A Better Way to Wire Cash Home?

An upstart challenges the remittance trade by proving it can benefit immigrants and make money using microfinance

Atsumasa Tochisako's $2 million, 60-employee microfinance and remittance processing upstart, privately held Delaware corporation Microfinance International (MFIC), wants to shake up the $268 billion worldwide remittance industry, traditionally dominated by Western Union (WU). By partnering with UAE Exchange, a powerful finance company headquartered in the United Arab Emirates with real-time remittance transfer capabilities in 75 countries, MFIC will offer one of the most extensive networks in the world by the end of January.

With more than 30 million potential customers and 20,000-plus agent locations, MFIC will see its remittance processing capability expand from its current reach of 10 countries in Latin America to 85 countries, with additional locations in Asia, Eastern Europe, and Northern Africa. Western Union has some 245,000 agent locations in over 200 countries and territories.

Perhaps most important, MFIC's remittance business breaks with tradition by providing a way for microfinance institutions (MFIs) in developing countries to process remittance transactions themselves. Its unique Web-based platform, adapted from the leading Latin American banking software, requires only a simple computer and an Internet connection. That means senders and receivers will no longer be at the mercy of big money transfer companies, and more of them will gain access to formal financial services.

Capitalizing on a Need

Tochisako, a 53-year-old former Japanese banker, says he doesn't want to create the next Western Union. He's more interested in proving to the world that a financial services company can benefit poor people and make money by adapting traditional microfinance models to serve immigrant populations in the U.S. and underserved people in the developing world, a goal he set for himself after witnessing abject poverty in Mexico while first working there in 1979.

During his 12 years working in branches of Japanese banks in Latin America, Tochisako, who is fluent in Spanish, learned that many locals received money wired from family members working in the U.S., but that 90% of them didn't have bank accounts. Initially, the goal of MFIC, which was founded in 2003, was to capitalize on the $30 billion U.S.-to-Latin America remittance market.

Along the way, Tochisako stumbled on another untapped market. He found that not only are the remittance receivers in the developing world chronically unbanked but the millions of people sending the money from the U.S. had also been ignored by mainstream financial institutions. If it were done correctly, Tochisako believed, providing them with affordable financial services would be a huge business opportunity (see BusinessWeek.com, 7/18/05, "Embracing Illegals").

Taking Some Convincing

Today, with over 39 million unbanked people in the U.S., Tochisako knows he was right. "This is really a huge open market and unsatisfied demand. We listen to what they need and produce customized service menus for them. That's why, in just one year, we have 50,000 loyally attached customers. This is new, but it's changing the market," says Tochisako.

Admittedly, as a for-profit microfinance institution based in the U.S., MFIC is unique, blurring the line between for-profit and nonprofit. Educating customers and potential investors about its services and business model has been its biggest challenge, and MFIC has had difficulty raising money outside Japan, where Tochisako has drummed up support from old colleagues and clients.

To raise more funding, MFIC, which is not yet profitable, issued a corporate bond of $5 million. But Tochisako says his company's short lending record still inspires some trepidation among investors.

The key to achieving profitability while serving the needs of the poor, he says, lies in his company's diverse revenue stream. MFIC's business model includes a remittance delivery platform that can be licensed to banks, new loan products for migrant workers in the U.S., larger loans to provide more lending capital to microfinance institutions in developing countries, and a burgeoning network of retail banking outlets in the U.S. geared toward serving the needs of low-income people.

Expecting to Turn a Profit

While a debate rages in the microfinance community over how best to spread the poverty-alleviation technique popularized by 2006 Nobel Peace Prize winner Muhammad Yunus and his Grameen Bank of Bangladesh (see BusinessWeek.com, 11/27/06, "Taking Tiny Loans to the Next Level"), Tochisako and his team argue that to help the most people, microfinance can and must be profitable.

They're on their way to proving the first part of their case. This year the company's gross revenue will be $2.2 million. Next year, Tochisako expects it to grow to about $8 million, with MFIC breaking even sometime in the middle of the year. By 2009, he expects to net about $8 million and to go public by 2010. "Our ambition is really big, but we believe we can do it," he says.

