The latest advertising campaign of Banco Santander, Spain’s largest financial institution, contains a surprise. Featured in the campaign are not just the usual executives, families, and smiling mothers embracing children. Workers also appear at their construction sites, and some of them are immigrants. A new player is starting to show up in the financial picture, and he will have a leading role in the plot.


“We are looking at a business of considerable magnitude,” notes Altina Sebastián, professor of finance at the Complutense University of Madrid. In her opinion, you merely have to take a look at the figures to understand the reality: “The immigrant population has undergone enormous growth recently. It has already reached 3.5 million, or 8% of the Spanish population. The prospects for growth are that the population will reach 4.5 million immigrants by 2008, equivalent to 11% of the population,” she adds.


According to Raúl Sánchez of the European University of Madrid, “Banks clearly have a gold mine in this new line of business.” As a result, Spain’s financial institutions recently began a headlong competition aimed at not falling behind in this future competition.


A Frenetic Activity


In less than a year, Santander has purchased Latinoenvios, a remittance company that has been active in Spain for the last decade. Santander has also established a method for making payments to that company in its more than 2,500 branches. BBVA, Spain’s second-ranked bank, is developing its own network of offices, known as Dinero Express. Banesto has purchased the Cambio Sol network of outlets, with the intention of distributing its financial products to its customers. Bankinter and Bancaja have developed a high-tech service that enables remittances to be made through mobile telephones. Ceca, the association of savings banks, has developed a platform designed to capture business in the immigrant community. Meanwhile, eight savings banks have teamed up with Americo Amorim, the Portuguese entrepreneur, to create a company called BEMA, which will enter the business of immigrant banking.


That sounds overwhelming, but it’s not all. Some Spanish companies have also started to take steps to target the immigrant sector outside of Spain. During the second half of 2004, BBVA announced its purchase of Laredo Bank, a U.S. institution that serves the Hispanic population of that country. BBVA has also purchased two other companies in the U.S., Hipotecaria National and Valley Bank. BBVA’s goal is to take control of this community which already comprises 40 million people in the U.S., the same number of people as in Spain.


It is hard to remember the last time banks made such a frenzied effort to develop a new market niche. “Spanish banking has reacted quickly, and in various ways; acquiring companies with a customer base; creating networks of their own agents, and forging collaborative agreements (such as Caja Navarra’s pact with MoneyGram, and Caja España’s tie-up with Western Union),” notes Sergio Torassa, a consultant and former professor of finance at the Pompeu Fabra University.


The Move towards Normalization


When it comes to domestic developments in Spain, Raúl Sánchez sees an important catalyst: “The Spanish government’s effort to normalize the status of immigrants has created a clear line between ‘before’ and ‘after,’” he notes. A recent measure legalized the labor status of about 700,000 immigrants. Beyond those workers, an additional 400,000 family members will benefit, as relatives, by acquiring normal status.


In the past, said Sánchez, many of these citizens did not dare to go into a bank, out of fear that their condition would be discovered. They preferred to use remittances or money transfers because financial institutions do not require such strict documentation for users. However, the landscape has changed, and banks and savings institutions are well aware of that fact. The status of these immigrants has been normalized. They can now begin to generate savings, although their short-term priorities are often otherwise.


As Sergio Torassa explains, “Most of this new flow of individuals comes from countries where banks have not penetrated the market (50% of immigrants come from Morocco, Ecuador and Colombia). As a result, they are not used to using the channels of the banking system. In the short run, what they demand is a way to send money back to family members in their country of origin.”


Torassa aids, “Spanish institutions identified this need, and they began to offer a service for transferring funds via SWIFT. It was secure, and reasonably priced. However, SWIFT takes 48 hours, and the customer must actually go to the banking office. Banks soon realized that they had a strong competitor in ‘EGTs’ – companies that manage money transfers. They are popularly known as ‘remittance firms.’”


These companies specialize in the business of foreign remittances. Normally, they work through local outlets, and the whole operation takes place in only ten minutes. However, for their customers the cost is higher than that of bank transfers (where the bank charges between 10% and 15% of the actual value of the remittance). As noted above, banks have reacted by buying some of these institutions in order to get into this attractive sector.


Last year, the value of foreign remittances sent to foreign countries reached $4.2 billion. This year, the figure is expected to grow substantially, in large part because of the process of normalizing the status of immigrants. Worldwide, remittances totaled $126 billion in 2004, because of considerable increases in the outward flow to China, India, Mexico, Pakistan and the Philippines. According to the World Bank, remittances have grown by 50% since 2001.


Dealing with Compatriots


Up until now, remittance firms have counted on an important competitive advantage. “In most cases, they deal with people from their own country,” notes Sebastián. When dealing with people who live far from their homeland, it is critical to provide access to someone who shares some aspects of their experience. This approach has created a sense of loyalty among those immigrants who use these services. They welcome the social and emotional ties because they have left their families behind in their countries of origin.



