Consumer behavior Driven Innovation or ICT Driven Innovation in mobile to mobile remittances, which way?

Consumer behavior or ICT / Innovation in mobile to mobile

remittances, which way?

Abstract:-

The objective of this paper was to do a concept comparison

of consumer behavior v/s ICT/Innovation investments in the market

based companies involved in international remittances. The

motivation behind the research was to find ICT/Innovation

opportunities in the International Remittances area but midway

through the research it was conclusively found that investment

made in consumer behavior perspective in mobile to mobile

remittances gives better returns compared to ICT / Innovation.

The research study findings ably support the earlier studies and

findings of Dr. C. K. Prahalad, owing to the reach, market

segments and stake holders involved.

Keywords:- Consumer behavior, Financial Services, Foreign

investment, General Management, Social Innovation, Innovation,

Mobile Banking, Transactional Economics, Bottom of Pyramid.

Introduction:-

International Remittances or money transfers are the sums of

money that an individual sends back essentially to his or her

country of origin. The world wide remittance market is estimated

at $283 billion in 2009 with 72% of total remittances in the

developing countries (Dilip Ratha, 2003 & World Bank, 2009). The

remittances are expected to be resilient compared to other

categories of resource flows, despite the recession and downward

spiral in global economy. Although uncertainty in outlook for

global growth, oil and non commodity prices, and currency

exchange rates create additional uncertainties (World Bank,

2009). There is a significant potential on reducing the

transaction costs and make the overall value chain more efficient

by increasing the value and frequency of remittances, this was

further consolidated by qualitative and quantitative results. The

brand strength, size and the reach of the global network,

convenience and reliability for the consumers continues to be

significant factor for the growth of international remittance

industry, as more and more consumers are looking for cheaper and

faster ways for transacting the money internationally. Today the

impact of remittance is very well recognized in developing world,

driving force behind which is estimated 150 million people who

remit money typically £100, £200, £300 or £500 at a time. This is

clearly an indication that a direct increase in frequency and a

decrease in transaction charge will definitely result in more

savings, credit mobilization and poverty alleviation particularly

in rural areas. These factors have been validated by the results

of qualitative aspects of survey that has been conducted to

determine the remittance perception of consumers across a section

of demographics.

The study was based on international remittances in

developing countries specially from concept opportunities in ICT.

Innovation of different MTO’s and consumer perspective in Mobile

to Mobile International Remittances from Innovation , Marketing

and Consumer Behavior and Economic and Regulatory factors. A

direct comparison into the different corridors for India and

China, for consumers based primarily in UK and USA has led to the

different findings developed in the research study. The

motivation behind the research was the huge penetration gap in

saving and credit bank account, scope of financial inclusion and

number of mobile additions in developing part of the world. Lack

of financial infrastructure in both China/India highlight a

strong inclination towards mobile remittances in reducing the

transaction cost as well as the speed of completion of

transactions. Parameters for consumer perception that came out

after conducting one on one qualitative interviews of the

remitting customers in Mobile to Mobile International Remittances

yielded following variables on Innovation, Marketing and Consumer

Behavior and Economics and regulatory factors.

Innovation

ICT and Innovation

Mode of remittance

Frequency of Remittances and Transaction Cost

Savings Account

Type of Remittances

Mobile to Mobile Perception

Marketing and Consumer Behavior

Customer Service and Process Efficiency

Brand Power and Brand Presence

Marketing Channels

Market Share of MTO’s

Economic and Regulatory factors

Transaction fee

Regulatory framework

The Research changed direction midway since it was found that for

majority of MTO’s and other market players in international

remittances, consumer perception as an area affected the overall

operating profits more than advanced customized IT and innovative

systems. The findings of the study are strongly supported by Dr.

C. K. Prahalad argument that power of information and resource

mobilization play one of the most important role, locally on a

global level while talking of international remittances. The

opening of markets in the past 20 or so years has led to firm

argument that development aid can’t be a substitute to both power

of information and Resource mobilization. Another recent example

has been the cut in development aid to India from United Kingdom

by over £280 million.

The comparison between innovation and consumer behavior might

give different findings based on a different product or different

industry sector(s).

