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Remarkable Facts about Remittances
Monday, December 11, 2017 6:45 AM

David England, Senior Research Analyst, Cornerstone Credit Union League

I recently came across some statistics that impressed me, and I thought you might like to learn what I learned about the size of the market for remittances.

To clarify, I am defining remittance as a sum of money sent, especially by mail or wire transfer, in payment for goods or services or as a gift. You have to show ID when sending a remittance, but you do not have to show immigration status. You have to send cash for cash, no wire transfers from sender’s account to recipient’s account like a Western Union (and others) transaction. You give the cash to the company you are using, and your recipient will receive cash from the company they are using. There is a fee, a high fee, usually a percentage of the amount sent. 

As of mid-year 2017, 132 credit unions in Arkansas, Oklahoma, and Texas, or 23 percent of all credit unions in our tristate area, have originated approximately 42,000 international remittances.

Two years ago, in 2015, $133,552,000,000 in remittances was sent to the United States from other countries. Worldwide, an estimated 582 billion U.S. dollars was sent by immigrants to relatives in their home countries in 2015.

Countries that receive the most remittances from the U.S.
Mexico tops the list of money sent outside the country, with $25.68 billion recorded by the World Bank in 2015. Mexico is followed by China ($16.23 billion), India ($11.74 billion), the Philippines ($9.65 billion), and Vietnam ($7.32 billion).

Despite this, Mexican immigrants send, on average, $4,178 per person each year to Mexico. This is less than the average amount sent to any of the other top remittance recipient countries, with the second highest, China, sitting at $11,025 per person per year.

In some poor countries, like Somalia or Haiti, remittances make up more than a quarter of national income.

Battles for the Fees from This $400+ Billion Business Are On
A new class of startups is using bitcoin and the blockchain to drastically lower fees as they try to grab a share of the remittance market from old competitors like Western Union.

New startups might do for international payments what Venmo (and others) have done for domestic transactions: make transfers mobile, painless, and social. Some argue that in five years or 10 years, the whole idea of a remittance or cross-border payments will be gone, just as we don’t have cross-border email or cross-border web browsing. It’s just the Internet.

Yes, this is big business. Until recently, economists tended to overlook these dollars. Remittances 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 who pay for schooling, medical expenses, and new fridge-freezers. 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.

Costs Are High
There are several reasons why the cost of sending money cross-border is currently so high. Most payments start and finish as cash, which means human agents need to be employed to receive and disburse the money, raising the price for everyone. Remittances can be initiated via an agent (like those affiliated with Western Union or MoneyGram), a credit union, 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 credit union. There are “correspondent institutions” 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.

Banks and transfer companies are now required to identify customers and report transactions in excess of $10,000. But the compliance burden also makes it difficult for new entrants to eat into its business.

Criminal networks and entities force you to keep them out of your infrastructure. There’s a pretty high barrier to entry because of the risks associated with the market. 

The promise of bitcoin and blockchain-based startups is that they dis-intermediate corresponding banks from the settlement process. This will increase competition and reduce costs to customers.

Who Wins the War?
Many agree that this is a high-touch business (even as high tech might be disrupting it). Credit unions provide this needed high touch and high tech, along with liquidity and brand trust. I have no idea who will win the war. Competition and technology will likely continue to drive costs down. The likely winners are those who invest in measuring the market for remittances, understanding the needs of remittance users (senders and recipients), and among credit unions strengthening their relationships with members.