Financial Sector Analysis for South Caucuses

Financial Sector Analysis for South Caucuses Introduction The third phase of this report presents the results of a regional and comparative study of the flows of remittances to Azerbaijan, Georgia and Moldova and their relationship to the financial sector, its industry and marketplace. The study analyzes the inflow of unilateral transfers known as remittances in connection with different economic sectors. Specifically, the study focuses on macroeconomic dynamics, payment system modernization, the market for transfers, cross sale of financial services, securitization and bond issuing if possible, remittance and financial literacy, regulatory balance between payment systems and migration management and the macroeconomics of finance. Among the main findings of this study, we identify issues relevant to development and policy intervention in key areas of finance and regulatory policy. Specifically we find that: Remittances represent an non-negligible source of foreign earnings amounting to US$1.5 billion but reflect varying impacts depending on the economy of the country; Notwithstanding differences across countries, the inflow of these transfers is distributed across the population whereas nine to twenty percent of people are remittance recipients; The banking industry, an almost exclusive payer of remittances, competes with a relatively important informal sector (estimated to average one third of all flows), and money transfer payments account for revenues that represent up to twenty percent of the financial institution s net income; Payment competition is often affected by the concentration of a few banks and by restricted participation of non-banking financial institutions, such as credit unions, which exhibit a strong presence in rural areas; Industry competition, measured by volume of transfers, is determined mostly by the number of branches and services offered rather than by the number of money transfer partners; Financial intermediation through cross sales of products to remittance senders or recipients is relatively absent with some exceptions despite the fact that remittance recipients demonstrate strong links with bank account ownership and demand for financial products. Remittance flows have several effects and dimensions in the financial system of a country s economy. From a macroeconomic standpoint, these aggregate flows influence national reserves, foreign currency exchange and saving and credit ratios. At the financial industry level, not only do these flows represent revenue streams from international payments, but they are also resources with leveraging potential as a means for securitization, loan backing, or as instruments for modernization of the payment industry through the adoption of advanced technologies. Moreover, from a consumer banking perspective, remittances are a source for asset accumulation, credit history and collateralization. The intersection between remittances and finance is thus threefold: these transfers interact with financial macro and micro dynamics, as well with individual participation in the banking sector. As foreign savings, these unilateral worker transfers are a substantial inflow that supports national income and holds up the financial sector. Second, through intermediation, these flows provide added revenue as well as a venue for modernized payment systems. Third, the beneficiary of the flows attaches a relationship to finances insofar as he/she uses these resources as mechanism to build savings and assets. 195

The effects that remittances can have with these three levels, macro, micro and intermediation, depend on the ways in which these flows interact with the local economies and their enabling environments. The study presented here is based on fieldwork in Azerbaijan, Georgia, Moldova and Russia, including primary data collection, interviews with government officials from the National Banks of each country and interviews with heads of international payment units of banking institutions and microfinance institutions. The comparative analysis uses data from three nationwide surveys conducted for this study about the profile and determinants of remittance reception and financial resources. The study was conducted with research assistance from research associate Jill Reifsteck. 196

1. Economic growth, migration and remittances in the South Caucasus Although migration during the time of the Soviet Union was predominantly from Russia to the satellite countries, an inverse mobility developed with the formation of the Community of Independent States (CIS) in the early 1990s. The contemporary movement of CIS citizens into Russia and other countries occurs partly as a result of positive economic conditions and population decline in Russia and Western Europe and poor economic performance in many of the CIS countries. According to figures from the United Nations, there are 1.3 million Azeris abroad, 1 million Georgians and 0.6 million Moldovans (see Table 1). Between sixty and forty percent of migrants from these countries have moved to Russia. In fact, migration into Russia is mostly from CIS countries: more than 90% of migrants in Russia have come from the CIS. Table 1: Geographic Distribution of Migrants from Three South Caucasus Countries WORLD Azerbaijan Georgia Moldova Russia 846,104 61.7% 628,973 60.7% 277,527 41.8% Ukraine 122,274 8.9% 95,680 9.2% 222,478 33.5% Greece 397 0.0% 71,692 6.9% 6,358 1.0% Armenia 152,213 11.1% 70,138 6.8% 30 0.0% Germany 26,520 1.9% 30,177 2.9% 14,845 2.2% Israel 23,613 1.7% 17,512 1.7% 14,305 2.2% Azerbaijan - 0.0% 12,630 1.2% - 0.0% Kazakhstan 38,270 2.8% 2,590 0.3% 9,531 1.4% Other 161,536 11.8% 106,278 10.3% 118,344 17.8% Total 1,370,927 100.0% 1,035,670 100.0% 663,418 100.0% Source: United Nations, obtained from Development Research Centre on Migration, Globalisation and Poverty (Migration DRC). Poor economic performance during the transition of these economies partly explains the migratory flows. As the table below shows, per capita GDP fell over the first ten years in the 1990s, accompanied with rising rates of income inequality and little modernization. The transitional economies, that still have predominant rural sectors, have struggled to increase productivity and wealth, except in Azerbaijan. The case of Azerbaijan as an exporter of oil in the global marketplace, growing in 2006 at 35%, separates it in large part from many CIS countries. 197

