Banks swallow $5 billion out of remittances to India. Fintech startups are out to disrupt this

India gains the most from its diaspora among all countries. The World Bank estimates that Indians abroad will send US$72 billion home this year. China comes second with US$64 billion in remittances, and the Philippines is third at US$30 billion. Pakistan and Bangladesh also figure in the top 10.

Remittances to India will grow 2.5 percent this year, up from 0.6 percent in 2014. This is expected to rise further next year and contribute significantly to economic development.

But the cost of sending money home remains high, averaging 7.7 percent globally, according to the World Bank. The hidden costs in FX spread – the difference between an inter-bank currency conversion rate and the rate quoted to you by a bank or money transfer company – will thus eat away more than five billion dollars from the remittance money coming to India this year.

See: Banks are bleeding you dry on your money transfers

The rise of Instarem

A number of startups are out to disrupt this space in different ways. And some of them are seeing quick traction too on the back of rising remittances to India and the Philippines.

Instarem, which got a licence to do remittances from Australia in November last year, saw its transfers to India cross a monthly volume of A$2 million (US$1.43 million) in September. Last month it opened up new corridors from Australia to the Philippines, Indonesia, Sri Lanka, and Singapore. It aims to be in Vietnam and Bangladesh by the end of the year.

The Australia-Singapore corridor is mostly B2B (business-to-business) with a number of startups registered in Singapore using the channel to receive small ticket payments ranging from A$1,000 to A$10,000 the same day. The other corridors are mostly for individuals.

Mumbai-based Prajit Nanu, co-founder and CEO of Instarem, says it hit a weekly remittance volume of A$1 million (US$714,000) in October. “Our average transaction size is A$2500 (US$1784), and nearly half of our customers transfer money every quarter,” Prajit tells Tech in Asia.

The startup has applied for a licence to do remittances from Hong Kong, which is expected in January, and is in the process of applying for one in Singapore. This will allow Instarem to start sending money from Hong Kong and Singapore, where many Indians are based. It also has a licence in Canada and will soon open up corridors from North America to Asia and Australia.

The expansion of Remitly

Instarem charges a flat fee of 1 percent of the amount transferred, which is significantly lower than the 2 to 3 percent FX spread that banks cut from the inter-bank rate in addition to transaction and other charges. It is able to do this by tying up with local banks. For instance, if Instarem receives the money in Australia to be transferred to India, a local bank in India will transfer an equivalent amount in rupees to the receiver minus the 1 percent fee.

In other words, the money received in Australia remains in the Instarem account there, and the actual transfer happens locally in India. Instarem has a proprietary algorithm and network to perform this magic, which also enables a money transfer within hours irrespective of the amount.

The FX maze