BRINGING SMART POLICIES TO LIFEGUIDELINE NOTEINNOVATIVE CROSS-BORDER REMITTANCE SERVICES: EXPERIENCES FROM AFI MEMBER COUNTRIESGuideline Note No. 30August 2018BACKGROUND 3OPERATIONAL AND REGULATORY LANDSCAPEOF CROSS-BORDER REMITTANCES 4CHALLENGES FOR REGULATORS IN PROMOTING FINANCIAL INCLUSION 7RESULTS OF THE SURVEY ON INNOVATIVECROSS-BORDER REMITTANCES 10RECOMMENDATIONS 14APPENDICES 18© 2018 (August), Alliance for Financial Inclusion. All rights reserved.CONTENTSACKNOWLEDGMENTThis guideline note was prepared under the guidance of the Innovative Cross-Border Remittances Subgroup of the Digital Financial Services (DFS) Working Group. Ms. Carla Fernandes, Chief of Financial Inclusion Service of Banco de Moçambique and Subgroup lead, is the main author of the report, with support from Ali Ghiyazuddin Mohammad, Policy Manager, Digital Financial Services. Aboubacar Keita, Banque Centrale De Guinee and Jahongir Amijonov from National Bank of Tajikistan also contributed to the preparation of the report.Developing Markets Associates, led by Mr. Leon Isaacs, provided additional analysis through stakeholder interviews and literature reviews. AFI sincerely thanks the member institutions that participated in the survey on innovative digitally enabled cross-border remittances. We also thank stakeholders who participated in the study: Claire Scharwatt (GSMA), Ola Polczynski (TransferTo) and Hemant Baijal (MasterCard).Special thanks to Beth Porter and Amil Aneja from UNCDF for their review and useful comments. ACRONYMSAML/CFT Anti-Money Laundering/Combating the Financing of TerrorismATM Automated Teller MachineB2B Business to BusinessBCEAO Central Bank of West African StatesBIS Bank of International SettlementsCPMI Committee on Payments and Market InfrastructuresDFS Digital Financial ServiceEMI Electronic Money InstitutionFATF Financial Action Task ForceFCA Financial Conduct AuthorityGDP Gross Domestic ProductGPFI Global Partnership for Financial InclusionID Identification DocumentationIMTO International Money Transfer OrganizationKYC Know Your CustomerMECBR Mobile-Enabled Cross-Border RemittancesMTO Money Transfer OperatorP2P Person-to-PersonPI Payment InstitutionPOS Point of SalePSP Payment Service ProviderRSP Remittance Service ProviderSDG Sustainable Development GoalSSB Standard-Setting BodyWAEMU West African Economic and Monetary Union 3INNOVATIVE CROSS-BORDER REMITTANCE SERVICES:EXPERIENCES FROM AFI MEMBER COUNTRIES BACKGROUND According to the World Bank,1global remittances in 20172totaled USD 595.7 billion, 75.6 percent of which ($450.1 billion) correspond with remittance flows to low- and middleincome countries. This volume marks an increase of more than 50 percent since 2007,3and cross-border remittances now account for more than five percent of GDP for 47 developing countries.4At the societal level, remittances are associated with lower levels of poverty and represent a large and steady supply of foreign funds. Remittances support demand for local consumption and provide a cushion for the volatile flows of other types of international funds, such as foreign direct investment and aid. At the household level, remittances are associated with increased spending on housing, education and income-generating activities.5Remittances therefore play a vital role in the development of low- and middleincome countries. There are challenges, however. Remittances sent through existing formal channels can be prohibitively expensive, with costs currently averaging 7.2 percent for a $200 transfer. A large proportion of remittances are still sent through informal channels, which lack consumer protection mechanisms.6The rise of new communication and information technologies and innovative mechanisms for delivering financial services and products are creating new opportunities for cross-border transfers to get money into the hands and ideally into the accounts of those who need it most. Unfortunately, these technologies may not be covered by existing regulatory frameworks for cross-border fund transfers. To address this issue, AFI issued a guideline note in 2014, “Mobile Financial Services: Mobile-Enabled Cross-Border Payments”, to identify the main challenges with cross-border remittances and payments and how regulators have addressed these challenges.This guideline note on innovative cross-border remittances updates the 2014 guideline note and has the following objectives:(i) To broaden the scope of the topic from mobile cross-border payments to digital financial services, or innovative cross-border payments, to cover all financial services provided through digital or other innovative platforms;(ii) To define existing cross-border remittance business models, legal and regulatory requirements, and the challenges regulators face in promoting financial inclusion;(iii) To reveal the