Table 2: Economic Indicators for Three South Caucasus Countries GDP growth (annual %) GDP per capita (constant 2000 US$) Rural population (%) Income Inequality Azerbaijan 1990-1250.7 46.27 0.35 2000 11.1 655.1 49.46 0.35 2004 10.18 945.34 49.99 - Georgia 1990-14.79 1492.9 44.95 0.31 2000 1.83 647.76 47.33-2004 6.2 882.73 48.28 0.469** Moldova 1990-2.4 829.13 53.1 0.27 2000 2.1 301.41 54.21 0.44 2004 7.3 399.62 53.79 0.41** Source: World Development Indicators. World Bank, 2006 Simultaneously Russia s declining demographic growth rates as well as an increasing economic boom led to a demand for foreign labor from countries that were historically linked under the former USSR. This economic boom has been fed by growth in a variety of sectors including agriculture, construction, and oil. In the agricultural sector, there has been increased growth in food processing and heavy machinery. The construction boom in Moscow has created an elevated demand for foreign labor. Furthermore, high oil prices have fostered a favorable economic environment for migrants. 1 In turn, one of the resulting outcomes has included an increasing flow of foreign earnings from migrants, which for 2006 the World Bank has estimated to amount to more than US$2 billion for the three countries combined. 15.00 10.00 Figure 1: Russia: economic and demographic growth 1.00 0.80 5.00 0.60 0.00 (5.00) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 0.40 0.20 0.00 (10.00) (15.00) GDP Growth Population growth (annual %) (0.20) (0.40) (20.00) (0.60) 1 Morgan Stanley Research Note. Western Union. April 24, 2007. 198

$1,400,000,000 Figure 2: Remittances to Georgia, Moldova and Azerbaijan $1,200,000,000 $1,000,000,000 $800,000,000 $600,000,000 Georgia Moldova Azerbaijan $400,000,000 $200,000,000 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 a) Data collection on remittances and their measurement reported by the Central Banks In measuring remittances, the World Bank reports figures from Central Banks. The Central Banks follow the typical methodology issued by the IMF. The National Bank of Georgia (NBG) and the National Bank of Moldova (NBM) in particular define migrants remittances as the sum of two credit items: Compensation of Employees (from the income account) and Workers Remittances (from private transfers). A third item, referred to as Migrants Transfers, is taken from the capital account and represents the movement of household goods and other financial items that result from migration and is therefore not considered part of migrant remittances in its traditional definition. What distinguishes Compensation of Employees from Workers Remittances is the amount of time the individual sending money stays abroad. For instance, if an individual works abroad for more than one year he is consequently considered a non-resident and the money sent back to Moldova is treated as a transfer from a non-resident to a Moldovan resident for balance of payment purposes. This describes how the term Workers Remittances is technically defined. On the other hand, when an individual spends less than one year outside the country, he continues to be considered a Moldovan resident and thus the money he transmits is part of the compensation received from a non-resident employer. However, the figures presented by Central Bank offices are different from those reported by the World Bank. For example, in 2004 the Central Bank of Georgia reported that remittances were US$254 million (doubling to US$555 million in 2006) against US$303 million reported by the World Bank. Similarly, the Bank of Moldova reported US$221 million for 2004 (tripling to US$602 million in 2006) against US$700 million by the World Bank. Although Central Bank officials follow typical Balance of Payment methodologies to record remittances, they agree that it is difficult to estimate these flows because they rely mostly on what banking institutions report. In the CIS countries banking institutions are the only legal entity allowed to pay remittances. It is important to stress that the Central Banks in Georgia and Moldova also use household surveys to account for informal flows and further improve their methodologies. But accuracy in estimating the flows escapes their control because there are intrinsic difficulties in often distinguishing personal from commercial transactions, for example. This situation however is not unique to this region but is a typical problem worldwide. 199

Given these differences it is difficult to reliably analyze the macroeconomic dynamics of remittances. Therefore using these numbers requires precautions as to the extent of the generalizations emerging from the analyses. The survey conducted in this study presents results that partly coincide with the figures offered by the Central Banks. The table below shows the different available estimates for 2006. Table 3: Estimates of Remittances to three South Caucasus countries, 2006, (US$) Georgia Moldova Azerbaijan Bendixen and Associates 418,000,000 595,000,000 530,000,000 Central Bank 1 555,000,000 602,000,000 N/A World Bank 393,000,000 1,201,000,000 693,000,000 1 Figures provided by the Central Banks of each country. b) Remittances and their relationship to the economy 2 Although the economies of Azerbaijan, Georgia and Moldova share some characteristics, such as low per capita income, high levels of inequality and high rural ratios, they also are significantly different economies. Azerbaijan is increasingly consolidating as an oil exporting economy, where oil represents 70% of exports, and is experiencing fast and large growth rates. Moldova, on the other hand, is a predominantly rural and agriculture-based economy, accompanied by a significant labor export dynamic to countries like Russia and Italy. Georgia is somewhere in the middle of the spectrum of these two other economies. It does not rely exclusively on one single commodity or sector, as in Azerbaijan or Moldova, and it registers high growth rates. These flows follow independent patterns, which often mirror a behavior associated with the demand for foreign labor in the host countries or the labor migration relationships that exist between two or more countries. The figure below shows quarterly movement of transfers and transfer variations across quarters in Georgia and Moldova alongside Russia s quarterly GDP patterns. Quarterly flows to Moldova are markedly high during the third quarter until 2005, when flows began to follow a more incremental growth. However, in the case of Georgia, where a larger number and share of migrants go to Russia, there is greater correspondence between the inflow of remittances and GDP performance in Russia. 3 2 This section relies on comparative statistics from the Central Banks offices except with Azerbaijan, where we rely on the World Bank figures. Therefore we caution the reader about the reliability of the estimates. Although there are some discrepancy in the figures, Central Bank remittance figures for Georgia and Moldova offer important data points for comparison with other indicators and are supported by their BOP methodologies. Moreover, the differences between this report s survey and the Central Bank are relatively small. 3 There is particularly a statistical relationship between remittances and inflation in the home countries. 200

