For a long time, economists tended to overlook these dollars, but recently they’ve come to appreciate their importance. Remittances, which totaled $429 billion in 2016, are worth three times as much as all the foreign aid doled out by governments worldwide, and it’s likely the money is more effective dollar-for-dollar. Unlike aid, which is notorious for passing through corrupt middlemen and inefficient bureaucracies, remittances go directly to recipients, where they pay for schooling, medical expenses, and new fridge-freezers. In some poor countries, like Somalia or Haiti, remittances make up more than a quarter of national income. And statistics show that remittances tend to hold up even in times of crisis. After the financial crash of 2007-2008, the intra-family flows continued even as private capital ground to a halt.
But that’s not to say that remittances couldn’t be more effective. New startups are aiming to do for international payments what Venmo and others have done for domestic transactions: make transfers mobile, painless, and social. “In 5 years or 10 years, the whole idea of a remittance or cross-border payments will be gone, just like we don’t have cross-border email, or cross-border web browsing. It’s just the internet,” says Jeremy Allaire, CEO and founder of Circle, a blockchain-based service that’s working on the remittance market.
Currently, it’s expensive to send money overseas, which is especially damaging for the immigrants sending small savings home to the developing world. The World Bank says transaction fees average 7.45% globally, and, in many remittance corridors, they’re a lot higher than that. Sending money to Africa from the U.S. or Europe sometimes costs an extra 15%, and within Africa, the fees can be stupendous. To transfer 33,000 Angola Kwanza (about $200) from Luanda to Namibia costs about $50, according to the World Bank’s price database.
But in the last 10 years the average global fees have fallen by about 2.5%, which equates to about $90 billion in extra love-dollars, the World Bank’s Marco Nicoli says. The D.C. institution works to bring more transparency to remittance pricing (the database lets you compare providers), and it lends money to poorer countries to beef up their payment systems. A further 5% drop in fees would mean $16 billion in extra annual income for recipients, it says.
In his speech, Ratha suggests several reforms, including loosening money laundering regulations on amounts lower than $1,000, ending monopoly arrangements between post offices (which often disburse remittances) and money transfer companies, and creating a new low-cost remittance system funded by philanthropy. But new technology and the boldness of an emerging group of money transfer startups–like Circle, and others like Abra, Transferwise, and WorldRemit–could also have a profound impact. The combination of the internet, mobile phones, bitcoin, and the blockchain could dramatically reduce the cost of sending money internationally, say experts. That is, if the startups are allowed to grow unimpeded by unnecessary regulation and special interest griping, including from banks and exchange companies that currently gain handsomely from the fees and inefficiency in the space.
The High Costs Of Sending Cash
There are several reasons why the cost of sending money cross-border is currently so high. Nicoli notes that most payments start and finish as cash, which means that human agents need to be employed to receive and disburse the money, raising the price for everyone.
Bill Barhydt, founder and CEO of Abra, points to all the “hands in the pie” in traditional transactions, like those orchestrated by market leaders like Western Union, MoneyGram, and RIA. Remittances can be initiated via an agent (like those affiliated with Western Union or MoneyGram), a bank branch, a post office, the internet, and via mobile. So there’s someone at the cash window taking the money. There’s the agent’s bank. There are “correspondent banks” on both sides of a national border. There’s the bank for the agent in the receiving country. There’s the disbursing agent. There’s Western Union or MoneyGram itself.