International Money Transfer Operation

The following figure shows the actual flow of money and

information from the remittance sender to the remittance

recipient. This will lead the way to further analysis and

breakdown of the business model as well as the network costs

associated with the connected networks in the whole set of

operations. The breakdown of the costs across the network will

further pave the way for reduction in the overall transaction

cost.

Business Model of MTOs (Western Union and Money Gram)

There are a number of different revenue streams employed by these

companies. Some of them are discussed below to further analyze

the scope of innovation and technological process improvement

specifically to improve the global coverage and bring the network

cost down. Balaji and Priego have proposed the following cost

breakdown as a part of the business model.

An analysis of the different associated costs is as follows:

a) Network costs account for almost 30% of the total revenues

with 17% on receiving agent’s side while 13% on the sending agent

side (Balaji & Priego, 2004). Network structure implied a strong

fixed component of total network costs. Recently due to the

increased competition and increased network coverage for customer

acquisition and retention, both western union and money gram have

also resorted to contracting third-party agents to offer their

services (post offices, Seven Eleven stores, etc.). These agents

are usually warranted a minimum fixed compensation, but are also

paid on the basis of number of transactions and volume

transferred. Hence the companies are working on the principle of

making the pie bigger and then sharing the benefits associated

with increased business to all the stake holders in the value

chain. (Balaji & Priego, 2004)

b) Financial costs comprise processing and money transfer costs.

A third party bank usually facilitates the transaction for the

MTO and gets the profit through the currency exchange. Liquidity

holding for disbursement has small financial cost associated with

it. Transferred volume and transaction cost also drive the

financial cost, but economies of scale also help in bargaining

power when applying for the fee. Also all the transactions might

be consolidated for the day to consolidate and save on

transaction cost element. Also the use of advanced technology can

help in swifter movement and decrease in financial cost. The key

here is to seek balanced flows from one country to the other. A

simplified hypothetical example for a money transfer company

would be to have daily average flows of $500,000 from UK to

India, and $200,000 from India to UK. This remittances company

could arrange to send only $300,000 from UK to India through its

back-end channel and save transaction fees based on $200,000

flowing from India to UK and the other way around. (Balaji &

Priego, 2004)

c) Marketing expenses are dedicated towards building stronger

networks by building more sustainable and well know global

brands. Due to increased competition and increase in the size and

complexity of the network there has been a rise on advertising

expenses. Western Union currently follows a policy of dedicating

7-8% of revenues to marketing expenditures. Similarly money gram

is dedicating marketing expenditures in the tune of 8-10% of

their total revenues. (Balaji & Priego, 2004)

d) Compliance and regulatory costs are growing in importance with

strict regulatory pressures, government control and increasing

need of transparency in the remittance operations. More and more

money is spent for the training of employees as well as to

maintain process compliance which leads to increase in

transaction cost. (Balaji & Priego, 2004)

e) Administrative and IT expenditures include data transfer,

office maintenance and equipment costs. Major players’ enjoy

economies of scale in this category due to the high fixed cost

involved in setting up the data network. (Balaji & Priego, 2004)

Overview of Western Union and Money Gram:

Western Union is the global leader in International MTOs. It has

a strong presence in more than 200 countries. Recent company

figures showed a substantial cash flow and continued growth which

is a very healthy sign for any forward looking organization.

Revenue was $5.1 billion, and $1.2 was delivered from operations

cash flow. There has been a continued economic crisis around the

globe but western Union has still able to get new customers while

retaining the market share and current customers. Operational

excellence, improving speed to market and creating financial

flexibility to fund growth and support margins. The main focus of

western Union has been the consumer to consumer business which

has remained the core focus while developing innovative products

and services that attract new customers while doing things to

retain the existing customer base. Western union is spreading it

network all around the world where it can expand its agent

network. Marketing efforts and innovation has also yielded double

digit growth. It has also successfully launched mobile to mobile

remittances plan in Kenya and Philippines. It has also

consolidated it brand and brand image with the launch of program,

YES!

The core principle behind yes is about empowering the customers.