300 250 200 150 100 50 0 00-1Q 00-2Q 00-3Q Figure 3: Remittance Flows to Georgia and Moldova, and Russia's GDP Russia (US$ billion) Moldova (in millions) Georgia (in millions) 00-4Q 01-1Q 01-2Q 01-3Q 01-4Q 02-1Q 02-2Q 02-3Q 02-4Q 03-1Q 03-2Q 03-3Q 03-4Q 04-1Q 04-2Q Source: World Development Indicators. World Bank, 2006. 04-3Q 04-4Q 05-1Q 05-2Q 05-3Q 05-4Q 06-1Q 06-2Q 06-3Q 06-4Q These transfers exhibit different characteristics both at the macro- and microeconomic levels. In relationship to national income, remittances account for nearly 20% for Moldova but less so for the other two countries, with Georgia in the middle. However, the significance of these transfers for Azerbaijan is also noteworthy even considering the oil-driven boom in the economy at US$20 billion (US$9.5 billion of which comes from oil exports). The nearly US$700 million in remittances estimated by the World Bank reflects a substantial amount that has been growing during the economic boom. This situation may raise questions as to what factors other than economic growth explain international labor mobility. Despite the differences, remittances vis-à-vis national income are increasing annually in the three countries. Table 4: Remittances as Percent of GDP Georgia Moldova Azerbaijan 2000 2.1 4.1 1.1 2001 2.2 5.4 1.8 2002 2.5 6.1 2.9 2003 4.9 7.7 2.4 2004 5.0 8.5 2.7 2005 6.3 13.2 5.5 2006 7.3 18.6 3.5 Source: For Georgia and Moldova, Central Bank; Azerbaijan, World Bank. Within the current context of a global economy, relying more on foreign income as a source of growth and wealth generation is key to enhancing a country s performance. Thus, earnings such as remittances can have a relevant influence to that end. As the table below shows, the participation of remittances as part of other sources of foreign earnings, particularly foreign investment, aid, tourism, and exports is noteworthy. These transfers represent an increasingly non-negligible percent of foreign income, particularly for Moldova and Georgia. Foreign earnings in fact are a major source of national income for many of these countries, and policies leveraging these flows play an important role in further enhancing growth opportunities to expand a country s productive base. While most countries have policies and strategies on exports, foreign cooperation, foreign investment, international tourism, it is uncertain that they have concrete approaches to the earnings emanating from migrants transfers. 250 200 150 100 50 0 201

Table 5: Remittances and other foreign earnings Remit. % Reserves Remit. % of Exports Remit./Total Foreign Income Moldova Georgia Azerbaijan Moldova Georgia Azerbaijan Moldova Georgia Azerbaijan 1995 0.40-2.48 0.12-0.28 0.10-0.19 1996 0.99-0.00 0.33 - - 0.29 - - 1997 0.36-0.00 0.12 - - 0.10 - - 1998 0.81-1.34 0.15-0.59 0.12-0.26 1999 0.33-8.02 0.10-4.21 0.08-2.56 2000 23.63 57.83 8.38 8.20 9.51 2.77 5.26 6.81 2.32 2001 35.10 43.65 11.59 10.87 8.59 4.44 7.29 6.26 3.52 2002 37.79 42.47 25.21 11.59 8.44 6.82 7.67 6.41 3.91 2003 50.29 103.10 20.83 14.35 15.44 5.59 10.21 11.15 2.48 2004 47.07 67.33 20.92 16.80 15.81 5.39 11.55 10.86 2.76 2005-85.19-26.22 - - - 21.49-2006 - - - 39.25 - - - - - Source: World Development Indicators. World Bank, 2006, and National Bank of Moldova. Given the macroeconomic significance of these aggregate flows on the national economies of these countries, remittance policy considerations are decisive to leverage these transfers to enhance economic growth. As remittance flows grow, their interaction with the local economy requires government and private sector intervention to maximize and capitalize from these flows. Cues to those considerations include an understanding of the sources of these flows, the profile and characteristics of recipients, as well as the participation of the financial sector in managing and leveraging these flows. One of the most important links of remittances to an economy is the financial sector because these flows go through the financial system and interact with the recipient in the context of a demand for financial services. The other two links include the impact of remittances to reduce poverty and to diversify the productive base of the local economy. The rest of this section points at the origin of the flows and characteristics of recipients. Section Two of this report analyses the extent of competition and intermediation of money transfers, and Section Three explores and analyzes the interaction of these flows with the financial sector. c) The geography of remittances and characteristics of remittance recipients: A brief profile There is an important correspondence between the places where migrants are and the places where remittances come from. According to surveys conducted in the three countries, the main source of remittance flows is Russia, which is the location where most migrants are living. Survey results show that Russia is predominantly the destination of Azeri migrants, against 45 and 41 percent for Georgians and Moldovans. Moldova, however, distinguishes itself from the other countries in that its migration is scattered to more than one country. Italy is a primary destination for many Moldovan citizens. Greece is also an important destination for Moldovans and Georgians. 202

