Reducing The Costs of Remittances

Remittances, the money sent home by migrants working abroad, have become a fundamental financial lifeline for emerging markets across the planet.

In 2023, the volume of global remittances reached a staggering $890 billion, significantly outpacing the current amount of foreign direct investment and official development assistance coming in. These payments now play an important role in supporting millions of families while also helping to stabilize economies in developing nations.

With international economic leaders meeting at the 2024 IMF-World Bank discussions, remittances and their impact will be a core component of their discussions. Their increasing importance to the global financial system calls for urgent attention, especially as countries look at ways to reduce the high costs of sending money across borders.

The Fundamental Role of Remittances in Emerging Markets

Remittances are a financial powerhouse for emerging markets, with $669 billion flowing into these economies in 2023 alone.

For many countries, they are more than just supplementary income—they’re lifelines. In nations like Tonga, Tajikistan, and Lebanon, remittances make up over 30% of their GDP, directly highlighting just how much these economies depend on funds sent by their citizens abroad.

Beyond providing basic household support, remittances play an essential role in helping to shore up national finances. They help countries fill gaps in current accounts and reduce fiscal deficits, especially for those with limited access to international capital markets.

Having a steady stream of capital coming in from overseas can provide some much-needed stability to developing economies under strain.

Macroeconomic Factors Influencing Remittance Flows

Remittance flows are closely tied to the economic health of more advanced economies like the U.S. and Europe.

When these regions experience strong GDP growth and healthy labor markets, migrant workers tend to send more money home, boosting remittance levels. However, when a recession hits, or inflation rises, the story changes completely.

Economic slowdowns in these countries often lead to lower incomes for migrants, which means less money is sent back to their families. During those tough times, remittance flows can shrink significantly, impacting both individual households and entire economies.

In fact, remittances now make up one-sixth of all global cross-border payments, illustrating just how vital they are to the greater global financial system.

The High Cost of Sending Remittances

Sending money across borders comes with a steep price tag for many migrants. On average, the cost of sending remittances globally is 6.35% of the total amount, which is well above the World Bank’s target of 3% and the G20’s goal of 5%, creating a significant burden for those who rely on these transfers.

The cost varies widely depending on the region, and in some cases, especially in certain cross-border corridors, fees can climb as high as 20% of the remitted amount. So, for every $100 that’s sent, a migrant may be spending as much as $20 on transaction fees alone, which is a significant loss for families already facing severe financial constraints.

These high fees severely limit the amount of money migrant households can actually use. Instead of saving or reinvesting in local economies, they lose a substantial portion of their income to transaction costs.

Reducing these costs isn’t just about convenience—it’s essential for the financial well-being of millions of households that depend on remittances as a key source of income.

Efforts to Reduce Remittance Costs

Reducing the already high cost of remittances has become a global priority for policymakers. Both the World Bank and G20 have set ambitious targets to lower fees, aiming for a 3% cost as part of sustainable development goals and a 5% cap within G20 initiatives—yet, meeting these goals still requires significant action to be taken.

Several existing models already show promise in helping to cut down on these costs. For example, Wise (formerly TransferWise) has successfully reduced fees by integrating nonbank services into the UK’s Faster Payments System. The move has directly demonstrated that including new participants in the payment ecosystem can drive down transaction costs.

Project Nexus is another innovative effort designed to connect domestic payment systems across borders. Through regulatory and technological alignment, Project Nexus aims to enhance interoperability between countries, enabling faster and more cost-effective cross-border transfers.

Fintech companies and the growing digitalization of remittance channels are also key to reducing these costs. Mobile payments and digital remittance platforms tend to offer much lower fees than traditional banks, providing more affordable options for migrant workers.

On top of this, retail digital assets, such as stablecoins or central bank digital currencies, could further decrease costs by streamlining the transfer process and minimizing currency conversion fees.

These growing technological advances represent real opportunities to ease the financial burden being placed on millions of migrant families.

The Current Barriers and Challenges to Cost Reduction

Despite efforts to lower remittance costs worldwide, some significant barriers still remain in place that are hampering progress. One key issue is that remittances often get overlooked in the broader development of cross-border payment systems.

Because these systems are typically built with domestic transactions in mind, remittance needs end up as an afterthought, which keeps fees high. Alongside this, an array of regulatory and technological barriers are also slowing progress.

Initiatives like Project Nexus still face several challenges in aligning regulations and building the necessary infrastructure. Without having seamless coordination between countries, scaling these kinds of projects quickly becomes difficult and costly.

Another major challenge is the current lack of focus on high-volume remittance corridors. For example, the U.S.-Mexico corridor is one of the largest in the world, yet it continues to see high fees and is plagued by inefficiencies.

Cutting down on costs in these key corridors could make a significant impact, but they haven’t received the type of attention they need from policymakers and financial institutions.

A Call to Action for Policymakers

Remittances are a vital lifeline for many emerging markets across the globe, but the high costs that come with sending them continue to weigh heavily on migrant families.

Reducing these fees is fundamental when it comes to improving their financial well-being and overall quality of life. International cooperation is essential here, and global institutions like the G20 and IMF need to prioritize systemic reforms in cross-border payment systems to make transfers faster, cheaper, and more efficient than before.

See:  IMF Working on Global CBDC Platform to Revolutionize Global Remittances and Trade

Looking ahead, expanding digital solutions alongside streamlining existing regulations can provide long-term relief, allowing remittances to remain a reliable source of support for millions of households around the world.

About the Author
Howard Davidson is the CMO of Almond FinTech.

Almond FinTech is a B2B fintech company transforming cross-border payments by empowering financial institutions and their customers with the best possible rates and near-instant FX settlements across all corridors globally. With Almond technology, institutions can guarantee fast, affordable, and transparent cross-border transactions. Finally.

‍