Proactive Exchange: Integrating Immigrants into the Financial System
By Jeffrey Gangemi
It is undeniable that immigrants are a tremendous economic force, both here, in the United States, and abroad. Their enthusiastic participation in international workforces, combined with a propensity to fulfill economic niches, creates for them a role as potential market catalysts. In the United States, and in other international settings, immigrants are predominantly an “untapped” market resource in and of themselves. Investigation into the nature of immigrant culture has sparked an interesting plan of action to integrate them further into our national business model.
The worldwide remittance industry, or the business of fee-based electronic money transfers — often across international borders, is worth approximately $300 billion worldwide, according to a World Bank estimate1. Remittances sent to Latin America and the Caribbean from all parts of the world exceeded $60 billion in 2006 alone, more than that of official development assistance and foreign direct-nvestment to the same region, according to numbers from the Inter-American Development Bank (IDB)2. In the United States, 12.6 million Latin American immigrants sent home $45 billion in 2006. That’s a significant increase from about $30 billion in 2004, with the average remittance sum increasing from $240 to $300 during that timeframe.
While the United States government debates border protection tactics, the Hispanic population continues to grow at a rate faster than any other major ethnic group in the country. What’s more, the number of Hispanic-owned businesses grew almost seven times faster than the national average between 1997 and 2002, according to the U.S. Census 3. Still, mainstream institutions largely continue to ignore Hispanics and other immigrant populations as potential markets. Additionally, huge numbers of these capable entrepreneurs and workers fail to be integrated into the formal financial and credit systems.
Where most mainstream financial institutions see financial-liability, Microfinance International Corporation (MFIC), a privately owned, $2 million, 75-employee microfinance and remittance processing company based in Delaware, sees an opportunity. Interestingly, they see gains on both sides of the remittance transaction, which can traditionally cost up to 20% of the total amount of funds being sent away.
To reduce the cost of such remittance transactions for immigrant workers in the U.S. — a critical issue, considering the typical labor-to-wage ratio among the immigrants and its importance in supporting their families in the developing world —, MFIC developed ARIAS, the company’s licensable remittance processing platform. Adapted from a popular Latin American banking software, ARIAS processes remittances directly through a growing network of partner microfinance institutions, predominantly in Latin America. Perhaps best of all, the system is easy to implement; it only requires the institution to have a simple computer and an Internet connection.
To further serve their target-market, in 2004 MFIC developed Alante Financial, a group of financial service centers dedicated to offering a line of monetary services designed to bring previously unbanked and underserved immigrant populations into the mainstream financial system. Instead of considering credit history prior to granting a loan, Alante’s starter loan service uses a customer's remittance history in order to determine his/her creditworthiness. The system then reports the processed information to a credit bureau, thereby enabling customers to start building up their credit.
MFIC management believes credit scores may be the key to helping clients improve both their businesses and their personal lives. In September of 2006, Jose Douglas Miranda Chicas, co-owner of D&A Enterprises, a small business providing services such as painting and household cleaning, stepped into an Alante Financial branch for the first time. Lacking any credit history, he was granted a $500 credit builder loan, which he repaid in six months. The following month, Douglas borrowed $1,200 in the interest of purchasing a new carpet cleaner. All the while dedicating himself to his business, Douglas sends remittances ranging from $100-500 to his wife, two sons, and parents back in El Salvador. Today, Douglas’ business continues to thrive and expand – impossible without MFIC’s streamlined Alante credit services.
In the process, Douglas’ family’s life will continue to improve. Since ARIAS only requires a simple computer and an Internet connection, senders and receivers will no longer be at the mercy of big-money transfer companies. That means greater competition in an industry long dominated by entrenched industry players like Western Union and Moneygram, two highly profitable outfits occassionally accused of gouging the poor.
Of course, neither Western Union nor Moneygram are deposit-taking institutions. To this end, clients in the developing world often put money from their relatives working in the United States directly under their mattresses and floorboards. Subsequently, only a small proportion of remittances have stayed in the banking system, money that may have otherwise been used to finance local investments, help families purchase houses, or initiate business startups. MFIC hopes that by offering lower prices and utilizing community-based microfinance institutions to disburse money, they might persuade more unbanked assets present in the developing world into established and formalized financial services.
MFIC has already played a role in easing the price burden in the remittance market. In the past five years alone, the cost of remittance transactions has dropped from more than 15% of the total transaction amount to about 7%, according to Maria Jaramillo, director of the remittance project at ACCION, a large microfinance nonprofit institution based in Boston.
As Alante quickly catches on, MFIC finds itself in a position poised for growth. Thus far, Alante runs nine locations in the District of Columbia, Delaware, Maryland, and Virginia, with more than 50,000 customers to date. Presently, MFIC is preparing to launch its tenth Alante branch in Arlington, VA, and to apply for licenses allowing for the initiation of more branches in both New Jersey and Georgia.
In tune with their tradition of addressing underserved immigrant populations, MFIC is preparing to begin work with the Ethiopian and Vietnamese markets within their existing branches. While they work to grow their partner network of microfinance institutions abroad, the company has begun licensing the ARIAS technology to commercial banks, several of whom are beginning to dip their toes in the growing remittance market. This provides an extra revenue stream for MFIC as it works toward profitability, which the company expects to achieve by the end of 2007. Along the way, MFIC brings tens of thousands of immigrants into the formal credit system, all the while proving that immigrants can be both reliable borrowers as well as creative and influential entrepreneurs.
Student editor: Justin Wheeler is an undergraduate at Cornell University and a member of the Class of 2011. Aside from editing articles for the Johnson School of Management's Center for Sustainable Global Enterprise, Justin studies Communication and Applied Economics and Management. Justin hopes to pursue a career in the media or advertising worlds.
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