Table 6: Remittances and Geographic origin of transfers Azerbaijan Georgia Moldova Russia 79% 45% 41% Italy - - 33% USA 2% 8% 3% Greece - 15% 3% Portugal - - 3% Other Countries 15% 32% 17% Source: Bendixen and Associates, Survey of the South Caucasus This section identifies characteristics among remittance recipients in the three countries and finds differences in remittance reception. First, not all of the study countries receive remittances in similar percentages relative to their population. Second, recipients in all three countries exhibit low income earnings. Third, their age range varies across groups and countries, but contrary to other remittance recipient societies, a small percentage includes people over sixty years of age. The number of remittance recipients varies from nine to twenty percent. Moldovans are the largest remittance recipient group of the three countries. A simple majority of remittance recipients in Azerbaijan are female (52 percent) and unemployed (61 percent). With regards to Georgians, a relative majority of remittance recipients are female (55%) and live in urban areas (53%). The majority of remittance recipients in Moldova are also female (61%). Table 7: Percent of people who are remittance recipients Azerbaijan Georgia Moldova 9 9 21 Source: Bendixen and Associates, Survey of the South Caucasus Income The household income of the majority of Azeri recipients (61 percent) is between approximately USD$0 to $100 per month, with 14 percent in the $101 to $140 category, 15 percent in the $141 to $230 bracket, and 10 percent in the $231 and up bracket. In the case of Georgians, household income among recipients spans principally from nothing to USD$500 per month, with 28% in the USD$51 to 100 category, 23% in the USD$101 to 250 bracket, and 20 percent in both the USD$0 to 50 and the USD$251 to 500 brackets. Among Moldovans, the characteristics are similar to the two other countries. Age Most recipients fall into a variety of different age groups, but unlike recipients from other societies, recipients in these countries are younger. For example, among Azeris the groups with most recipients are the 35 to 49 bracket (31 percent), followed by approximately 20 percent each in the 18 to 24, 25 to 34, and 50 to 64 brackets. Only 8 percent of Azeri recipients are 65 and over. Recipients from Georgia also fall into a variety of different age groups, with the most in the 35 to 49 years bracket, followed closely by 24% in the 18 to 24 bracket, and approximately 15% each in other age groups. Among Moldovans there is no dominant age range, most being under the age of 50. This condition raises questions about the opportunity to bring policies on health and education for younger cohorts that can benefit from incentives to improve their social condition. Given that these recipients are still active labor force individuals, they can also benefit from incentives to establish small enterprise activities. 203

Education The majority of remittance recipients from Azerbaijan have achieved at least a secondary education (over 90 percent). About 40 percent have no more than a secondary education, while 28 percent have achieved specialized secondary and 25 percent have a higher education. Family members of recipients overwhelmingly live in Russia (79 percent). Less than 10 percent of remittance recipients have relatives in Ukraine (4 percent), Turkey (3 percent), and the United States (2 percent). Education levels of remittance recipients in Georgia is relatively similar to Azeris, few have a primary education: 37% having graduated from college, another 31% having completed secondary school, and 27% having completed some college or technical school. In the case of Moldovans education shares the same pattern with the other two countries; over 70% of remittance recipients have at least completed secondary school and about 43% have pursued more advanced education. Recipients and non-recipients There are only a few notable differences between recipients and nonrecipients in Azerbaijan. A higher percentage of non-recipients are unemployed: 73 percent of nonrecipients are unemployed compared with 61 percent of recipients. Among Moldovans, over half (approximately 66%) do not work and this percentage is more or less the same in looking at male and female recipients. 35% receive from their son or daughter. Nearly half have been receiving remittances between 1 to 3 years, which shows a more recent remittance trend. 2. Issues and Patterns in the Marketplace of Remittance Transfer Businesses This section analyzes the marketplace of remittance transfers by looking at trends among money transfer operators (MTOs), payers, and extent of competition. Payment intermediation, the process that immigrants use to send money and have their families receive, varies depending on the players providing the transfer service, the applicable regulations and the extent of competition in the marketplace to attract those customers. Overall, there are three kinds of remittance-sending intermediaries: non-bank financial intermediaries (NBFI), banks (and credit unions or other depository institution) that provide remittance sending services, and informal intermediaries such as non-formal couriers or even friends who take or facilitate the sending of money from sender to recipient. Depending on what part of the world one is considering, the proportion of sending via these three means varies. The first two players are authorized to perform money transfers, whereas the last is a process that occurs outside the system resulting from a variety of factors including a lack of accessibility to the formal transfer mechanisms, cost or restrictions on legal status of the individual. To perform the delivery of the transaction, remittance companies also need agents or distributors on the receiving side. There are important national and regional differences in who these agentdistributors are and how they operate. In the CIS countries, the regulatory environment allows banks and in some cases non-banking financial institutions to perform the payment of money transfers. In the countries studied in this project most transfers take place in the formal or licensed money transfer system through a network of banks existing in each country. Informality was identified to be greater in Moldova and Georgia. Moreover informal reception is greater in rural areas than in the urban sector (see Table 8). 204

