The multibillion-dollar US-Mexico remittances corridor: what you need to know

The US-Mexico remittances corridor is the third-largest in the world by volume, after China and India. There are various players in the market, new and incumbent, all seeking a chunk of the multibillion-dollar pie.

To find out more and explore the fintech angle, BNamericas conducted an email interview with two academics who specialize in this area: Bernardo Bátiz-Lazo, professor of fintech history and global trade at Northumbria University in the UK and research professor at Mexico’s Universidad Anahuac, and Ignacio González-Correa, a graduate student at the department of economics at the University of California, Davis, in the US.  

Bátiz-Lazo and González are currently working on projects to map gender issues in the LatAm fintech startup sphere and the lon

Editor's note: Q&A produced jointly with BNamericas editor and senior writer Ulric Rindebro

BNamericas: Regarding the US-Mexico corridor remittances market, who are the main players and are there any fast-growing newcomers? 

Bátiz-Lazo: First let’s clarify that we are talking about family remittances in the third largest corridor worldwide by volume, after China and India. By family remittances we mean a cross-border transfer of funds that originates from a sender to a beneficiary. The sender is a migrant worker, that can be documented, or legal, or undocumented, illegal, Mexican-born or off-spring with at least one parent born in Mexico who sends a share of their income – around 20% of their wage or an average US$370 per month in two or three instalments – across the border. Beneficiaries are family members, typically a female – mother, close relative, or spouse.

There is no one-single intermediary working on both sides of the border. Part of the reason is that, for instance, in the US, licenses are issued by individual states. This means having to comply with a large set of regulations, which is not impossible but does imply significant resources.

Instead, there are several layers in the market, and each behaves quite differently in terms of its industrial organization. At the retail level there are over 100,000 remittance agents in the US while, at the same level, there is plethora of payers in Mexico: from bank branches and ATMs of BBVA Bancomer, Banorte, and Banco Azteca to some 22,000 outlets of retail shops Oxxo plus drugs stores, supermarkets – such as Soriana – and others, like white good players Elektra and Coppel each having about 1,000 physical outlets throughout the country.

At another layer there are the remittance companies. Here, Western Union had 80% of the market in the 1980s, which dropped to about 30% by 1995 and 12% by 2010. In the meantime, some 60 remittance companies emerged. Consolidation left some 30 of these today and it is likely that consolidation will continue.

At another layer, there are the aggregators, where BTS and TransNetwork control some 60% of the volume. And at a higher layer, some 15 banks control the cross-border market worldwide.

Fintechs such as Xoom – by Paypal –, Remitly, Wise, or Global66 might be the newcomers, but they have a small portion of the market. They work mainly with middle class, or banked, individuals, small and medium-sized companies.

BNamericas: You say fintechs serving the US-Mexico corridor only have a small market share. Why is that? What are the barriers?

González: About 90% of remittances in the Mexico-US corridor start and end in cash. We understand it is quite different in other countries such as Malaysia, where QR codes are quite popular.

In the Mexico-US corridor, senders have a relative high degree of bancarisation but do not want to take on digital payments. Some of the reasons why they initiate their transfer in cash include a very low threshold for failure and strong tendency to go for ‘tried and tested’ methods. A minority of them, about 6%, are of indigenous communities that do not speak or read Spanish. So, they follow the lead of friends or stewards.

The beneficiaries are mostly women, mainly elder relatives, or spouses of migrants. According to the World Bank, there are 304mn women without access to banking accounts in Latin America. Beneficiaries have also been subject to bad services and high commissions from banks. So, they are fearful and skeptical of financial intermediaries. However, there have been some recent successes, as is the case of BBVA in Mexico which, after some five to seven years of investment and hard work, migrated 85% of 14mn transactions paid in cash in 2015 to paying 85% of its 18mn annual remittances through N2 – prepaid – cards in 2022.

A major challenge for fintechs is complying with Know Your Customer, or KYC, regulations. This is a major part of the operation for remitters and payers. There are significant investments to be made in this area to keep regulators happy and deter money laundering. 

Another relevant barrier is that many beneficiaries live in rural areas in Mexico with little mobile phone coverage and little internet access; therefore, it is difficult to send money home digitally through apps.

BNamericas: In general, do fintechs have access to banks’ payment infrastructure? Or in other words, what payments infrastructure do fintechs tend to use to transfer funds from the US to Mexico? 

Bátiz-Lazo: Senders often use ATMs for their withdrawals or cash their pay cheques with the remittance agent. So fintechs could potentially pick up this business through self-issued or someone else’s debit or N2 (prepaid) cards. On the beneficiary side, fintechs could use ATMs or enter agent agreements to access retail branches of main players such as Banorte or Banco Azteca, or other major players such as Oxxo and Elektra. Mind you, ATM ‘disloyalty’ fees are quite steep in Mexico. 

In absence of a license to hold sight deposits, they will need to have correspondent banking arrangements in dollars and in pesos with banks on each side of the border. In addition, the Fed and the Mexican central bank, Banco de Mexico, created ‘Direct to Mexico’ which is a payment rail that speeds things-up and bypasses SWIFT.

BNamericas: In terms of LatAm remittances costs, what has the trend been in the past few years and what impact have fintechs had on this?

