August 20, 2014

Directo a México’s limited traction reflects difficulty of banking the unbanked

In 2001, the U.S. Federal Reserve and Banco de México embarked on a study of how to link the neighboring countries’ payment systems by creating an inter-bank mechanism available to all financial institutions in the United States and Mexico. The resulting platform was introduced in 2003 as FedACH International Mexico Service. In 2005, the Fed began marketing the service known as Directo a México to U.S. financial institutions.

Directo a México allows U.S. financial institutions to provide a fast, cheap and secure account-to-account or account-to-cash money transfer service from the U.S. to Mexico. The individual sending money must hold an account at a participating bank or credit union in the United States. The recipient in Mexico may receive payment either in a bank account or as cash at any TELECOMM-TELÉGRAFOS branch. When the program was initiated, the beneficiary in Mexico was also required to hold a bank account.

Directo a México’s website outlines the advantages of using its service to send money from the U.S. to Mexico.  Keep in mind that sending money internationally may carry its own tax stipulations in the eyes of the IRS. Therefore, be sure that when you are plugging information into a tax refund estimator, that you include any money transfers too.The average cost to send $350 via a traditional money transfer company is $10 plus a $6.50 foreign exchange fee. To transfer the same amount via Directo a México, the sender pays an average cost of $3 plus a foreign exchange fee of $0.70, an average total savings of $12.80. A transfer of more than $2000 will carry the same transfer costs at one of the best foreign exchange rates. Directo a México estimates savings of $82 in fees for a transfer greater than $2000. In addition to cost advantage, the service provides next business day delivery of funds, fee certainty, transparency and security.

One of the Fed’s chief objectives when developing a cross-border payments system was to enable banks and credit unions to market Directo a México as an entry product to unbanked Mexicans in the U.S. In other words, traditional financial institutions could target potential customers by offering them a cost-effective remittance product, then convert them to banking customers.

This approach has seen limited success. Although many U.S. banks and credit unions now offer Directo a México, the program has not been able to wrestle market share from the leading money transfer companies. Similarly, Bank of America introduced a remittance service, SafeSend, with the intention of attracting underserved Latinos and converting them to retail customers. This too was not very successful.

The inability of Directo a México to significantly penetrate the U.S.-to-Mexico remittances market underscores the difficulty of bringing unbanked Hispanics into the conventional banking system. Yes, remittances are driven by convenience and the traditional money transfer companies continue to offer the most convenient service. But most unbanked and underbanked Hispanics distrust banks and fear giving up anonymity for the limited benefits of being a low-income banking customer.

Directo a México is a great service. It’s a shame that more senders of money to Mexico do not use the central banks’ system. The program’s inability to impact the unbanked problem in our country indicates that a more comprehensive approach is needed. In addition to leading with services like cash checking and remittance service, banks must align with relevant community organizations and teach financial literacy. Community-based, culturally-sensitive education is the most effective way to bring the unbanked into the banking system.

How will remittances influence the development of mobile money in Latin America?

Entrepreneurs and academics agree about the future of mobile financial services in Latin America: The upside potential is tremendous.

Last week, Dr. Jerry Haar of Florida International University wrote this compelling piece about mobile money in Latin America. Conditions are right for converting a large portion of the region’s population – existing mobile phone users without bank accounts – to mobile financial customers.

Stakeholders agree on something else: Remittances will play a big role in rolling out mobile money in Latin America.

This stands to reason. More than $60 billion of remittances are sent to Latin America and the Caribbean (LAC) on an annual basis. Remittances to LAC dwarf foreign direct investment in the region, and they are expected to multiply over the next five years.

But U.S. Hispanics are not adopting the mobile channel for the purpose of sending money. They continue to use traditional money transfer services like Western Union and MoneyGram. In fact, underbanked Hispanic migrants are more inclined to adopt digital reloadable cards than mobile financial services.

Moreover, market leader Western Union is reluctant to push the mobile channel onto their customers. The money transfer multinational controls approximately 26 percent of the U.S.-to-LAC remittances market. Since mobile money transfer is a cheap and safe alternative to traditional remittance services, the mobile channel poses a threat to Western Union’s core business, which relies strategically on its agent networks.

Mobile money is the future. But the role of remittances will help determine when mobile money will truly explode in Latin America.

Slow down in transnational mortgages from Latin America attributed to U.S. recession

In late 2008, an Inter-American Development Bank (IDB) article titled El Boom de la Casa Propia praised the emergence of remittance-linked mortgage products enabling Latin American migrants to purchase homes in their country of origin.

Two financial trends in Latin America and the Caribbean (LAC) were driving the expansion of transnational mortgages: the continued growth of remittances and the development of affordable housing for middle and low income households. Remittances to LAC would increase from $60 billion to $500 billion over the decade, according to the IDB piece.

Since that article was published on October 8, 2008, little has been reported from LAC’s remittance-linked mortgage sector. Furthermore, the majority of remittance-based housing finance projects supported by the IDB’s Multilateral Investment Fund have concluded, despite their relative success.

What happened? The worst contraction in economic activity since the Great Depression took place and interrupted the evolution of this innovative space. Total remittances to LAC actually decreased as opposed to following a rapid growth trajectory, and the housing sector in Mexico, the largest recipient country of remittances, slowed considerably.

Expect Latin America’s transnational mortgage market to eventually pick up for several reasons. First, owning a house in their country of origin remains the dream of many Latin American migrants. Secondly, housing finance is becoming increasingly sophisticated in multiple Latin America markets. And thirdly, the supply of affordable housing in Latin America is growing.

Bank of Jamaica: Remittances to island nation increasing

The Bank of Jamaica’s latest remittance report revealed that net remittances for the month of July increased 11.2 percent compared to July 2010.

Remittance inflows of $170.6 million represent the highest inflows seen for the month of July since 2009.

According to the Bank of Jamaica, net remittances totaled approximately $1 billion over the first seven months of the year, an increase of 6.7 percent relative to the corresponding period in 2010.

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