Fintech: Bringing down remittance cost

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 12, 2017 - June 18, 2017.

Asia generates more than US$250 billion in annual remittance flows. As a start, we are focusing on the remittance markets in East Asia and Southeast Asia. > Tang (Photo by Sam Fong/The Edge)

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International fund transfers between banks take one to five days to be completed. The wait time, coupled with the high cost of remittance, can be seen as a hassle to those who frequently transfer money across borders. 

E-commerce enthusiast and cross-border shopping expert Tom Tang was among those who were frustrated with the remittance service offered by banks. So, he and his friends began thinking about the feasibility of building a money transfer platform that is secure, quick and cheap. 

Tang founded CherryPay, a peer-to-peer (P2P) money transfer matching platform last October. The platform aims to provide real exchange rates, transparent service fees and transfers within an hour. 

Tang, who currently operates in Taiwan and China, explains how CherryPay works. “We are a P2P matching platform. People who want to remit funds on our platform need to register as members first.”

CherryPay manages to cut the wait time of one to five days down to an hour. Tang says this is possible due to its unique business model. 

“We ask our task takers to wire the money to the recipients within an hour. The clock starts ticking the moment they take up the request. The task takers who are quick and accurate in executing money transfers may be rewarded by our company with special membership, which allows them to receive a cut from successful matches,” he explains.

“We are looking to further shorten the time taken, say, to half an hour. We will conduct ratings on our task takers in terms of speediness and accuracy to achieve this goal.”

There are two types of users on this platform — a task requester or task taker. If the task requester holds renminbi and needs Taiwan dollars, he will be matched with a task taker who is willing to provide Taiwan dollars in exchange for renminbi. 

“For instance, member A, who lives in Taiwan, requests that ¥100,000 be credited into the account of his daughter, who is studying in Japan, while member B, who is working in Japan, needs Taiwan dollars for his wife, who lives in Taiwan,” says Tang. 

“The platform will match these two members. If member B agrees to take up the request, member A will credit NT$27,115 (according to the real exchange rate of NT$1: ¥3.69, excluding service fee) into CherryPay’s account in Taiwan via a local fund transfer. The platform will then ask member B to transfer ¥100,000 to member A’s daughter in Japan via a local fund transfer within an hour. 

“After member A’s daughter receives the funds, the platform will transfer the NT$27,115 in its account to member B’s wife via a local fund transfer. CherryPay earns a small service fee from both parties in this successful match.”

Tang says the platform has logged a 100% response rate since it started operating, meaning every task request had been taken up. 

Lowering costs

Cost is an important factor in remitting funds. According to the Remittance Prices Worldwide report published by the World Bank on March 21, remittances cost an average of 7.45% of the amount sent globally in the first quarter of this year. This amount is slightly higher than the 7.4% recorded in the fourth quarter of last year. 

The report monitors global remittance prices and cost incurred by remitters when sending money along major corridors. It is used as a reference for measuring progress towards global cost reduction objectives, including the G20 commitment to reduce the global average cost to 5%. 

“Since the launch of the report in 2008, the market for remittance services has significantly evolved. Innovative players have emerged and begun to compete with traditional ones, such as banks, money transfer operators and post offices. New products have also been developed, including some enabled by new technologies or new applications of existing technologies,” says the report.

“In 1Q2017, the cheapest method of funding a remittance transaction was mobile money at 3.73%. The average cost when using a debit or credit card was 6.23% and cash was the next cheapest option at 6.99%. The most expensive option remains bank accounts at 8% of the total average cost.” 

Tang says CherryPay is one of the innovations that have lowered the cost of remittance. The company charges both task requesters and takers a service fee of 0.5% to 2% for every successful match made on the platform, depending on the country the users reside in. 

“Banks have buying and selling prices for currency exchange and they profit from the difference. As a matching platform, we do not profit from the price difference. The platform’s exchange rates are based on the Reuters’ currency table. The rates on our platform are refreshed every 10 minutes to reflect the latest numbers,” says Tang.

“Once a member sends in a task request, the exchange rate is locked in for 24 hours. If a member sees that the rate has been lowered after placing a request, he can cancel it and place a new one if it has not been taken by a task taker. This is a fair and transparent way of pricing.”

According to Tang, the company is considering giving task takers a reward of 0.3% to 0.5% of its service fee to encourage more members to take up tasks. “We are looking to reward our task takers who provide excellent services. If they fulfil the requirements of the company, we will make them a special member who enjoys a reward from each successful match. We are still ironing out the details,” he says, adding that the requirements include speed and accuracy. 

How does the platform ensure that the transactions are executed in a secure manner? Tang says the team’s experience in e-commerce has taught them a lot about security measures when it comes to cross-border transactions. Their experience can be applied to building a P2P money transfer matching platform. 

“Moreover, we have to comply with the regulatory requirements of each country. We conduct the Know Your Customer (KYC) process for each membership application,” he says. 

“It is easy to complete the KYC procedure in Taiwan as it can be done online. During the registration process, we receive the mobile number and identity card details of the individual. 

“Then, we send an activation code to the mobile number to verify the identity of the person. We also verify the personal information that the individual submits. The whole process takes about 30 minutes. If all checks out, the individual becomes one of our members.”

The KYC procedures present a challenge for CherryPay. As the company expands to more countries in Southeast Asia, it has to comply with the laws and regulations of each country. In some countries, the KYC process needs to be performed physically at the counter and this may prolong the registration process. 

“This will be a challenge for the company as we do not want a lengthy registration process that may increase our overhead costs and deter people from signing up for our service. However, we believe that a breakthrough is possible. After all, financial technology (fintech) and regulatory technology (regtech) are all about improving current practices. We think performing KYC online will be possible in other Southeast Asian countries soon,” says Tang. 

CherryPay’s target users are travellers, online traders, students and foreign workers. Tang says these are the people who have constant need for foreign currencies and they need a cheaper and quicker as well as secure alternative to remit funds. CherryPay is the right platform for these groups to access this service. 

Currently, only residents of Taiwan can put in a task request while residents of China and other countries can take up the requests. CherryPay is working to allow the residents of other countries to put in task requests too. The company will need to establish a subsidiary on the ground to manage the KYC process before people can apply for membership and sign up to be a task requester. 

Expansion to other countries is in the pipeline, says Tang. “Asia generates more than US$250 billion in annual remittance flows. As a start, we are focusing on the remittance markets in East Asia and Southeast Asia.

“We have already found partners in Japan, Thailand and the Philippines, so things will progress more quickly in these countries than in others. We also plan to expand to Malaysia and Singapore.”