Remittance payments are payments that are sent from one party to another and in modern times is used as the term for money sent back by migrants living and working abroad to their relatives back in their home countries. This money is generally sent in the senders host countries currency and is then required to be converted back to the recipients currency. Unlike local payments, remittance payments incur additional costs to transfer due to the inclusion of collection, exchange and pay out processes that are involved to conduct the transfer.
These costs are passed through to the consumer in a number of ways including increasing the pay in amount, decreasing the payout amount or including these fees in the provided exchange rates.
Remittance payments are also strictly regulated which results in either restrictions to payout to specific countries or increased delays to complete the payments. As an example of this, the recent Ukraine/Russia war has resulted in significant challenges for migrant workers in these countries to send money back home. This has prompted people to turn to the black market in an attempt to facilitate these payments and has even extended to senior government members as is evident with North Korea where the government under financial sanctions has turned to using its diplomats and criminal enterprises to smuggle money into the country.
Remittance costs vary depending on several factors, including the service provider, transfer method, destination country, and the amount being sent. The restriction of payment methods in certain jurisdictions also means that the market is limited and pricing is often not controlled by the payments entities. Most regulations also require that every transaction requires a full due diligence check to be conducted on the sender, receiver, and payment routing – although automated these often add a percentage cost to the transaction.
High remittance costs can pose challenges for individuals and families relying on these funds as a significant portion may be deducted as fees. This situation is especially impactful for low-income individuals and those living in developing countries. Globally, however, efforts are being made to bring down remittance costs. The United Nations has a goal to reduce remittance costs to 3% by 2030. Initiatives such as the G20’s Global Partnership for Financial Inclusion (GPFI) and the World Bank’s Remittance Prices Worldwide database strive to promote transparency and competition in the remittance market.
The rise of financial technology (FinTech) has introduced innovative solutions for remittance services. Mobile payment platforms and digital wallets offer lower fees and faster transfers compared to traditional methods. These advancements enhance financial inclusion and empower individuals with more affordable options for sending and receiving funds.
To mitigate remittance costs, individuals should compare different service providers, consider online platforms, and explore options with competitive fees and exchange rates. Additionally, governments and regulators play a crucial role in promoting competition and implementing policies that support affordable remittance services.
Transparency in remittances is essential as it empowers individuals to make informed decisions and enables them to seek out the most cost-effective options for sending money. When sending funds to their families or partners abroad, individuals should have access to accurate and easily understandable information about fees and any additional charges.
Greater transparency in remittance services fosters healthy competition among service providers, as it allows consumers to compare options and select the most affordable and reliable ones. It encourages providers to offer competitive pricing, lower fees, and better exchange rates to attract customers.
Transparency plays a vital role in detecting and preventing fraudulent activities (including money laundering and terrorist financing). Clear and accessible information enables authorities to monitor transactions effectively and identify suspicious patterns, contributing to the overall integrity and security of the remittance system. The transparency of the financial transaction also ensures the protection of the sender, receiver, payment system and financial ecosystems.