Table 8: Distribution of Formal or Informal Transfers Georgia Moldova Azerbaijan Urban Rural Total Urban Rural Total Urban Rural Total Informal 16.98 15.76 32.74 16.28 25.81 42.09 10.10 9.43 19.53 Formal 41.09 25.62 66.71 29.53 28.37 57.91 36.03 44.44 80.47 Total 58.62 41.38 100.00 45.81 54.19 100.00 46.13 53.87 100.00 Source: Bendixen and Associates, Survey of the South Caucasus a) Competition from MTOs The transfer of remittances occurs predominantly through a well-established industry of money transfer operators (MTOs) based in Russia. As the previous table has shown, most transfers are coming from Russia, and competition is significant in that corridor. Money transfer operators in Russia, known as money transfer systems, are highly competitive and currently may be overcrowding the market. In fact, saturation of the outbound market may be taking place as a result of the mushrooming of many companies competing for a nine billion dollar market. Russian Central Bank officials have registered 17 MTOs offering remittance services. The main money transfer companies include Anelik, Contact, Fast Mail, Leader (formerly VMT), Migom, UNIstream and Western Union. Other relevant companies that operate with less than five percent market share are MoneyGram, Ria, Blizko, PrivatMoney, STB-Express, Travelex Worldwide Money Ltd, VIP Money Transfers and Strana Express. The level of competition has been marked predominantly through pricing (see next section). However, companies have frequently implemented marketing tools to attract new customers, particularly from the competition or from informal networks, when these are identified. Each of the main companies dominates a particular corridor or two and competes almost equally in the other corridors in the CIS. Unistream and Anelik for example have a strong presence in Armenia, whereas Contact and Western Union are strong in Tajikistan. 3000 2500 Figure 4: Remittances to CIS by 2005-2006 quarters (millions) Transfers to CIS 2000 MTO and Post Transfers to CIS 1500 1000 500 0 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Source: Central Bank of Russia 205

Three main areas distinguish this industry for outbound transfers. First, the prevailing business models for money transfers are led by a unique banking strategy to compete in the payment industry outside of banking. Second, there are too many companies crowding out a market for an estimated nine billion dollar sector, and third, the industry is facing important developments that are indicative of a transition from an underdeveloped to a consolidating industry. Unlike other countries around the world, volumes and transfers as well as the main players in the money transfer industry in Russia are predominantly led by banks creating specialized Non-banking Financial Credit Institutions. Due to the regulatory environment demanding banks to be the only originators of wire transfers, several banks established separate legal and business entities to provide money transfer services instead of advertising their brand names for remittances. This business model is an interesting method that coexists within bank branches, but is legally separate from them. These include Migom (European Trust), FastMail (ImpexBank), Leader (IncredBank), Contact (Russlav Bank), Unistream (Unistrum) and Blizko (SviazBank). There are also typical money transfer operators, such as Western Union, Money Gram, and Ria, that compete in the market through the banks. However, the bulk of transfers is handled by what can be labeled as bank-backed MTOs. The second feature that characterizes the Russian outbound market is supply side saturation. The volume of transfers outside of Russia runs around seven billion dollars. Thus, no one in the industry controls more than twenty percent of the market. Although this feature would be a positive characteristic of a competitive market where monopoly or oligopolies are not present, the presence of this number of companies given prevailing profit margins makes it difficult for MTOs to further invest in marketing or new technologies. In fact, companies run on a revenue stream of no more than 2% of the volume transferred (at a likely 1%), with operating costs estimated between US$800,000 to US$1,500,000 (excluding marketing). In turn, average profits are less than ten million dollars, thus restricting investment and expansion plans. For example, introducing a new payment technology framework requires a minimum investment of one million dollars, making it difficult for many MTOs improve their technology. Table 9: MTOs operating in the outbound market from Russia MTO Annual Volume (in millions) Market share Revenue at 1% of volume Profit margins after operating costs Western Union 1200 17% 12,000,000 10,000,000 Contact 1200 17% 12,000,000 10,000,000 Unistream 1200 17% 12,000,000 10,000,000 Anelik 900 13% 9,000,000 7,000,000 Fast Mail 800 11% 8,000,000 6,000,000 Migom 800 11% 8,000,000 6,000,000 Leader 350 5% 3,500,000 1,500,000 Money Gram 1 0% 10,000-1,990,000 Blizko 1 0% 10,000-1,990,000 Other (MTOs, PO, and swift wires) 550 8% 5,500,000 3,500,000 Total 7002 70,020,000 50,020,000 Source: Data estimates based on company interviews. 206

