They pay school fees for nieces and nephews, doctor's bills for an ailing parent, or contribute to the retirement funds for siblings. Remittances from family members abroad keep communities across Africa going.

The United Nations estimated around 200 million people worldwide send home remittances, from which about 800 million benefit. The World Bank calculated that last year $626 billion (€584 billion) changed hands this way.

But the system that involves this roughly 1 billion-strong community is expensive. With hundreds of thousands of transactions from every corner of the globe, it's a lucrative market for the finance industry.

Worldwide, fees still average 6.5% of the value of the transaction. For east Africa, the database Remitscope even gives a rate of 9.4% — so for every $100 dollars sent, $90.60 arrive. But fees have been declining for years.

The cheapest rates — around 3.5% — are transactions using digital services. But only a total of 1% of remittances are transferred this way, according to the World Bank. 

"Saying cash is dead is very wrong," says Pedro de Vasconcelos from the UN International Fund for Agricultural Development (IFAD). "The figures basically say that we're not there yet. Compared to four years ago though we are in a much steeper curve than we thought we would be."

Pandemic accelerates digitalization

A big reason for the switch to digital is the COVID-19 pandemic. After initially causing a disruption in the flow of remittances, the flow of remittances, strict social distancing requirements led many people around the world to overcome fears or distrust of the digital world, creating a new target market for video conferencing tools, streaming and digital financial services. For example, in 2020, remittance service provider Azimo, which operates primarily in Nigeria, Ghana and Kenya, reported a nearly 200% increase in new customers registered than expected from April to June.

The potential is massive, and the market is responding.

"When it comes to remittances, we always sit down and look at the costs," says Sitoyo Lopokoyit, managing director of the Kenyan fin-tech pioneer M-Pesa. For 15 years, the subsidiary of mobile operator Safaricom has offered a mobile payment model that worked even before the smartphone era and has continued to evolve ever since.

Today M-Pesa has over 56 million clients — mostly in Kenya, but also in countries such as Tanzania, the Democratic Republic of the Congo and Mozambique. Accordingly, M-Pesa works with around 30 remittance partners: Money deposited with them can also be received at M-Pesa's own 700,000 payment points or sent on from a digital wallet.

"With new technology and online banking, you can pay directly into your M-Pesa account without physical outlets in the United States or London anymore. It is all digital, and the cost of operation has significantly changed."

On the way to 3%

The UN has set a target in its Sustainable Development Goals (SDGs): by 2030, remittance fees should only amount to a maximum of 3% of the value of the transaction. According to Lopokoiyit, M-Pesa is also committed to this target.

"In some countries that will not be reached," explains Pedro de Vasconcelos, coordinator of the remittance department at the IFAD, which focuses on agricultural development.

"But in some countries we already reached it. Was it important to have it? Yes, it gave a direction of where to go. It's a very good target to have."

Even more importantly, de Vasconcelos says, M-Pesa and other companies develop products that lead to more financial inclusion for their current and potential customers.

"We can cross-sell credit savings, insurance, pensions and all other things basically, that can be profitable for the institution by entering in this type of service — and fundamentally life-changing for the recipients," he says. De Vasconcelos also believes this trend is inevitable.

M-Pesa's Sitoyo Lopokoiyit describes what this could be on a practical level: "We are looking at customer to business payments. In the next phase, for example, somebody in the UK could pay a hospital bill directly into an M-Pesa account of a hospital in Tanzania."

The growing e-commerce sector is also to be integrated more and more effectively via apps.

Remittances increase — especially in crises

However, the new world of digital payments includes the risk of opportunities being abused for criminal activities. M-Pesa managing director Lopokoiyit says all transactions are verified in real time, and M-Pesa has partnered with wildlife NGOs to ensure the service is not exploited for the illegal ivory trade. Other providers, such as Western Union, also conduct real-time screenings - in part to ensure that international money flows do not circumvent political sanctions.

Remittances are set to gain importance: They have only been systematically monitored for 20 years, says de Vasconcelos — and have grown considerably since then, particularly in times of crisis. 

"While you would see some investments go down, even aid go down, this is where remittances go up. Migrants are responding to the needs of their families.  And with the connectivity nowadays it is more likely that they're very aware of the realities their families are facing a daily basis."

This article was originally written in German.

In a previous version, Ethiopia was listed as one of the countries where M-Pesa is already available. As a matter of fact, the company is only about to launch their operation there.

Adapted by Cai Nebe

Edited by Benita van Eyssen