Colombia is the 4th largest economy in Latin America. It also has somewhere between four million and six million of its citizens living abroad. In 2014 those citizens sent four billion dollars in remittances back to the country. It is an important enough chunk of Colombia’s balance sheet for the national bank to keep tabs on it.
Remittances to the country have been growing steadily in the past 15 years, with only a temporary slowdown in the dog years of the global downturn (2009-2012).
The largest source of remittances is, unsurprisingly, the United States (US$ 1 billion). Spain is a distant second (US$ 400 million) and the UK is fourth (US$ 73 million). So put together, the European corridor is significant. A quarter of all remittances are paid directly into a bank account, up from 21% in 2011.
Colombians abroad send remittances in a similar way to other nationals. Money is handed over to a network of agents in shops and specialist outlets associated with one of the remittance companies that operate in the market (like MoneyGram or Western Union). Once the money is “captured”, the remittance company issues a payment order to their agents in Colombia, who contact the beneficiary of the transfer and hands over the money in Colombian pesos.
In the case of Colombia the clearing of funds is done mainly by money exchange houses (casas de cambio). It appears that most of the trade is concentrated in a very small number of operators, although recent evidence for this is difficult to come by. A 2004 study by Colombia’s central bank found that 81% of the market was handled by only 14 exchange house. The rest was made up by banks, some stock exchange traders and commercial finance companies.
But that study was already pointing out that competition was hotting up and fees were coming down as a result. This 2010 study seems to suggest a similar trend.
At the moment, users pay fees in two different ways – in upfront commissions and in the so-called “differential exchange rate”, that is, the difference between the exchange rate in the market as a whole and the (lower) one that the remittance operators give to their users.
Remittances have a significant effect on those who receive them. The 2010 study found that households who receive remittances tend to spend more on education than those who do not. And they enjoy a standard of living that is higher than those in similar socioeconomic brackets who do not receive them. Remittances, in other words, change lives, for the better.
Arguably, the more competitive the market, the better for its users and the more money that ends up in the pockets of those who will use them to pay for school fees and better places to live.
But entry into this market for a new player is currently very expensive.The costs of compliance (e.g. anti money laundering), logistics (getting the money to the end beneficiary) and the sheer amount of liquidity needed upfront to keep paying out while money is settled across multiple countries, make it prohibitively expensive to compete in the market.
But cryptocurrencies could massively reduce the settlement times and transform the compliance and even the logistics scenario. Is this a market ripe for disruption?