The third feature deals with a transition point from an underdeveloped to a consolidating market. 4 Some of the features distinguishing this stage include the improvement in company compliance with international regulatory instruments on money transfers or a standardization of transaction costs for sending money as part of local business model development. Most of the companies in this industry are in an earlier stage of business growth, and with few exceptions, have been in operations for less than six years. The main companies in the market are faced with one of two situations: some are aging while others are at a point of intensifying their growth through network expansion, technology adaptation, and investment. One of the companies facing an aging process is Anelik, which is perhaps the oldest in the market. This company is among the top five competitors and was created in the late nineties just after migration from CIS countries started. Anelik, owned and established by Anelik Bank in Armenia, has provided a critically important intermediation support to migrants across the Caucasus and Central Asia. However, according to some competitors, its business model and technology have gradually lost competitive edge. The company runs its operations through banks as agents in Russia, without its own banking network and much less capital and network strength of companies like Western Union. Moreover, its technology in international payments is outdated since its software platform lacks real time payments and only provides limited technical support to agents. As new companies enter the market with more capital, their own independent bank networks, and new software platforms capable of adapting any banking infrastructure and new payment systems including mobile banks Anelik is facing a downward turning point. In contrast, other companies are seeking to strengthen their capacity and are finding ways to stay strong in the market and to remain among the main competitors. Many executives believe that the decline of Anelik (which has been losing market share in several corridors for the past two years) may signal a process of consolidation in the market. One approach other companies are considering is technology development (see section on technology), and the other is to offer value-added products within the realm of the possible in a restrained regulatory environment that prevents access to most financial services by undocumented migrants. Pricing dynamics One critical issue emerging in the competitive landscape that merits special attention is consumer pricing. The region is predominantly characterized by three pricing models: economy of scale prices, standard percent, and special corridor pricing. In the first case Western Union and Money Gram use a fee schedule to charge and appear to be among the most expensive. Despite their cost, Western Union retains a high market share partly because of its marketing and network capability. The prevalent practice is standard percent pricing. Most companies charge 3% on the value of a transaction, which usually runs around US$350 and is sent eight times a year. The fee is shared among the two agents and the MTO in almost equal parts with variations depending on the partnership quality of the agent. Most of the transactions are made in US dollars. The third prevalent practice is marking down prices in special corridors by offering special deals. In the Russia-Armenia 5 corridor, for example, UNIstream has offered 1% charge if the transfer takes place at their own outlets outside of banking agencies. It also offers a lower cost if transferred in rubles and converted in Armenian currency. Leader has followed a similar path to compete with UNIstream. Recently, reports stress that Western Union has 4 To understand MTO competition it is important to situate their location in the stage at which they are found: underdeveloped market, consolidating, or maturing. The features that distinguish each stage are associated to at least nine factors that include compliance to regulations, marketing, advanced technology, investment accessibility, among others (see Orozco 2004). Russia is moving out of the initial stage. 5 Morgan Stanley Research Note. Western Union. April 24, 2007. 207

begun to compete more aggressively since the first quarter of 2007 by reducing prices between 20 and 50% in the Russian outbound corridors. Table 10: Cost to send 9000 rubbles via MTOs to CIS countries (main MTOs) Cost (%) (Rubles) Western Union 650 7.22% Contact 300 3.33% Unistream 200 2.22% Anelik 300 3.33% Fast Mail 300 3.33% Migom 250 2.78% Leader 150 1.67% Blizko 190 2.11% Interexpress 275 3.06% Source: MTOs tariffs. In fact, to most competitors in the industry, UNIstream is considered to be a loose cannon in competition because of subsidizing pricing below operating costs. Some experts argue that the reason they do that is to secure greater volume from clients and increase investment from shareholders since the company recently entered the IPO market. UNIstream s price decreases, now in effect for more than nine months, have pushed some to compete. However, most major players have retained their pricing and only lowered prices in certain corridors. However, further reduction of costs may be financially unsustainable and instead may cause risk in the market on both supply and demand sides. The most likely effect of this trend is that Anelik may face further losses and accelerate a potential sell while new entrants will have to continue to subsidize low pricing. Overall, however, major companies will retain their 3% standard, which on average may drop to 2.5% and stay there for the foreseeable future. b) Mapping the paying market The money transfer payment market in Georgia, Moldova and Azerbaijan is regulated by the National Banks of each country, which require that banking financial institutions be the payers of money coming from other countries. No other institution is allowed to do so. However, a non-banking financial institution, such as a micro-finance institution, can work as a subagent of a bank. The exception is Georgia, which allows micro-finance institutions to offer payments as primary agents. Azerbaijan The banking industry in Azerbaijan (see section 3 for details) is bifurcated between a single bank holding 50% of all bank assets in the country and 44 banking institutions with assets one tenth or less the size of this other bank. Therefore in terms of competition in the payment industry, significant differences also exist between the largest bank, which is the International Bank of Azerbaijan (IBA), and the other competitors. The table below displays the competitors in money transfers. Aside from Standard Bank or IBA, most banking institutions conduct less than five thousand transfers a month. Their low participation reflects 208

the large presence of banks, most of which are involved in the payment of money transfers. Combined, the bank branches total 350 with operations predominantly in urban areas which represent their points of sale and payment of transfers. According to data provided by these institutions, market share is distributed almost in relationship to their branch numbers and financial position. Table 11: Transfers of remittances by banking institutions in Azerbaijan # Transactions/mo Volume/mo # Transactions/yr Volume/yr Market share IBA 50,000 12,500,000 250 600,000 31% Respublika 3,500 5,126,578 42,000 61,518,936 13% Azerdemiryol 1,666.67 2,375,000 20,000 28,500,000 6% Bank Standard Bank 10,416.67 2,083,333.33 1,25,000 25,000,000 5% Bank of Baku 2,082.00 1,780,116 24,984 21,361,392 4% Unibank 2,083.33 607,486.17 25,000 7,289,834 2% AtaBank 1,000 1,000,000 12,000 12,000,000 2% Microfinance Bank 3,500 700000 42,000 8,400,000 2% Mugan Bank 4,000 800,000 48,000 9,600,000 2% ParaBank 771.83 399,788.83 9,262 4,797,466 1% Nikoil Bank 1,000 200,000 12,000 2,400,000 0% YapiKredit Bank 377.25 50,000 4,527 600,000 0% Other banks 50,000 12,500,000 250 600,000 31% Total 481,467,628 Source: Data estimates based on company interviews. Some of these banks are payers for more than 10 MTOs, but Western Union, Contact, Unistream, Migom and FastMail are the most active in the country, followed by MoneyGram with a smaller presence. The perception among banks is that competition is relatively saturated but there is still room to expand and attract new customers. Western Union dominates the market, with over 35% of inbound transfers. Although IBA controls a significant sector of the market, banks compare themselves against the rest of competitor banks in the industry. For example, Bank of Baku estimates that Standard Bank is the leader in payments because of its strong relationships with an international bank in Russia. According to company executives, the Bank of Baku is estimated to occupy 5% of the inbound market representing an increase from 2% in December 2006 after it began a marketing campaign to attract customers. Competition is even more complicated in Azerbaijan because loyalty to specific banks is low. Customers easily change where they pick up their money transfer. Bank of Baku s advantages are that it has a high percentage of branches outside the city and it offers promotional profit-sharing schemes on remittances. At Mugan Bank, company authorities expressed that banks do not disclose their numbers related to remittances, so there is no general sense of the market. However, in its work with the various MTOs, Migom is Mugan Bank s main partner in transfers from Russia. It also works closely with Contact on Russian transfers and with Western Union on transfers from other parts of the world. ParaBank is focusing on its competitive advantage by adding new systems to its existing services. It hopes to add Migom, PrivatMoney and ExpressMoney shortly. Moreover, it has made an agreement to provide Western Union services at over 2000 post offices throughout the country. In addition, it will 209

