> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

According to a recent Overseas Development Institute (ODI) report, of every eight dollars sent to Africa, a whole dollar is lost to accompanying transaction fees. This loss, estimated by ODI to be between $1.4 and $2.3 billion annually, is particularly significant given that remittances comprise a significant share of African states’ economies and are rapidly increasing; the World Bank estimates they totaled around $32 billion in sub-Saharan Africa (SSA) in 2013 and may reach $41 billion by 2016. These numbers attracted The Economist to ask, “Do the middlemen deserve their cut?

Looking at these practices through the lens of the Smart Campaign’s Client Protection Principles, we question whether they are in keeping with responsible pricing. These charges can’t be explained by distance. In fact, large amounts of remittances are intra-country or intra-Africa, transmitted from urban to rural areas or by migrant workers from one country to another. Remittance corridors within Africa have some of the highest charge structures in the world. The 12.3 percent average charge for sub-Saharan Africa compares to a global average (without SSA) of 7.8 percent.

Secondly, these practices often appear to violate principles of transparency. Fees are unclear, hidden, or simply undisclosed. On top of an initial fee to transfer funds, there are reports of providers employing foreign exchange rates that generate a “bonus profit” for themselves, without disclosing to the client that this is happening. This lack of transparency leaves individuals unable to make informed decisions about which provider to use.

Third, remittances services providers in Africa may not always meet standards for the principle of Appropriate Product Design and Delivery. As discussed in a recent post on this site, many migrants, particularly those who work for low sums in agriculture, would prefer to send money more often and in smaller amounts, but high fees instead force them to wait.

One of the causes of high prices is likely to be the relatively low level of competition. According to ODI, Western Union and Moneygram control 50 percent or more of the market in three-quarters of sub-Saharan African countries. In some countries such as Zambia, Angola, and Mali, they have over 90 percent of the market. On the whole, Western Union and Moneygram account for two-thirds of all transfers to the region. Competition remains limited because when the two pioneered their services on the continent, they imposed exclusivity agreements with local authorized agents and at payout points (usually banks). Moreover, local regulations limit the number of financial institutions which can pay out remittances to banks in most countries.

So, will costs come down and service improve? After all, for recipients, every little bit counts. Many point to the benefits that will occur as new technologies emerge and existing technologies improve, leading to greater competition, challenging the duopoly, and providing options for higher frequency, smaller transactions. New options include money transfer via mobile wallets, pre-paid cards, and international airtime top-up services without fees.

Yet, such innovation must be accompanied by client-protection-focused regulation, wider competition, and greater transparency. Regulators could also promote the use of microfinance institutions and post offices as remittance pay-out agencies and public-private partnerships as governments and MTOs work together to promote mobile banking options. After all, new entrants and start-ups face extremely high entry costs, delayed deployments, and operational challenges and current remittance service providers are a step ahead. Western Union and Moneygram’s size, infrastructure, and reputation make them attractive versus competitors. Regulation could open the market to greater competition. New actors and new business models would be welcome.

Image credit: Bloomberg/ Getty Images

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