González: Remittance costs result from a fee and the FX differential. The former is easier to track. Broadly speaking, fees have significantly dropped from an average US$30 in the 1990s to US$10 today. That means about 6% of a transaction, which is still above the 3% sustainability goal set by the UN for 2030.

Fintechs initially had a very interesting and attractive proposal, with better FX and fees in the US$7-US$8 range for individual transactions. More recently, some, like Broxel, have begun to offer zero commission remittances.

However, as the era of ‘cheap money’ gives way to high inflation, it is becoming evident that many fintechs burned through investor money like mad, in large part by keeping transaction prices – i.e., fees and FX – artificially low. To become profitable, companies like Wise or Xoom are increasing their commission rates to approximately US$30 per transaction, roughly equivalent to that charged by banks, leaving ‘only’ convenience and speed the differentiating feature of their digital offering.  Yet ‘traditional’ remittances companies such as Western Union, MoneyGram and some of the mid-sized remitter companies, already offer digital services to send funds across borders through their websites and apps.

We cannot see how fintechs will become more attractive to the large masses of migrants if scarce funding pushes fintechs to raise or keep on raising commissions in the US while there are steep charges in Mexico to use ATMs, POS terminals or ‘brick and mortar’ branches. So, it sure looks like in the near future fintechs will be left with a pricey service used primarily by the well-to-do and SMEs. 

BNamericas: And in looking a little further ahead, what impact could fintechs have on costs?

Bátiz-Lazo: As mentioned, negligible. On the one hand, we have explained why we think fintech costs will actually increase. On the other, fintechs will continue to face a cash-led economy until there is success in widespread bancarisation or at least greater use of N2 – prepaid – cards that allow interoperability, i.e., routing to Mexico through its real time payment system SPEI, until the Mexican QR payment system – called CoDi and launched in 2019 – takes-off or until there is a joint effort by the federal government, banks and other private intermediaries, that takes seriously both increasing financial inclusion and reducing barriers to financial exclusion.

BNamericas: In the past several years remittances to LatAm have increased a lot. But now, with the expectation of a recession in the US, where most Latin American migrants are, and on top of that high inflation, could that impact remittances to LatAm in 2H22 and 2023?

Bátiz-Lazo: That is indeed the case. The growth of remittances during 2020 and 2021 was not unique to Mexico. For instance, while Mexico observed an increase of 27.1% in remittances at year-end 2021, those to Guatemala increased 34.9%, 26.8% in El Salvador, 26.6% in the Dominican Republic, 24.4% in Colombia, and 20.4% in Jamaica.

But at least in the Mexican case, most of the migration is led by agricultural – and construction – employment in California and Texas. So, the current drought and possible collapse of the real estate market might have a bigger impact than the overall drop in employment. That is because the said combination with an overall recession could well see a return to mass deportations and hence, a drop in remittances in the medium term.

An interesting factor to consider is that neither the number of migrants nor migrant pay has risen at a pace of 20% per year. Hence, by this back-of-an-envelope estimate, we can assume substantial money laundering is taking place. This poses a further risk to fintech companies wanting to enter this market.   

BNamericas: Given growth in migration within Latin America, for example, Venezuelans moving to Colombia and Chile, could we see the emergence of an associated ecosystem of remittances providers that focus on this market in particular?  

González: Personal experience suggests this is where fintechs could have the greatest impact but mainly within the banked population. A few fintech companies had made efforts to capture remittances within Latin America. Take for example Global66. The Chilean fintech for remittances has over 500,000 clients in Latin America, according to [startup and venture capital knowledge website] Startupeable. Its customers prefer this fintech option rather than ‘old-school’ banks because it is comfortable and unexpensive. Also, it is a better option for recipients that are not near to banking areas, as explains Tomás Bercovich, CEO of Global66. 

However, you need to have a bank account to operate with Global66. There is no possibility for using N2 – prepaid – cards as those complicate the KYC compliance process while the more retail customers you have, the greater the level of complexity. At the same time, you will be unable to access a fintech app if you are in the US without a valid social security number. 

Fortunately for immigrants in Chile, BancoEstado, the state-owned commercial bank of Chile, offers formal financial services to immigrants. Mainly through the CuentaRut product, a debit card that its only requirement is to have a valid national ID issued by Chile, immigrants can be banked. This account allows you to use, for example, Global66.

However, BancoEstado and other banks also offer remittances services through their mobile apps, so fintechs face this competition too. At this point it is worth mentioning that Global66 had decided to expand their business horizon and now they are talking about a ‘global bank’, rather than a ‘remittance’ company, including instant peer-to-peer transfer via its digital wallet, debit cards (Mastercard), and remittances. In the same vein, Retorna is a fresh newcomer that seeks to democratize remittances within Latin America. The company led by Atilana Piñon uses a model that shares elements of Global66 and US-Mexico corridor operators, since it is a fintech enterprise that sends money across borders but also offers gift cards, instead of cash, to buy in allied stores.

Of course, there is still a large part of the population that could have a CuentaRut but do not have it. There are a lot of immigrants using the ‘traditional’ operators. For instance, it is very common among Haitian immigrants to use Western Union agents to send money abroad. This pattern could be related to different variables such as distrust in banks, language barriers, following the lead of friends, relatives, or stewards, among others.

That being said, the CuentaRut product is an atypical case in the region. Almost half of adults in Latin America do not have access to a bank account, so fintech options based on people that already are banked still have troubles to enter in that market and to reach undocumented immigrants.