As I've frequently observed, the worst companies to encourage into new money businesses are banks. Frank Trotter, now the Chairman of the highly successful Internet bank, Everbank, once famously observed that the companies best placed to enter the new money business were mass transits, telcos and couriers. I think he was dead right; and he's been proven correct, 2 out of 3 so far.
Here's a report about banks failing to get into the remittances business. The reasons should be fairly easy to spot, so I'll not bore with yet another list of critical factors.
U.S. banks fail to attract immigrant remittance business
Eduardo Porter NYT
Tuesday, June 08, 2004
The entry of big U.S. banks into the business of handling immigrants' remittances of money back home was expected three years ago to produce a financial revolution with potentially powerful policy implications for the United States and Latin America.
So far, the revolution does not seem to have panned out.
According to a report that was set for release on Monday by the Pew Hispanic Center, a nonprofit research group, banks have captured only a trifling share of the money flow. And the price of remitting money - which fell sharply in the late 1990s - has leveled off.
For the 10 million Latin American immigrants in the United States who last year sent $30 billion to their families back home, linked bank accounts and international cash-machine networks offer a cheaper way to send money than using traditional cash-based services like Western Union, a subsidiary of First Data, and Moneygram, which is owned by Viad. Through remittance services, banks also hoped to draw these immigrants - more than half of whom do not have U.S. bank accounts - into the formal financial sector.
Treasury Secretary John Snow has been a major promoter of this cause. In April, he joined finance ministers and central bank governors of the Group of 7 industrialized nations in a statement promising to continue working on ways to make it easier and cheaper for immigrants to send money to their home countries and "to integrate remittance services in the formal financial sector."
The fee for sending small amounts, after dropping from about 15 percent in the late 1990s to 9 percent in 2001, has not fallen much further. The average fee for sending around $200 to Latin America this year is 7.6 percent of the amount sent, according to the study.
"The banks have gone through all this effort; it's still early, but the numbers are still fairly small, given the size of the operation and the extent of their investment," said Roberto Suro, director of the Pew center. "Prices have stabilized, especially in Mexico, the biggest market, despite very substantial increases in volume and competition."
Today, some 50 companies vie for a slice of the roughly $1.2 billion a month that flows to Mexico. And banks have focused on the Mexican market. It was the Mexican government's decision to issue new identity cards for its expatriates in the United States, and the U.S. Treasury's decision to allow banks to accept the cards as identification when opening accounts, that drew many banks into the remittance business three years ago.
But despite hefty marketing efforts, the banks still have only a meager share of the business. According to the Pew report, the four largest banks in the business - Citibank, Wells Fargo, Bank of America and Harris Bank - together handle about 100,000 transfers a month. That is less than 3 percent of the 40 million remittance transactions to Mexico each year. And banks' effect on prices also seems muted. The average fee to send $200 to Mexico is 7.3 percent, compared with 8 percent in 2001.
Offerings from the banks have changed the market to some extent. Flat-fee structures make it less expensive to transfer larger sums of money: The average fee to send $400 to Mexico is 4.4 percent. And some of their products and services are cheaper than other transfer methods. But the banks remain hampered by many immigrants' lack of familiarity with formal banks and financial services as well as by other obstacles - like the small cash-machine networks and bank branch systems of Mexico and other Latin American countries, which seldom extend into rural areas.
Manuel Orozco, a remittance expert at Georgetown University who put together the report for Pew, said that U.S. banks had been aggressively pursuing the business for only about three years and were still learning how to gain new customers.
"The cost will fall," Orozco said, "as banks attract more customer deposits and so they can finance the transfers."
The New York Times
Posted by iang at June 18, 2004 08:29 AM | TrackBack