results of a survey on cross-border remittances completed by members of AFIs Digital Financial Services (DFS) Working Group; and(iv) To share cases studies from AFI member countries that document how innovative cross-border remittance services are being implemented.1 passthrough.fw-notify/download/538676/knomad/sites/default/files/2017-10/Migration%20and%20Development%20Brief%2028.pdf 2 According to the BIS and The World Bank (2007), remittance transfers are defined as “cross-border person-to-person payments of relatively low value” and, according to Garcia, J. (2006), a cross-border payment is “a transaction that involves individuals, corporations, settlement institutions, central banks or a combination thereof, in at least two different countries”. The GSMA (2017) has defined mobile-enabled cross-border remittances as “low-value person-to person (P2P) international transfers, delivered electronically to a financial account held on a mobile phone”. bis/cpmi/publ/d76.pdf cemla-remesas/medicion/PDF/seminariomx2006/JoseGarcia01.pdf3 ifad/documents/38714170/39135645/Sending+Money+Home+-+Contributing+to+the+SDGs%2C+one+family+at+a+time.pdf/c207b5f1-9fef-4877-9315-75463fccfaa7 4 theglobaleconomy/rankings/remittances_percent_GDP/ 5 unctad/en/docs/ditctncd20108_en.pdf 6 knomad/sites/default/files/2017-12/Migration%20and%20Development%20Report%2012-14-17%20web.pdf4INNOVATIVE CROSS-BORDER REMITTANCE SERVICES:EXPERIENCES FROM AFI MEMBER COUNTRIES In this guideline note, we analyze some of the digitally enabled cross-border remittance channels in AFI member countries and provide recommendations on regulatory approaches to support the development of these channels. TYPES AND CHANNELS OF DIGITALLY ENABLED CROSS-BORDER REMITTANCES In 2017, the Digital Financial Services (DFS) Working Group conducted a survey on digitally enabled cross-border remittances. The survey covered different categories of digital cross-border remittance services (see Table 1) and different business models (see Table 2). In 2007, the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) and the World Bank established “General Principles for International Remittance Services”,12which guide countries in classifying cross-border remittance services.OPERATIONAL AND REGULATORY LANDSCAPE OF CROSS-BORDER REMITTANCES CONTEXT AND INTRODUCTIONAccording to recent research, remittances contribute to the welfare of 800 million people worldwide.7Between 2015 and 2030, it is expected that $6.5 trillion in remittances will be sent to low- and middle-income countries.8In Liberia, Kyrgyz Republic, Tonga and Nepal, inbound remittances represent, on average, 31 percent of GDP (see Figures 1 and 2).In addition to their direct economic impact, remittances also help to limit the number of displaced persons in conflict, war-to-peace transition and crisis areas by enabling those with few income prospects to sustain themselves. Remittances also support forcibly displaced persons (FDPs) while in transit and/or in refugee camps.9Remittances are also a tool for achieving several of the Sustainable Development Goals (SDGs) and contribute directly to poverty alleviation and access to food, water, healthcare and housing (i.e. SDG 1, 2, 3, 4 and 6). Remittances are also associated with increased spending on income-generating activities, which improves economic growth and reduces inequalities (SDG 8 and 10).10Given the impact of remittances on socio-economic development and the high transfer costs, SDG 10c aims to reduce the transaction costs of migrant remittances to less than three percent.Remittances can also be a path to financial inclusion as they provide formal channels for sending and receiving money, particularly when they are made into transaction accounts. Remittance inflows enable families at the receiving end to save and invest through formal channels. A recent study by IFAD suggests that 75 percent of remittances are used for immediate needs, such as food, shelter and bill payments. The remaining 25 percent, which accounts for approximately $100 billion, is used for education, health, savings, investments and income-generating activities.11As both men and women are active senders and receivers of remittances, it is important that gender is taken into account in the remittance services themselves and in the regulation and supervision of those services. The proliferation of digital technologies is rapidly transforming the remittance landscape. Innovative new technology-based remittance models are challenging incumbent, clunky and costly models. On the one hand, these new models help to reduce transfer costs and time, and improve access at both the sending and receiving ends. On the other hand, these new, untested and fast-evolving business models present challenges to customers and regulators alike.7 It is estimated that 200 million senders send money home to family, or around 800 million people. ifad/documents/36783902/4a5640d9-e944-4a8c-8007-a1bc461416e6. 