, between Tanzania and Kenya. In contrast, the cost of sending money from Malaysia to the Philippines is less than three percent.
Companies working in remittance need to become increasingly customer-focused. When we start to look at the needs of those transferring money to Africa, what becomes clear is that migrants, particularly those earning a weekly wage, prefer to send smaller amounts of money more frequently.
At present, exorbitant minimum fees, which can be as much as half of the transferred amount, leave migrants with little choice, but to wait until the end of the month to remit comparatively large amounts, typically values greater than 200 dollars.
The World Bank does not set a good example. Mandated to lead international efforts in reducing the cost of remittances, its flagship project - a remittance price comparison website - is based on the flawed assumption that migrants will want to send larger amounts of money back to Africa, basing its model on average remittance transactions of 200 dollars and 500 dollars. Only a very small percentage of African migrants send 500 dollars at a time, and those that do send 200 dollars or more, usually only do so because of prohibitive minimum fee.
Offering a comparatively low fee for transferring small amounts of money, however, could result in a far lower average transaction value than the industry average. Lowering the price of remittance to Africa has significant implications for development. According to the World Bank, reducing fees would generate a net increase in income, for recipients in developing countries, of approximately 15 billion dollars.
In some African countries, up to 40pc of households rely entirely on remittances to get by. In these instances, the ability to send small amounts of money swiftly is vitally important. We see African migrants sending as little as 1.5 dollars in airtime top-up. Frequently this is in response to a crisis, where a family member requires the small amount of money it takes to make an important phone call or pay for transport to a doctor. This support is not possible when you have large minimum fees.
The big international remittance players have created services that do not cater for actual customer needs. As we look forward, advances in remittance technology, such as; mobile money transfer and airtime top up, will continue to help drive down prices.
The market must become more competitive, however, and respond better to the needs of migrants. At present, it is being held back by artificial barriers erected by big global brands. This must change if the remittance industry is to truly serve its customers.
Ismail Ahmed, Ph.D., is the founder of Worldremit, an online money transfer service provider. This commentary first appeared in African Arguments.