soon offer Contact at the post office locations. It is also seeking an agreement with Western Union to be the only bank to grant subagent contracts to financial institutions that do not have existing Western Union contracts. Atabank is improving its technology and services, but is not doing anything particular towards remittance recipients. Meanwhile, AzerDemiryolBank also sees itself as one of the top five payers of remittances in Azerbaijan. Through this bank, account to account transfers are very popular. It tries to offer lotteries and other incentives to attract customers, but so far, nothing has been focused on remittance recipients. Bank Respublika receives the highest volume from Western Union, then Migom, then Contact. It sees itself as fifth or sixth in money transfer payments behind IBA (ahead because of the number of branches), Standard Bank, and Unibank (speedier transactions). Bank Standard occupies 40% of the remittances market through the four money transfer systems that it provides. The bank offers promotional campaigns jointly with the MTOs to attract customers. Furthermore, its main advantage is customer service. Company executives expressed that there is overall consumer confidence in Standard Bank. Unibank, one of the largest and more innovative banks in the country, factors money transfer services when opening new branches. Its strategy has been to increase the number of MTOs. In fact, the bank is currently processing three more money transfer contracts with PrivatMoney, Leader and Travelex. Azerigaz, on the other hand, is of the opinion that the more systems, the more complications. Moreover, the services at Azerigaz are among the most expensive in the banking sector. The bank is aware that remittances do not play an important role in their bank. It tries to reach out to corporate customers more than retail customers. Opening branches might improve its competitive advantages, but opening branches in the regions is inefficient. The Microfinance bank is an innovative financial institution that has targeted customers in order to increase its volume. However, this institution is not concerned with the revenue base but with the expansion of its client base, and therefore aims at attracting clients into the bank and markets less on actual transfer payments. 210

Table 12: Market Share Composition between Banks and MTOs in Azerbaijan Financial Institution Western Union FastMail Contact MIGOM Etc. Yapi Credit MoneyGram Bank of Baku X X X Travelex, ExpressMoney Mugan Bank X X X X Travelex, Leader, QuickMoney Xalq Bank X X ExpressMoney, ParaBank X X X AtaBank X X X X PrivatMoney, Travelex AzerDemiryol Bank X X X X Travelex Respublika X X X X ExpressMoney, Travelex, PrivateMoney Bank Standard X X X X Unibank X X X X ExpressMoney, Faster AzerigazBank X X Microfinance Bank X X Source: Data estimates based on company interviews. Georgia Remittance payments in Georgia exhibit a similar trend to Azerbaijan because competition is constrained by the strong presence of the Bank of Georgia, which is the largest bank in the country. The remaining banks compete to attract flows among each other but face a large constraint from the monopoly role that Bank of Georgia plays. In terms of MTO presence, one quarter of payments originate from Western Union branches followed by Anelik and MoneyGram and then other companies with market shares below five percent. Table 13: Transfers of remittances by banking institutions in Georgia Monthly Transactions Monthly Volume Annual Transactions Annual Volumes Market share Rico Credit 2,700 540,000 32,400 6,480,000 1% TBB 1,371 274,167 16,450 3,290,000 1% Bank of Georgia 111,111 33,333,333 1,333,333 400,000,000 75% TBC Bank 2,900 700,000 34,800 8,400,000 2% VTB Georgia 3,499 1,288,165 41,984 15,457,975 3% Cartu Bank 2,765 2,212,000 33,180 26,544,000 5% Standard Bank 750 170,000 9,000 2,040,000 0% Basisbank 1,407 1,000,000 16,884 12,000,000 2% Other 25,000 5,000,000 300,000 60,000,000 11% Total 151,503 44,517,665 1,818,031 534,211,975 Source: Data estimates based on company interviews. 211

