Venture capitalists have reason to love the remittance business: Official estimates of overseas money-flows from the United States range upwards of $30 billion a year and are growing. The World Bank's estimate of overall remittances to developing countries is $167 billion for 2005, up 73 percent since 2001.
As a result, investment capital has been feeding innovative companies using modern technology, all planning to take market share away from industry leaders Western Union and MoneyGram International. There’s only one problem: According to a recent study by the Government Accountability Office (GAO), those estimates are at best optimistic, and at worst, wildly inaccurate—perhaps by two-thirds.
The two standard estimates of 2003’s overseas remittances from the United States are $28.2 billion from the Bureau of Economic Analysis (BEA), and, from the Inter-American Development Bank (IDB), $30.1 billion just from the United States to Latin America. The GAO says these estimates depend on weak methodologies and are plain wrong. Using the BEA’s own sources, the GAO's estimation of overseas money-flows ranges from $17.3 billion to $35.9 billion, and it thinks the IDB's estimates regarding Latin America should be more like $17.9, not $30.1, billion.
As the GAO observes in the study, conducted for the Senate Banking Committee, no U.S. agency tracks remittances through the payments system; this, despite the fact that the United States is the single largest, and fastest-growing, source of overseas remittances worldwide—about $30 billion in 2004, compared with just over $10 billion in 1990, it says, quoting the International Monetary Fund (IMF).
This omission hasn’t stopped the Federal Reserve from developing ACH-based remittance systems to Mexico, nor has it stopped investors from piling into the space. But since Western Union and MoneyGram between them account for about $1.7 billion in overseas remittances, cutting the cake in half would seem to undercut the hopes of some of those companies and their investors to live long and prosper.
This is especially true because many of those new companies are pinning their hopes on re-loadable stored-value cards as the remittance vehicle of choice. These schemes, however, are coming under regulatory scrutiny from the U.S. Treasury and the Financial Crimes Enforcement Network (FinCEN) because of money laundering concerns (see related story, this issue).
But most close observers of the remittance business think there is less to the GAO study than meets the eye.
“Any executive in the industry knows there’s no robust scientific estimate for the market for remittances, so it’s not a surprise to anyone,” says Gwenn Bezard, a partner in Boston-based Aite Group.
In Bezard’s opinion, the main point for investors isn’t the size of the remittance market, but the growth rate. And as seen above, the growth of overseas remittances from the United States is impressive—much more so than remittances from Saudi Arabia, the second largest source of such money flows. Saudi remittances, which were about 50 percent larger than US flows in 1990, peaked in 1994 at about $23 billion, and have since trended downwards, to about $13 billion, according to the IMF.
That being the case, he says, there’s plenty of profit to go around. “If you start a business in this space, whether the market is $200 million or $50 billion doesn’t make a big difference; it’s not going to prevent you from getting into the space if you feel there’s a sizeable market.”
Maybe, says Robert Dodd, a financial analyst with Morgan Keegan & Co., but that’s not to say the GAO study should be dismissed.
“It’s meaningful, but I don’t know how much attention people are going to pay to it,” he says “Whether they should or not is another matter; it’s hard to get data on the money-transfer space, so when you do get some, you should factor it in,” and make business forecasts accordingly.
Even so, Dodd has little dispute with Bezard’s main premise. “From my point of view, it’s not the overall dollar number, but the growth rate that’s important, and the GAO study changes the dollar numbers, but not the growth rate in the dollar volume,” he says. As a result, he says, even venture capitalists investing in startups won’t be over concerned—or stop investing—since their calculations are based on how much market share their company has today and what the potential growth rate would be.
Looked at this way, the real importance of the GAO report is less on its market impact, than on worldwide government decisions about how to understand and account for these flows. The paper observes that several international committees are meeting now to get their arms around the matter; the G-8’s 2004 Sea Island Summit called for creating such a group, for instance, and it first met in January 2005. Another group will be meeting for the first time this June, and the so-called Luxembourg Group, created by the EU’s Eurostat statistical office, is likewise meeting in June.
While this topic might seem strictly a matter of academic concern, it isn’t. Studies like these have an ineluctable way of laying the foundations for policy and, eventually, leading to regulation. And since several significant nations—the Philippines, Bangladesh and the Dominican Republic, for instance—rely on remittances from overseas to fill out their national accounts, the concerns of the receiving nations will eventually affect the business plans of investors in the United States, and the employment prospect of payments executives. (Contacts: Government Accountability Office, 202-512-6000; Aite Group, Gwenn Bezard, 617-338-6037; Morgan Keegan & Co., Robert Dodd, 901-579-4560)