The market is growing. Remittances sent to Latin America and the Caribbean from all parts of the world are expected to exceed $60 billion in 2006, surpassing both the amount of official development assistance and foreign direct investment to the region, according to numbers from the Inter-American Development Bank (IADB).

In the U.S. alone, 12.6 million Latin American immigrants will send home $45 billion in remittances in 2006. Over the last two years, the percentage of Latin American immigrants regularly sending money home to their relatives has increased from 61% to 73%, and the average amount of each remittance increased from $240 to $300 (see BusinessWeek.com, 12/28/05, "Channeling the Remittance Flood").

Out of the Liquor Store

Traditionally the remittance industry has been dominated by Western Union (WU), which made almost $1 billion on sales of almost $4 billion last year, and Moneygram (MGI), companies some say haven't had the customer's best interests at heart.

"They're gouging. Their profit margins are 30%, so if you can serve the poor efficiently charging an appropriate rate, then that's great. It's a great opportunity," says Geoff Davis, president and CEO of Unitus, a Redmond (Wash.) nonprofit that uses for-profit models to expand the reach and efficiency of microfinance.

To improve upon the existing remittance system and make customers, who would normally rely on authorized agents at liquor or grocery stores, aware of the financial services available at microfinance institutions, MFIC developed ARIAS, a licensable platform to process remittances directly through a network of microfinance institutions. The platform, which modified the leading Latin American banking software to serve MFIs, only requires the institution to have a simple computer and an Internet connection.

It also allows the MFI access to a larger client base, and helps the sender and receiver avoid the traditionally high costs of sending money overseas. MFIC charges $7 for up to $200 and $10 for $200 to $1,500 in remittances. Although Western Union's prices vary by region, sending $1,000 from Colorado to Mexico costs $50.

Off the Radar

The ARIAS system is already licensed to two banks in the U.S., and MFIC is seeking to expand throughout the country. Tochisako says ARIAS is attractive to lending institutions because it "might be the only system that can comply with 100% of existing remittance regulations." Licensing the platform to more banks will help achieve MFIC's social aim, while providing an additional revenue stream, adds Tochisako.

Money transfer remittance services are just one of the rag-tag group of financial services that many have become dependent on in the U.S. Check-cashing services, payday loan services, and other financial companies can not only charge exorbitant annual interest rates of between 700% and 1,000% but also don't report to credit rating agencies. That often keeps immigrants out of the formal U.S. economic system.

"If you never go to a bank, never build a credit history, then you stay in the shadows. If you don't have proper papers and no credit history, you're outside the banking sector," says Kai Schmitz, executive vice-president and chief operating officer of MFIC, who says immigrants and low-income people routinely pay fees for such services amounting to 10% of their income. "There's really a market out there for affordably priced and professionally run services."

To serve the needs of the immigrant population in the U.S. and offer a way to start a credit history, in 2004 MFIC developed Alante Financial (formerly Mi Pueblo), a group of financial service centers. Instead of traditional credit ratings systems, Alante uses a customer's remittance history to determine his creditworthiness, and reports to a credit bureau so that customers can build a history.

More Services

"The work that MFIC is doing is unique in the market, because other remittances companies only do the transfer. MFIC is providing a full range of services for the immigrant. The impact is more integrated," says Maria Jaramillo, director of the remittance project of ACCION, a large microfinance nonprofit based in Boston with 21 partners in Latin America. She adds that in the past five years, the cost of remittance transactions has dropped from more than 15% of the total amount sent to about 7%.

So far, there are eight Alante locations in Delaware, Maryland, and Virginia and more than 50,000 customers, and the centers offer a line of financial services designed to bring previously unbanked and underserved immigrant populations into the mainstream. Although it's not a deposit-taking institution and probably won't become a licensed bank until late in 2007, Alante offers services that include micro loans, remittances, insurance products, and check cashing.

Their unique transnational loan helps provide an opportunity for clients living in the U.S. to purchase property, a house, or other major assets in their home country and to be able to pay up front, instead of piecemeal. So far, MFIC has lent $1 million through the program.

Schmitz reckons MFIC is only serving one-third of the loan clients it could if it enjoyed full funding. But he says it's all part of proving the model's viability. The average bank takes between two and three years to be profitable, and MFIC should be there within four, he says. "Becoming profitable quickly was important for us—to set a standard for other [companies] that would like to do this."

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