School fees, medical expenses, weddings, a new refrigerator – there are countless reasons why millions of migrants send money back home to their families. For many families in developing countries, remittances from overseas are a reliable and steady source of income that help them meet the basic needs of daily living. According to 2017 World Bank estimates, remittances to developing countries reached a record high of $466 billion – more than the total of official development assistance provided globally.
However, sending money across borders is not cheap. The global average cost of sending a remittance is 7 percent of the total amount sent. This is still far off from the U.N.’s sustainable development goals to reduce, by 2030, the average cost to 3 percent and the maximum cost to 5 percent.
But why are remittances so expensive?
There are several reasons, including: underdeveloped financial infrastructure, limited competition, regulatory obstacles and lack of access to the banking sector. Often, remittance fees are not transparent or properly reported.
The global community is now looking to emerging financial technologies or “fintechs” – such as distributed ledger technology – to help reduce the cost of sending remittances, while still meeting customer due diligence requirements. Although in their infancy, these technologies have the potential to significantly reshape the global economy.
Innovative fintech startups are also using online and mobile platforms to replace the traditional middlemen – bank branches or agent operations – making it cheaper to send money abroad and increase the amount sent home to families.
Even small decreases in remittance fees will have a significant impact on migrants’ families. If a Bangladeshi father working in Dubai could pay one percentage point less for sending money back home, the annual savings would be more than enough to pay for a new school uniform for his daughter.
Digital technologies can also help speed up the money transfer process. Countries including India or Thailand have upgraded their financial infrastructure to support “faster payment” services, which means migrant families can receive their funds almost instantaneously. This can be life-changing for migrants whose families experience emergencies; for instance, an Indian family living in Singapore could instantly settle the bill for their mother’s urgent surgery back home or provide much-needed funds following a natural disaster.
Sending and receiving remittances through digital channels can also improve women’s access to financial services. According to the latest World Bank Group’s Findex data, the gender gap in mobile money accounts is much narrower than traditional bank accounts. Many women in low-income countries rely on male relatives or other male members of the community to collect their money from banks because they either don’t have time – often burdened with domestic duties – or it is not safe to visit a brick and mortar bank. Offering the same services digitally can remove those barriers and make it possible for women to have ownership of their money.
These digital technologies can also be used to address the “de-risking” phenomenon, which can affect families who rely on remittances.
Currently, all cross-border payments depend on a number of interlinked banking relationships. To get money from the United Kingdom to Mozambique, for example, your bank in the United Kingdom (the correspondent bank) needs to have a relationship with a local bank or money transfer operator in Mozambique. However, global banks sometimes terminate their relationships with remittance companies and local banks in certain regions, or “de-risk” them. With data gleaned from a recent World Bank report, it’s clear the impact of de-risking on money transfer operator (MTO) services has been acute – many of them reported that there is only one bank willing to do business with them and that the costs of compliance have increased. MTOs tend to be the first financial access point for people who send and receive remittances, leaving whole cities, regions or countries unable to access their funds consistently, or safely.
A blockchain-based settlement network for cross-currency funds would help improve the surveillance of transactions, lowering the risk of providing services to MTOs in the eyes of correspondent banks and decreasing the risk that certain markets will be left out of the regulated financial system.
DLT can improve customer due diligence that banks and other financial institutions must undertake when receiving funds. Making information on fund origin, customers, and individual remittance transactions more easily accessible and verifiable to correspondent banks could reduce the perception among financial institutions that MTOs are a high-risk business.
Countries are eager to harness fintech’s potential benefits of lower costs and efficiency gains. Just imagine, if these new technologies could help reduce the price of sending remittances by 5 percent, recipients could receive over $16 billion more each year.
The global community is working to develop inclusive solutions for cross-border transfers. International organizations, the fintech industry, academic communities and governments are looking at how technology can help address development challenges to end extreme poverty and boost shared prosperity.
The remittance industry needs disruption, and new technologies can make it happen. If sending money across the world becomes cheap, safe, fast and easy, the unleashed potential of millions of migrant families will bring us one step closer to a more inclusive global economy.
Ceyla Pazarbasioglu is senior director for the Finance, Competitiveness, and Innovation Global Practice, World Bank Group, since Feb 1, 2017. Prior to taking on this role, she was a senior adviser in the Bank's Finance and Markets Global Practice. Previously Ceyla worked as deputy director at the Monetary and Capital Markets Department of the IMF. Ceyla holds a PhD in economics from Georgetown University and was a visiting scholar at Princeton University. She is a certified Securities and Financial Derivatives Representative.
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