The customized program was launched together is local languages

in more than 50 countries. Western Union is expected to excel in

future due to its global brand, unmatched network and financial

strength and is well poised to sustain better growth in the

future times of boom. (www.westernunion.com, 2010)

Money gram is the second largest global MTO provider in the

world. It operates in more than 190 countries with operations

supported by more than 190,000 agents. It has in-house built ICT

systems which help the customers to get a very high standard of

customer service but at the expense of higher operating expenses

than Western Union. Typically a commission is offered at both the

sending and receiving agent location. The money is also

transmitted through the retail operations throughout the world.

In Italy and Philippines money gram is offering the mobile money

transfer service which is intended for expansion in regions of

Africa also in the near future. (www.moneygram.com, 2010)

The study consolidated the perception of the customers on

remitting side, since it’s easier to interview people in the

receiving countries but reach and accessibility of consumers

remitting to one destination from several different countries is

always more difficult. The comparison of consolidated annual

reports of the leading market players in the industry led to the

research catch. It also gives more validity to the market based

view of the research. The quantitative questionnaire demonstrated

that there is a significant difference in the remittance

perception between Indian and Chinese consumers on Transaction

Cost, knowledge of financial regulations in the sending as well

as receiving countries. Similar type of consumer perception can

be done for other countries in a broader detail for comparison.

This research validated the point of doing a field based research

since the findings of Ernst and Young report on mobile to mobile

banking were fraught with practical issues.

Research Methods:-

Methodology refers to the philosophical basis on which research

is founded. The techniques that are used to collect data and

information are called methods, Brian White (2000). Methodology

is concerned with how as a researcher we view things in real

world as well as academics where the research is being performed.

This study is a mix of real time case studies, real time

quantitative analysis, supported by literature, Research Journals

and academic papers. Because of the nature of the research it is

important to explore the innovation work as well as consumer

perception towards the different aspects of International

Remittance. Primary and Secondary research and data collection

were performed collecting and validating the data, survey based

questionnaire design, quantitative analysis led to research

findings, short comings, recommendations and future work in the

area. The questionnaire results were reported online as well as

based on field data. The research size is limited due to the

reach of the people practically remitting or who had remitted to

India and China, There were 112 respondents from India and 62

respondents from China. However to reduce the disadvantages

associated with internet sampling and with non-probability

sampling (i.e. users of the internet are not representatives of

the general population), social networking sites like Face book

and LinkedIn were used where it was possible to target known

respondents based on demographic requirements like age, to keep

the questionnaire focused and gain the advantages associated with

probability sampling. Informal one to one short interviews were

conducted initially apart from the case studies and Annual

reports for western union as well as Money gram. There was a lot

of struggle involved in conducting this kind of research, since

there were clashing outcomes coming from the overall initial

literature review and interview findings and consumer

perceptions. The subjects were carefully asked questions that

were relevant to the scope of the study. Since extensive

literature and data review from international remittance industry

was already done, it was really difficult not to have a biased

opinion from the observer. It was more of a free ranging

conversation that led to the structured questionnaire used for

data collection for detailed quantitative analysis. Also these

were conducted on random people and cannot be constituted as a

friendly chat with a group of known people. This technique was

cheap since it involved face to face talking to people who had

sent international remittance in past or they do so currently.

This Quantitative as well as Qualitative analysis results were

augmented by Case studies. Case Studies are very particular in

nature and generally used to generate theory and ideas about a

topic to test out a theory to see if it is available in the real

life situation. Case study used in this research was a precursor

to identify the issues involved in the research before careful

and detailed literature review was done on the topic. Also

company’s annual reports were used to conduct a detailed study to

bring down the cost, time as well as the access. There was a big

catch associated with the research which became more evident

after comparing the annual reports for corresponding operating

costs of the two major market players in the industry.

