The Malaysian central bank reported in May that the cost of remittance by non-bank service providers was 2.96 percent in 2017, just below the United Nation’s target of 3 percent set forth as part of goal number 10 of the Sustainable Development Goals (SDG)(1)(2).
Malaysia hit the target over a decade ahead of the 2030 timeline set in the SDG. It’s worth noting that the cost of Malaysia’s cross-border remittances was in the region of 12 percent in 2006. In addition, information from the World Bank showed that the global remittance cost stood at 7.09 percent at the end of 2017. The above points show that the success in Malaysia regarding remittance cost isn’t commonplace in the remittance space. That said, what could other countries learn from Malaysia?
Consolidate Money Services Business Industry
In 2011, the Malaysian central bank introduced the Money Services Business Act (MSB Act 2011) in a move to consolidate the money changing, remittance and wholesale currency businesses so that there is a uniform regulatory framework for operating any of a combination of the mentioned businesses in the country. The introduction of the MSB Act repealed the three separate laws — MCA 1998, ECA 1953 and PSA 2003 — that had governed these businesses.
Before the MSB Act, banks were responsible for the majority of remittances sent out of Malaysia. In fact, around 2005, the country had only 39 non-bank Remittance Service Providers (RSPs)3. Just as a pointer, that was the period during which remittance cost in the country was hovering around 12 percent.
As part of enforcing the MSB Act, the Malaysian central bank embarked on a relicensing mission, reducing the number of licenses from 839 in 2011 to 337 as of May 20184. The bank argued that its intent was to raise industry standards as well as safeguard smaller MSBs against the risks inherent in the business. To ensure that remittance services were still within reach, the bank allowed ex-licensees to apply to become MSB agents, resulting in the growth of access points from 1,560 in 2011 to 2,700 in 2016.
One of the positives of the consolidation is that it produced some bigger players, who could now generate revenue by combing two or three of these businesses under a license. This move improved economies of scale for the bigger players, meaning that they had more incentive to lower remittance prices. The central bank credited the consolidation for yielding a 1.2 percent remittance cost reduction. The cost savings most likely wouldn’t have been possible had the MSB Act not fostered the growth of non-bank RSPs in the country. As of 2016, non-bank RSPs handled 63 percent of Malaysia’s outflowing remittances. Recall that the World Bank’s quarterly remittances fee report has always cited banks to be the most expensive way to send remittances.
IN SUMMARY: Countries should consider empowering non-bank RSPs by consolidating the money services business industry so they can have bigger businesses, which they can run profitably without having to put a premium on remittance fees.
Digitization Helps Reduce Cost
The use of online comparison services to compare prices to get the best remittance prices is an example of how digitization to reduce remittance fees. Here’s proof. In 2015, the Malaysian central bank partnered with the World Bank on the Greenback 2.0 Project in the Malaysian city of Johor Bahru. Part of this included an initiative to get migrant workers to use the World Bank’s Pick Remit app, which helps sender compare prices. Malaysia reportedly had the highest downloads of the app worldwide in 2016. The bank reported that the remittance cost in the city of Johor Bahru dropped as the number of people who participated in the program increased. Put simply, technology makes information about where it’s cheaper to send money available at the fingertip.
Another finding from the study in Johor Bahru is that information about where to get cheaper remittance services increased B2B remittance value. This alone could bring more business to non-bank RSPs, which could end up scaling economies a notch higher for them. In the end, there’d be more incentive to lower prices, a win for migrant workers.