According to Sebastián, “Many banks are learning the importance of this factor, and they are beginning to hire immigrants to deal with their compatriots.” The employment pages of newspapers are starting to display advertisements for financial institutions that are looking for immigrants to staff their offices. For banks, a key to future success may be to use this approach to build loyalty and confidence in their personnel.


Integrating the Various Phases


According to the experts, several stages are involved in the life cycle of a typical immigrant’s adaptation to a new country. “The financial needs of immigrants can be classified into phases that depend, among other things, on how long they have been in the country,” says Sebastián. “Clearly, during the first two years of their stay (Phase One), the major preoccupations are finding a job; acquiring ‘papers’ for legal residence; talking on the phone to family members they left behind; and sending money to their relatives. Financial remittances are the leading product, and banks have only limited room to improve their results, no matter what they do about that.”

Later on, notes Sebastián, “there is a second phase, which can coincide with the following three or four years, when the immigrant wants his family to reunite with him. And if things are going well, he will apply for some small consumer loans and perhaps move toward buying a residence, which will mean taking out a mortgage. During this period, the immigrant will get used to having a bank account and a credit card, and to dealing with office personnel, and so forth… From that point on (Phase Three, beginning with the sixth year of residence), the immigrant requires the full range of services that a bank normally offers to its customers.”

In the case of Spain, most immigrants are still in the initial phase. According to data collected in a recent analysis by Expansión, the Spanish newspaper, only 29% of immigrants are directly on a payroll. Only 9.5% have taken out a loan, and only 22% have a credit card.


These products, along with mortgages, are the stable sources of income for banks, far more than remittances. Yet they seem to be almost a secondary business for financial institutions. Most banks don’t deal with them. However, they stress that remittances are becoming merely a tool for attracting immigrants to their offices.


A Means of Building Loyalty


Some institutions now provide significant discounts when providing remittance services to their bank customers. Moreover, Fernando Silva, director of International Express, Santander’s service for immigrants, told Expansión that in the future his bank might “consider lowering the cost of remittances (now offered at a flat rate of three euros per transfer) to those customers who sign up for other products.”


Everything seems to indicate that, within a few years, sending money to one’s country of origin will be virtually free of charge. It will be merely a tool for building the loyalty of the immigrant population, as it is in the United States. In the U.S., growing competition has led to a major drop in the cost of remittances in the battle for attracting the Hispanic population, the fastest growing segment in the country. Bank of America, one of the largest U.S. banks, charges nothing for transfers from Chicago to Mexico.


According to Sánchez, the key for Spanish institutions is to study the latest trends in the United States. In that country, financial services for immigrants “have the advantage of several more years of experience than in Europe. You have to realize that there are already second-generation immigrants” in the U.S. In other words, the sons of immigrants are already native-born Americans.


In this context, BBVA is the Spanish bank best positioned to take advantage of its experience, because of the institutions it has been buying in the U.S. For example, in the mortgage loan sector, BBVA already understands the needs of immigrants as a result of its purchase of Hipotecaria Nacional, an institution that offers Mexicans financing for buying housing in their country of origin.


According to Sánchez, a key factor that explains the sudden interest of banks in immigrants is the “decline in the perception of risk” involved in serving this sector of the population. “Financial institutions are realizing that immigrants are making a better effort to pay off their debts because they have more at stake if they are unable to repay their loans.”


Advances by Country of Origin


The efforts by banks to attract this business are also supported by institutions in the immigrants’ countries of origin. “If immigrants can transfer money to their families through remittances, the money goes directly into consumption, without passing through financial institutions,” stresses Sánchez. “On the other hand, if they channel the money through a bank, it is possible for the family to have access to loans backed by those periodical transfers.”


That way, using the same money, they create a two-sided activity, which can contribute to the development of these regions. You create a multiplier effect from the money, which can be very useful for these countries, which have undeveloped financial systems. According to the Multilateral Investment Fund (MIF) of the Inter-American Bank of Development (IBD), only 10% to 20% of Latin America’s population uses banking services.


About 25 million people from Latin America and the Caribbean are living outside their homelands, and two-thirds of them make it a habit to send money back to their countries of origin. It is easy to imagine what it could mean for the financial systems of those countries if the transfers were made through banking channels. According to the MIF, Latin Americans sent more than $45 billion to their family members last year. Of this figure, almost a third involved Mexico. A large number of Mexicans are living in the United States, the source of most remittances.


An Intense Competition


Everything seems to indicate that the banks are moving along the correct path, and all indicators are favorable. However, the big remittance companies are not going to stand pat. They, too, are beginning to modify their product offerings in order to prevent the banks from stealing away their customers.


Western Union, the global leader in the remittance business, has already launched a pan-European bank, Western Union International Bank. Next year, it will use that institution to offer customers transfer services via the Internet, as well as pre-paid debit cards. Medium-term, the institution is even thinking about providing loans and bank accounts, according to the June 30 issue of Expansión.


The immigrant community seems to be the next El Dorado of the financial world. However, the competition will be intense. The keys for winning the gold medal in this competition will be quality of service, proximity to the community and intimate knowledge of the financial products that it needs.