By Justin Grensing
The growth is driven in large part by capital flows to low- and middle-income countries (LMICs), which saw international remittances reach record levels in 2018, according to the World Bank's most recent Migration and Development Brief.3 The Bank estimated that officially recorded remittances to developing countries reached $528 billion last year, a 10.8 percent increase over 2017's record high of $483 billion.4 When international remittances to high-income countries are included, the total grew from $633 billion in 2017 to $689 billion in 2018.5 To put the 2018 total into perspective, that's slightly larger than Saudi Arabia's 2017 GDP.6
These amounts are large from an absolute value sense, but international remittances also make up a significant percentage of developing nations’ funding. These capital flows provide more income for many nations than more structured forms such as foreign direct investment (FDI) or official development assistance (ODA).7
Despite the drop between 2015 and 2016, international remittances have been growing long-term, and are less volatile than ODA or FDI.8 They contribute to the economies and well-being of developing nations. For some nations they can represent anywhere from a quarter to over a third of GDP—for example, in Tonga (35.9 percent), Kyrgyz Republic (35.1 percent), Tajikistan (32.2 percent), Nepal (30.1 percent), and Haiti (26.5 percent).9
To some observers, the cost of sending international remittances across borders is too high.10 The global average cost of sending $200 was roughly seven percent in the first quarter of 2019, according to the World Bank,11 which is well above the organization’s long-term target of three percent.12 Some regions see costs much higher than this average. In parts of Africa, and on small islands in the Pacific, the rate is greater than 10 percent. While these fees are significant, the overall trend in the cost of sending international remittances has been on a slow and steady downward trend since peaking just over nine percent in 2011.13
The institution facilitating the international remittance is important to the cost, with banks charging 11 percent on average and post offices charging over seven percent. Part of the cost for post offices includes a premium based on an exclusive partnership with a money transfer operator. This premium can be up to four percent, with a global average of 1.5 percent.14
International remittances, like any international payments, open the institutions facilitating the transfers to the risk of non-compliance with anti-money laundering/combating the funding of terrorism (AML/CFT) regulations. The U.S. Government Accountability Office (GAO) has found that money-laundering-related risks have contributed to the closure of bank branches in the Southwest U.S.15 The GAO has also found that money transmitters sending remittances to fragile countries have lost bank accounts.16 Experts looking to further drive down the costs of international remittances have pushed for greater consistency in regulations to help reduce the administrative burdens—and resulting costs—of enforcing AML/CFT requirements.
The high-cost of cross-border financial transactions, combined with the growing value of aggregate international remittances, has opened up opportunities for companies hoping to leverage alternative payment technologies.
An example is cryptocurrency, which uses blockchain to ensure the security of transactions while bypassing traditional banks and the associated transaction fees. According to an article for Banking Technology by FinTech Futures: "The scope of blockchain for remittance is increasing in emerging markets, which are characterized by low banking penetration, strong demand for financial services, high levels of mobile penetration, and a less-developed financial infrastructure."17
International remittances are closely tied to labor markets—both in the country from which the funds are sent and the country where received. The prospect of remittances can reduce the labor supply in the receiving country.18 But the economies that provide the source of remittances often see a boost in their labor pool.
The U.S. is the largest source of remittances globally, providing nearly $150 billion in remittances in 2017.19 The Bureau of Labor Statistics reported that there were 27.4 million foreign-born persons in the U.S. labor force that year, making up 17.1 percent of the total workforce.20 The ability to send money to family and loved ones in the home country is a major reason for cross-border migration. As the World Bank explains, migrants not only want to make money in a country like the United States, Saudi Arabia or Russia, they also want to send it back home. If they can't do this, they might choose to simply stay in their home country to find work or pursue opportunities in a different nation with fewer restrictions on remittances.21 Even if international remittances are not formally hindered in any way by the host country, as the transfer costs of sending that money back home grow, the value of doing so is eroded. This has the potential to reduce a significant source of labor.22,23
International remittances represent over half a trillion dollars in annual financial transfers and are a significant portion of the GDP of many developing nations. The World Bank is encouraging solutions to help make international remittances easier and less costly, including reforming the financial regulatory environment to provide greater international consistency as well as adoption of new financial technologies that can help reduce cost.
Justin Grensing is a freelance writer, MBA and attorney who covers topics ranging from finance, marketing, human resources, legal/compliance, and general business.
1. “Migration and Development Brief 28,” World Bank; https://www.knomad.org/sites/default/files/2017-12/Migration%20and%20Development%20Report%2012-14-17%20web.pdf
2. “Migration and Development Brief 30,” The World Bank; https://www.knomad.org/sites/default/files/2018-12/Migration%20and%20Development%20Brief%2030.pdf
4. “Record High Remittances Sent Globally in 2018,” The World Bank; https://www.worldbank.org/en/news/press-release/2019/04/08/record-high-remittances-sent-globally-in-2018
6. “The World Fact Book,” Central Intelligence Agency; https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
7. “Remittances, The Flywheel Of The Global Economy,” Forbes; https://www.forbes.com/sites/dantedisparte/2019/04/23/remittances-the-flywheel-of-the-global-economy/#71075a767cd0
8. “Migration and Development Brief 30,” The World Bank; https://www.knomad.org/sites/default/files/2018-12/Migration%20and%20Development%20Brief%2030.pdf
10. “Remittances, The Flywheel Of The Global Economy,” Forbes; https://www.forbes.com/sites/dantedisparte/2019/04/23/remittances-the-flywheel-of-the-global-economy/#71075a767cd0
11. “Migration and Development Brief 30,” The World Bank; https://www.knomad.org/sites/default/files/2018-12/Migration%20and%20Development%20Brief%2030.pdf
13. “Migration and Development Brief 28,” World Bank; https://www.knomad.org/sites/default/files/2017-12/Migration%20and%20Development%20Report%2012-14-17%20web.pdf
14. “Migration and Development Brief 30,” The World Bank; https://www.knomad.org/sites/default/files/2018-12/Migration%20and%20Development%20Brief%2030.pdf
15. “Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews,” U.S. Government Accountability Office; https://www.gao.gov/assets/700/690310.pdf
16. “Remittances to Fragile Countries,” U.S. Government Accountability Office; https://www.gao.gov/assets/700/690546.pdf
17. “How blockchain could change the global remittance industry,” Banking Technology; https://www.bankingtech.com/2018/06/how-blockchain-could-change-the-global-remittance-industry/
18. “The good and the bad in remittance flows,” I Z A World of Labor; https://wol.iza.org/uploads/articles/97/pdfs/good-and-bad-in-remittance-flows.pdf
19. “Remittance flows worldwide in 2017,” Pew Research Center; https://www.pewglobal.org/interactives/remittance-flows-by-country/
20. “Foreign-Born Workers: Labor Force Characteristics – 2017,” Bureau of Labor Statistics; https://www.bls.gov/news.release/pdf/forbrn.pdf
21. “Why Taxing Remittances is a Bad Idea,” Dilip Ratha; https://blogs.worldbank.org/peoplemove/why-taxing-remittances-bad-idea
23. “Remittances in the Philippines: The Impact of Remittance Taxes,” Miles K. Light and Brian Lewandowski; https://www.colorado.edu/business/sites/default/files/attached-files/western_union_tax_impact_122215.pdf