The remittance market has always been a fundamental part of the economy of Latin American countries. Through migrations between countries in the region or to countries like the United States, there has been a significant flow of money sending and receiving in local currencies or USD, resulting in the emergence of platforms and businesses that respond to the high demand existing in this segment. Fortunately, with the emergence of fintech and their faster and cheaper solutions to address the challenges associated with remittances, this market has been revolutionized.
In this article, we will explore the importance of fintech in the remittance market in Latam, highlighting some successful industry cases that offer this solution innovatively in the region. Additionally, you will learn how companies can leverage this booming segment to launch their own businesses. Let's go!
Remittances are a service that facilitates the sending and receiving of money between people or companies located in different countries, whether to receive it in local currency or in the originally sent currency. Historically, it was done by going to the offices of a company in the segment with the cash intended to be sent, which would arrive at the destination in the local currency. This process - still leading in several countries in the region - involves a delay of several days and fees for the nationalization of funds, in addition to the service fee.
According to the World Bank, remittances are a key source of income for households in low- or middle-income countries, and they have a high impact on improving malnutrition and schooling in children from disadvantaged households. On the other hand, it can also be a tool for people with income abroad who need to use those balances in their country of residence. In the case of companies, the use of remittance platforms is similar, as it provides them a solution for covering local payroll payments, suppliers, or the purchase of supplies, among others.
Fortunately, the remittance industry has experienced a great transformation in recent years thanks to the emergence of digital alternatives more efficient in cost and speed: fintech solutions through mobile applications, digital accounts associated with cards, and the crypto world. These alternatives represent significant savings for senders and recipients, and they also improve the speed of transactions, allowing money to reach its destination in a matter of minutes instead of days.
This growth of remittances in Latam was influenced by the increase in employment of Latin migrants in the United States, as well as the post-pandemic economic recovery.
Additionally, the World Bank shows that the average cost to send USD 200 to Latam was 5.8% at the end of 2022, a figure that exceeds by more than double its goal set in the Sustainable Development Goals. And, according to their records:
traditional banks are the most expensive means for sending remittances with an average fee of 11.8%post offices are in second place with 6.3%.But if we talk about digital solutions, the numbers drop considerably:
money transfer operators have commissions of 5.4%mobile operators of 4.5%.Paradoxically, these are the most economical options recorded in this report, but they represent less than 1% of the total volume of remittances sent. A great opportunity to create platforms to compete in this segment, right?
As a paradigmatic case in the region, Mexico stands out: it is the second country to receive the most remittances globally during 2022!
Mexico accounts for approximately 42% of the remittances received in the region, followed by Guatemala with USD 18.11 billion in remittances and Colombia in third place with USD 9.44 billion. "Remittances have always been important in Colombia but are still usually managed in a traditional way, with players like brokers or money transfer companies. Fortunately, we see that over the years new technologies have made it easier to send and receive dollars from abroad to Colombia. It was an industry that needed transformation. I believe that the new players in this segment have a key value proposition in being more efficient with the speed and timing of transfers, as well as transparency with what is sent and received, without hidden costs," Enrique Fadul, Biz Dev Lead of the Andean region at Pomelo.
They play a crucial role in the economic development of the region, helping to improve the living conditions of recipient families as they are often used for basic consumption, such as food, housing, health, or education. Additionally, they can have a positive effect on domestic consumption, boosting demand and potentially stimulating economic growth.
Lastly, it is important not to overlook the impact they can have on reducing economic inequality in the region, as they provide extra income for many people. The remittance industry in Latin America has been developing for years and everything indicates it will continue to grow. However, the costs faced by Latin Americans are very high, and they often experience poor service that frequently requires in-person procedures. Fortunately, fintechs are building superior experiences and significantly reducing costs. The impact on the region is transformative, and we have only seen the beginning! Juan Fantoni, Co-founder & CCO of Pomelo.
With the increase in international migration and globalization, it is expected that remittance flows will continue to grow in the future. This means there is growth potential for businesses wishing to enter this segment! Let's look at some ways they can do this with the help of fintechs:
Firstly, they will have access to modern technological infrastructure, which will provide immediacy and simplify processes to streamline remittance transfers with accounts and cards. Additionally, if the fintech solution is compatible with all local regulations, companies will be able to scale their solution to other countries, which is essential in a constantly evolving market.
On the other hand, using modern technologies allows you to quickly complement your value proposition, for example, through APIs. This methodology helps with the simple and fast integration of external products or services into your platform, so you don't have to develop them from scratch. A great tool that can be incorporated into your remittance solution through APIs are credit, debit, or prepaid cards, which will complete your users' experience:
People do not need to visit a physical location to withdraw the money; they receive it in real time on their card. Ready to use!They can make digital or physical purchases at any store, accessing benefits, discounts, or financing provided by the card.They can access cash networks and ATMs to withdraw the amount they wish.Another alternative where cards can be easily incorporated is in blockchain-based solutions for sending and receiving remittances in cryptocurrencies. In this way, they can make everyday purchases with the sent balances; crypto cards are a win-win!
And if we talk strictly about the revenue you can receive with a remittance business, the interchange fee is an innate income from the card model, thus it will be an amount you will always receive if you incorporate them into your remittance business. However, in this segment, where each transaction involves a process of fund nationalization, there are more substantial earnings to consider: the exchange rate conversion fee, or spread fee, which refers to the difference between the value at which the remittance company sells and buys that sent currency. This will be the main income for any player!
Taking advantage of the exponential growth of the remittance market in Latam is a great opportunity to generate financial business and respond to the needs of millions of people in the region. Doing so by leveraging modern and modular technology, such as that provided by fintech, will allow you to harness all the advantages of this booming industry and expand your business more efficiently and competitively compared to the competition.
Without a doubt, this market will continue to grow and play a fundamental role in the financial landscape of Latin America!
A journalist and Communications graduate born in Buenos Aires, Argentina, she joined Pomelo’s marketing team after writing for media outlets, agencies, and IT companies—experiences that honed her ability to decipher technical information regarding software and blockchain. She is a cinephile who loves music and exploring new places, and—above all—she is a cat lover.
Talk to our team and get started faster.