Conclusion and Future Work

The lower cost for small transactions makes western union an

obvious choice for the customers who remit money more frequently

in Asian corridors. The competitive advantage of western Union

has been exclusive arrangements with check cashing, merchant and

foreign bank agents. Western Union has a huge competitive

advantage in overall consumer-to-consumer operating margins,

which have been in the range of 30% over the past few years. On

contrary Money Gram has operating margin in the range of approx

15%. Overall on an average western union transaction cost is

close to 5-6% compared to Money gram of 4-5%. (www.moneygram.com,

2010) (www.westernunion.com, 2010)

If we just consider consumer perception of Indian remittances,

there was a significant difference between perception of

customers who possessed a savings account for cash to cash and

cash to account. Similarly different Income groups had

significant difference in perception for cash to cash and cash to

account remittance. Also the different brands had different types

of customers which showed a significant difference on cash to

cash and cash to account perception. The basis for taking cash to

cash and cash to account was that cash to account transactions

show an affinity towards ICT and technological development. Also

customers doing cash to account transactions are more likely to

be remitting to places which can support ICT innovative practices

and technological advanced POS systems. Similarly there is a

significant difference in the perception of mobile to mobile

remittance in different age groups. Factors such as low

transaction cost, convenience, safety and time of receipt showed

significant difference for mobile to mobile remittance. Different

age groups had a different perception of the regulatory

environment and new innovative practices. If we consider the

consumer perception factors for remittances made to China we can

see that there is a significant difference in perception of cash

to cash and cash to account when we take transaction cost into

consideration. This may be possible due to the fact that

regulatory environment and safety issues still make cash to cash

remittance more favorable in China. Also different age groups

also showed different perception on cash to cash and cash to

account transactions. Similarly other the perception of customer

factors as safety, time to receipt, convenience and pick up

location showed a significant variation in cash to cash and cash

to account remittances. Mobile to mobile remittances showed a

significant variation for different age groups. Remittance

services and customer factors showed a significant variation for

respondents to China. Similarly the purpose of remittance also

had a significant variation when

we considered cash to cash and cash to account remittances. If

we compare some of the analysis findings we can clearly see that

consumers who remitted to India had more % of savings account, %

share of cash to account transactions was much higher in India,

which gives rise to the fact that although overall infrastructure

in China is better India is doing better on financial and

technology infrastructure. Customers who remitted to India were

more satisfied with the overall remittance efficiency and process

compared to the ones who sent to China. Customers who remitted to

India were more concerned with the transaction cost than the one

who remitted to China. Also mobile to mobile remittance was

considered a good option by customers who remitted to India while

it was perceived poorly by china remitting customers. Safety was

a bigger concern for the customers remitting to China. Overall

the survey gave some stark findings which can be used for doing

similar studies for other countries and markets. More customers

remitting to India were familiar with regulatory standards; also

more customers remitting to India were open to the idea of ICT

advancement and innovation in remittance process.

Further there are issues which need a deeper understanding and

work needs to be done both at academic and research front.

Some of these issues are:-

a) Security Issues:

Security stands as a foremost issue in international mobile

remittance services, Regulatory pressures and demands of sending

and receiving countries make mobile transfers requiring

additional tracking and logging.

b) Business Issues:

Absence of clear and viable business models makes it hard for the

mobile market to launch on a large scale mass market. Payment

cost reduction should be the objective for a good business model.

The business case is difficult for banks and operators due to the

complexity between business issues between developed and

developing world.

c) Financial regulations and legislations:

The stringent financial regulation in a lot of countries makes it

impossible for all the stake holders to be a part of value chain.

Strict legislations make it difficult for telecom operators to

adopt the role of financial institutions. Both banks and telecom

operators are in direct competition to control the international

remittance market.

d) User Experience:

User or Customer Experience is one of the most crucial and basic

element to making mobile money services a success, primarily due

to ease of use and reliability. In International Remittance there

is a lot of need to transparency especially in the case of

transaction which take more time to process from sender to

remitter destination. A lot of work needs to be done to promote

user acceptance.

There is a definite future for cash-to-cash remittances for

countries where the financial and IT infrastructure is weak.

Money businesses due to heavy regulation and compliance have

different laws in different countries. It is also dependent on

the maturity and sustainability of country’s financial system.

The intensity needed for quantifying the regulatory and

compliance standards of developing countries is enormous and

there is a huge gap which needs to be filled. If all these

considerations are taken care of then only a spill over will

happen to the under developed countries across the world and the

motto of social change and corporate responsibility will also be

fulfilled.

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