Remittances: Looking Ahead

Philippine remittance services have evolved significantly in the last 25 years. Arising from a need to send money home in a safe and reliable manner but held back by the high cost of transacting through banks, OFWs sought more economical means of sending money home.

The earliest and most common channel was the “padala” where money is sent through anyone coming home. It was based on trust, “pakiusap” and “pakikisama” but was unsafe and unreliable. As the number of OFWs grew over the years, door to door cargo service providers and enterprising OFWs began pooling the money of customers they served and transferred them in bulk for a fee and the foreign exchange margins.  The operation was crude, largely underground and unregulated. The volume was large enough for the authorities and the host country banks not to ignore but banks were also unprepared to deal with hordes the service would bring over their counters.

New licensing regulations and partnerships formed with banks and money shops in host countries by Philippine banks operating through subsidiaries brought remittances to the mainstream of financial services. Remittance offices created by these partnerships gave the host country banks a significant share of the business but kept hordes off their counters.

According to the Bangko Sentral ng Pilipinas (BSP), Philippine remittance inflows have grown unabated reaching USD16.4B in 2008 and rising by a further 2.7% in the first quarter of 2009 despite the global financial crisis. The huge volume offers great opportunity for banks, non-bank financial intermediaries and downstream transfer service providers.  Fast changing technology and tighter regulations arising from the Anti-Money Laundering Act (AMLA) have, however, restricted entry to the remittance business making it increasingly more competitive.

Technology now exists for seamless interconnectivity from end to end of a remittance transaction.  Systems with file transfer capabilities allow massive data to flow through securely from one bank to another. And the same facility may be used to transfer funds from a sending host country to a receiving Philippine remittance organization. ATMs, SMS, web and phone banking also keep hordes off counters of host country and Philippine banks. The ability to serve massive volume at low cost will eventually make redundant or at least marginalize non-bank money transfer intermediaries. This will result in two-tier pricing, one that will serve bulk transfers and the other the retail transfers.

To free banks of problems relating to mass markets, what may remain are technology providers who can create and run seamless interconnectivity operating as a business process outsource (BPO) or service provider.

Meantime, there remains ample room for non-bank remittance service providers with the right technological infrastructure and expertise. There will always be cracks in the system arising from cultural differences, AMLA restrictions, immigration laws, risk aversion and many of the local banks’ inability to respond quickly to changing technology.

About the Author

Ernestine Tamayo is an OFW working in the US with wide knowledge on the remittance Philippines industry.  She is currently planning to write a book on Philippine remittance that her countrymen can read and learn from.