8 ifad/documents/36783902/4a5640d9-e944-4a8c-8007-a1bc461416e69 reliefweb.int/sites/reliefweb.int/files/resources/EB1BC67D16B67DD0C125714E004DD94C-Remittances.pdf 10 ifad/documents/38714170/39135645/Sending+Money+Home+-+Contributing+to+the+SDGs%2C+one+family+at+a+time.pdf/c207b5f1-9fef-4877-9315-75463fccfaa7 11 IFAD, (2017), “Sending Money Home: Contributing to the SDGs, One Family at a Time”, available at: maintenance.ifad/documents/36783902/4a5640d9-e944-4a8c-8007-a1bc461416e612 bis/cpmi/publ/d76.pdf 13 businessdictionary/definition/Bilateral-Trade-Agreement.html 14 businessdictionary/definition/multilateral-agreement.html 15 newsroom.mastercard/press-releases/mastercard-launches-cross-boarder-remittance-service-in-zimbabwe/ 16 newsroom.mastercard/mea/news-briefs/mastercard-launches-cross-border-remittance-service-in-nigeria/17 Regulation (EU) No. 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euros. 18 gsma/mobilefordevelopment/wp-content/uploads/2017/02/GSMA_Licensing-mobile-money-remittance-providers_Early-lessons-1.pdfFIGURE 1: FINANCIAL INCLUSION USAGE IN NUMBERSKyrgz RepublicHaitiTajikstanNepalLiberiaMoldovaComorosGambiaTongaHonduras37.10%31.20%28.00%27.20%25.90%21.20%21.00%20.40%19.90%18.40%FIGURE 2: INWARD REMITTANCES (US BILLIONS, 2017)IndiaChinaPhilippinesMexicoPakistanNigeriaEgyptBangladeshVietnamGuatemala65.462.932.830.522.319.818.213.812.98.75INNOVATIVE CROSS-BORDER REMITTANCE SERVICES:EXPERIENCES FROM AFI MEMBER COUNTRIES TABLE 1: TYPES, CATEGORIES, CHANNELS AND DELIVERY FLOWS OF NON-BANK DIGITALLY ENABLED CROSS-BORDER REMITTANCESCATEGORY ALTERNATIVES DESCRIPTIONTYPES OF CONTRACTUAL AGREEMENTS a. Bilateral agreements Agreement between two entities or national governments in different countries/nations13that gives each party rights and obligations regarding the remittance service. The cross-border bilateral agreements would be: (i) between the same entity in different countries (hypothetical examples: M-Pesa Tanzania to M-Pesa Kenya; Western Union Ghana to Western Union Mozambique); (ii) between different entities in different countries (hypothetical examples: M-Pesa Tanzania to Western Union Kenya; M-Pesa Mozambique to Standard Bank South Africa).b. Multilateral agreementsAgreement among three or more parties, agencies or national governments.14The cross-border multilateral agreement is based on: (i) a link between the national switch of different countries; or (ii) cross-border remittance hubs (e.g. Zimbabwe15and Nigeria16); and (iii) a “scheme”, i.e. a set of business and operational rules and technical standards to which payment service providers (PSPs) agree to adhere (e.g. SEPA).17 TYPES OF NETWORKSa. Unilateral services A unilateral service is a proprietary product provided “internally” by a single remittance service provider (RSP) without involving other entities as capturing or disbursement agents. Examples of unilateral services include those provided by global banks (with branches in many countries) or other banks that have set up branches abroad in areas where migrants from the home country are concentrated (BIS, 2007). Examples include ICICI Bank with branches in the UK sending to branches in India, Barclays Bank sending to Barclays Bank in Ghana. b. Franchised services A franchised service is one in which a central provider, without necessarily having any access points of its own, provides a proprietary service. The central provider creates infrastructure to support the service (e.g. messaging and settlement, advertising), but acquires the necessary access points by inviting institutions in both the sending and receiving countries to offer the service or act as franchisees with essentially standardized terms. Examples of franchised services are global money transfer operators and international credit/debit card schemes are or could be adapted for this purpose (BIS, 2007). This is the primary model currently used for money transfer services. Examples include Western Union, MoneyGram, Ria and UAE Exchange.c. Negotiated services In a negotiated service, an RSP negotiates with a limited number of institutions in other countries to create a sufficient network of access points. Examples of negotiated services include bilateral arrangements between banks (one in the sending country and one in the receiving country), credit union schemes, most transfer services or schemes established by postal organizations (BIS, 2007). These services are more commonly used by focused corridor operators. Examples include the La Poste (France) service to Algeria and the DBS (Singapore) service to Philippines.d. Open services In an open service, a remittance service provider offers a proprietary service to its custo