Business collides with politics as lenders strive to grab more international remittance revenue just as lawmakers grapple with how to stop illegal immigration.

The 33 million immigrants in the United States represent at once an opportunity and a problem, as fully one-third are “illegal” or “undocumented.” Yet, all represent a nearly untapped market for financial institutions here.

Estimates peg the piece of remittance business now going through U.S. banks at a measly 3 percent. The clear leader is Western Union with a 20 percent share.

“We used to talk about the future, but this purchasing power is here today,” declared Daniel Ayala, senior vice president – group head, Wells Fargo Global Remittance Services, himself a South American émigré.

“There is a huge opportunity to reach a market that historically has not been tapped,” said Ayala, noting that the foreign-born population in the United States is largely in its “prime-buying years” (homes, cars, tuition, building families).

“These numbers are bound to increase, and with the aging population in the U.S. we need more of them to fill jobs here. It’s going to be a more competitive marketplace,” the Wells executive predicted.

Of particular interest are remittances — the practice of sending money (usually cash) across borders, typically by immigrants in the U.S. to their families back home.

Remittances represent the potential for a high product cross-sell (4.7 per customer at Wells). But “there’s limited awareness that banks offer remittances. People think of the grocery store first,” Ayala says, noting that lack of a common U.S. bank consumer remittance product has confused the marketplace.

Over-engineering

“(Bankers) are very smart people (but) we over-engineered the solutions. When banks decided to go into this market everybody came up with a different solution to the product and that confuses the segment. (Remitters) see that it’s so complex they just decide to do what they always have done, which is to go back to the local grocery store to send money,” the executive said.

“The road to remittances is littered with skeletons,” commented James Joaquin, CEO of XOOM, a San Francisco technology firm that assists banks in setting up remittance operations.

Putting further shape to the size of the remittance market, Joaquin said there will be some $345 billion worth in 2008, going to destinations including: Mexico, India, China and the Philippines.

Ayala noted that 90 percent of remittances are cash-to-cash transactions, but banks only offer account-to-account solutions. To “win this game” banks must focus on account-to-cash, because most of the deliveries in remittances are made in cash, he said.

Alice Perez, vice-president and director of multicultural banking, USBank, the sixth-largest financial institution in the U.S., spelled out where remittances made at her institution go: a third within the country, 15 percent to African nations, 15 percent to Mexico, and 3 percent to the Philippines; the remainder scattered throughout the rest of the world.

Perez said that profits are not necessarily in the remittance business but in the new customers it produces for financial institutions.

“If we turn 30 percent of these cash transactions into accounts, we’ll be successful,” said Perez, sidestepping the political ramifications attendant in chasing such returns.

“It’s not our job to determine if someone is legal or not, if they’re here they should have access to services,” she believes.

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