In a globalised world, money is rapidly becoming borderless. Heightened migration and commercial expansion on an international level have triggered a stark increase in remittance payments being sent, globally. Reports show that the bulk of remittance payments are being directed at developing countries by migrant workers. These payments ranked higher in their contribution to the recipient country’s economy than foreign aid.
In 2018, The World Bank reported that remittance sent to low and middle-income countries reached a record high of $529 billion. Although the Covid-19 pandemic initially triggered a dip in remittance payments being made, trends show that they are, once again, on the rise. While the reliance on remittance is not the all-purpose built solution for emerging economies, remitted payments have drastically increased the GDP of these countries.
In light of this, Latifa Alkhanjary, writer, Kinesis Money, shares her thoughts on how fintech is shaping the remittance industry.
What is a Remittance?
When money is sent to another party, this is referred to as a remittance or a remittance payment. Now that currency can be transacted, transferred, or sent via email, the term foreign remittance is more often invoked to describe the process of sending money to someone who resides in another county.
When transacting money, we expect that a fraction of that sum will be lost to the central banks or the institutions we are transferring money to. However, the fees incurred from remittance payments are notoriously high, as many will have noticed when trying to take out money from an ATM abroad.
The World Bank reported that in 2021, an average cost of 6.38% was deducted from a sum of money sent as a remittance. Hence, banks and Money Transfer Operators (MTOs) make a significant profit on the exchange rate used to convert one currency to another.
Whether you are a company owner or a migrant worker, fair remittance payments are crucial; not only will that increase the recipient’s fiscal spending power, but it will often serve as an emergency response fund for individuals experiencing a natural disaster or political conflict.
Fair remittance means that money can flow directly from the remitter to the recipient family member or friends, as opposed to foreign aid, which may never reach the parties in need of it.
Types of Remittance
When discussing remittance, there are two types to be aware of:
- Inward Remittance: when funds are sent domestically, from one person to another within the same country.
- Outward Remittance: when funds are sent to a bank account in another country.
Right now, outward remittance is skewed towards exploitative rates. This means that individuals sending money from their host country to the recipient’s face a transaction fee, a loss of value due to the exchange rate, and a fee relative to the speed of the transfer. This can take anywhere from under an hour to more than six days.
Remittance as Industry
Competitors in the remittance industry that can offer high-speed transfers and limits, favourable rates and no hidden fees are starting to have an edge over the renowned market-dominant, Western Union. Notably, the impact of blockchain on the remittance industry is also having a major impact.
Digital currencies like Dash, Cardano, and of course, Bitcoin, can be sent abroad for a fraction of the cost and time that traditional outlets offer. In fact, blockchain enables these transactions to happen in a peer-to-peer manner, such that intermediaries are no longer involved nor needed.
The great diaspora remitting payments to their countries of origin are likely fulfilling families or individuals in developing countries who are considered to be underbanked. Moreover, remittance payments can function as an alternative financial solution for often the poorest segments of society.
In 2017, 1.7 billion people were classifiable as ‘unbanked’ in emerging economies. This means that these individuals lack access to banking infrastructure, a mobile phone or the required government-issued ID to open a bank account.
A lack of financial inclusivity is no good for the underbanked individual nor the country’s economic system as a whole. Those who remain under or unbanked, tend to develop a general distrust of banking systems and further, a lack of participation in the country’s economy.
The Importance of Remittance
Remittance payments are, for many developing nations, a significant contributor to the economy. A staple report demonstrated that remittances equate to over 10% of the GDP of developing economies over the course of a year. These payments are highly important, not just for the country’s internal economic growth, but for global economic development as a whole.
In certain cases, remittance payments that flow directly to citizens in developing countries can function as business start-up capital. This enables the injection of funds into business infrastructure that will eventually act as a catalyst for employment opportunities, innovation, and stirred competition.
The result of start-up capital is plain to see, from the tech giants dominating Silicon Valley to the dramatic impact of Alibaba on Hangzhou, the domino effect of enterprise transforms the operation of cities. Remitted payments can therefore provide financial leverage for start-ups, paving the way for financial success.
Understanding the importance of remittance payments, mega-corporations should take care to manage the extent they are capitalising on an individual’s hard-earned cash. Coincidentally, the recent partnership of Monzo and Wise is indicative of fintech start-ups seeking to benefit from the explosive capital opportunity presented by the remittance industry.
Thankfully, there is a much safer, efficient and transparent alternative to this. System participants are able to send fiat currencies or digital cryptocurrency assets. In turbulent times of high-level inflation and economic instability, money parked in precious metals is becoming increasingly more appealing for those in emerging markets.
As for the remittance industry as a whole, the diversification of providers can be a positive aspect for individuals. More competition means that companies will have no choice but to do better in regard to their services, rates, and product offerings. It may be this rivalry that leads, eventually, to fair remittance policies for all.