There is a general perception that the market is growing, with over 80% of the turnover from Russia. The Bank of Georgia offers transfers through Western Union, Contact, and Anelik. As a direct agent of Western Union and Anelik, it grants subcontracts out to other banking institutions. Additionally, the Bank of Georgia has an extensive branch system, with 70 in Tbilisi and over 30 outside of the capital. TBC is one of the main competitors of the Bank of Georgia. TBC is the other direct agent of Western Union in Georgia and has with two subagents. TBC is one of the two largest players in the financial system and offers all of its services online. TBC identifies its advantage in the domestic market as its exclusive affiliation with Western Union. People s Bank on the other hand offers many different MTOs to make payments and is located in rural areas throughout the country because of its extensive role in paying pensions. Republic Bank offers transfers via Western Union, Travelex and Anelik with Western Union receiving the highest volume of transfers. Bank authorities identify MoneyGram as the main competition of these systems. Republic is looking to become a primary agent of Western Union in order to receive full commission amounts and be able to grant sub-contracts. The exclusivity clause with WU is a problem for subagents because of the shared commissions, which means a lower cut for subagents. Other competitors, such as VTB, are in the process of developing their own transfer system. VTB has also made efforts to improve customer service and attract new clients because of strong competition. For Cartu Bank, with 5-7% of the market, remittances are a very seasonal business. Volumes increase substantially between March and June because this is when the greens business increases. Moreover, Cartu Bank specifically reaches out to small business owners that send money from Russia. It currently does not focus its efforts on retail banking, and bank executives see remittances as a non-banking product. Similarly, Bank Standard acknowledges that it occupies only a small share of the market. It is comfortable as a sub-agent of TBC, but does not receive as high of a commission as with other MTOs. Also, there is a sense that MoneyGram is not as popular in Georgia, but that it is cheaper than Western Union. Other competitors among banking institutions include MFIs such as RicoCredit and TBB. These businesses offer specific competitive advantages. In the case of RicoCredit, 24-hour a day service is a major incentive to pick up a transfer. TBB on the other hand offers a variety of other convenient services at their branches such as bill pay and a loan investment scheme to attract small investors. Table 14: Distribution of Transfers by MTO in Georgia Western Union 26 MoneyGram 7 Anelik 16 Caucasus Express 1 Other 51 212

Table 15: Market Share Composition between Banks and MTOs in Georgia Financial Institution Western Anelik Contact Unistream Etc. Union Bank of Georgia Agent Agent X TBC Agent Republic Bank Sub-agent X Travelex VTB Georgia X X X MoneyTrain Cartu Agent X X QuickPost, ExpressMoney, IntelExpress Bank Standard X X Israeli transfers Basis Bank X X ExpressMoney Source: Data estimates based on company interviews. Moldova Unlike the previously reviewed countries, payment of remittances to Moldova exhibits a more competitive landscape. All banks in Moldova are paying remittances, although their participation in the market is more evenly distributed with some exceptions among the largest banks. However, the payments are distributed among the majority of banks and nearly correspond to their size. As in the other two countries, Western Union is the primary partner remitting the most volume to Moldova. Other competitors include Anelik, Migom, Unistream and ImpexBank. Table 16: Transfers of remittances by banking institutions in Moldova Moldova Monthly Transactions Monthly Volume Annual Transactions Annual Volumes Market share Moldova- Agroindbank 8,200 3,916,667 100,000 47,000,000 8% Banca de Economii 10,000 4,000,000 120,000 48,000,000 8% Victoriabank 25,000 12,500,000 300,000 150,000,000 24% Moldindconbank 3,500 1,575,000 42,000 18,900,000 3% Mobiasbanca 9,500 5,000,000 120,000 60,000,000 10% Eximbank 6,300 3,150,000 75,600 37,800,000 6% Banca Sociala 20,000 10,000,000 240,000 120,000,000 19% Fincombank 5,000 2,500,000 60,000 30,000,000 5% BCR. Chisinau 15,750 7,875,000 189,000 94,500,000 15% Unibank 1,200 70,000 14,400 840,000 0% Universalbank 688 26,829 8,250 3,300,000 1% EuroCreditBank 2,400 840,000 28,800 10,080,000 2% Other 1,000 500,000 12,000 6,000,000 1% Source: Data estimates based on company interviews. 213

The money transfer market in Moldova exhibits a competitive context not only because there are more than ten MTOs actively remitting, but because unlike the other two countries studied in this report, there is greater geographic distribution of inflows. This situation in turn makes competition varied. For example, Russian MTOs offer less expensive services than Western Union, which is generally perceived as expensive, but its presence is strong because it also serves other corridors, such as from Italy and Spain. One strong competitor in the market is Victoria Bank. It identifies itself as third place in remittance payments after Agroindcon and Banca de Economii. EximBank claims to occupy between 5 and 7% of the remittance payment market. It cooperates with eleven money transfer systems, but overall prefers to focus on larger transactions as opposed to small worker remittances. EnergBank has about 15% of the market share. It understands that customers think that Western Union is expensive and is therefore looking to increase the number of MTO partners to reduce costs for transactions outside of the Russia market. It has been looking for partners in Europe, but European banks are not interested because of EnergBank s exclusivity agreement with Western Union. Moreover, like many other banks this institution seeks to engage in bank to bank transactions as much as possible. Banca Sociala sees itself as fifth in the money transfer market, but it has struggled to maintain that position since Italian banks bought Mobias Bank and other banks were acquired. Universal Bank identifies Western Union as the leader in money transfers, but bank executives say that the role of other competitors is changing due to price decreases. Universal Bank paid US$41m in 2006, but has seen its share decline partly due to the role of subagent networks. According to the management at Universal Bank, there is no aggressive competition in the banking sector; rather banks are concerned with ensuring customer attention and loyalty. To distinguish itself, Moldindcom Bank offers the advantages of exclusive transfer systems from Italy, Turkey, Greece and Portugal. Unibank perceives a high level of competition. It tries to offer bank services to recipients in order to differentiate itself from other banks. Similarly, FinCom Bank strives to incorporate more recipients as savings account holders. It also tries to distinguish itself by offering money transfers from more systems. 214