With the rapid development of globalization, from low-skilled labor migration to investment migration that creates job opportunities, more and more people are engaging in international remittances. This means a large amount of capital flows from developed countries to developing countries. According to the latest issue of the World Bank’s Migration and Development Brief, the total amount of remittances flowing into low- and middle-income countries continued to grow in 2023, with a growth rate of about 3.8% compared to the same period last year, and the growth rate is expected to be 3.1% in 2024. In fact, remittances play a crucial supporting role in some less-developed regions. For example, in 2021, nearly half of the GDP of Tonga, a developing country in Oceania, came from personal remittances.
In the following text, we will introduce the concept and types of remittances, how they work, and provide some advice on the matter.
Table of Contents
What is a Remittance?
A remittance refers to a cross-border transfer of funds via electronic transfer or wire transfer. It usually refers to money sent by overseas workers back to their home country, which can be in the form of cash, checks, or electronic transfers. Remittances typically originate from migrant workers who leave their home country to find employment opportunities and send their earnings back to support their families.
What is a bank transfer?
A bank transfer is the movement of funds from one bank account to another. This can be done online through a mobile app or in person at a bank branch. Bank transfers can occur between different accounts at the same bank or between accounts at different banks. Generally, to make a bank transfer, you need to provide the recipient’s name, bank account number, and an international bank routing number (in the US and North America, this is typically a Routing Number; European banks often use an IBAN, while other international regions commonly use a SWIFT Code). After initiating the transfer, it may take several hours or days for the funds to reach the recipient’s account, as processing speeds vary among banks.
How Does a Bank Remittance Work?
A bank remittance also refers to transferring funds from one bank account to another. Generally, a bank remittance involves the following steps:
- The sender provides the recipient’s bank account information, such as name, account number, and routing code.
- The sender’s bank sends a payment instruction to the recipient’s bank through the banking system.
- Upon receiving the funds, the recipient’s bank verifies that the account details match.
- The recipient’s bank credits the funds to the recipient’s account and confirms the status of the funds with the sender’s bank.
- The sender’s bank informs the sender that the funds have successfully reached the recipient’s account.
The time required for a bank remittance varies depending on the sending and receiving banks, the countries involved, and the payment method used. Generally, it may take 1 to 5 business days for the funds to arrive in the recipient’s account.
What is the difference between remittance and bank transfer?
The most significant difference is that a remittance does not require a bank account. Typically, the necessary documents for a remittance only include a valid ID, proof of address, and a phone number. However, due to the relatively simple procedure, using remittance services comes with a risk of fraud.
Remittance usually refers to cross-border money transfers, with the most common method being through third-party remittance service providers (like Western Union). A bank transfer, on the other hand, involves moving funds from one bank account to another, which can be done online or at a bank branch. Bank transfers can be domestic or international and are generally more secure and relatively cheaper than remittances.
Why are remittances necessary?
The necessity of remittances lies in their crucial role in improving the quality of life and economic well-being for many people around the world. These funds, sent by migrant workers back to their home countries, can be used to meet a range of needs for the beneficiaries, such as basic living expenses, education, healthcare, and investments in small businesses or real estate. In some cases, remittances can even serve as a source of capital for businesses and entrepreneurs, thereby promoting local economic development.
Overall, remittances help ensure financial stability for individuals and communities and, on a larger societal level, have a profound positive impact on economic development.
Who do remittances serve?
Remittances are essentially funds sent back by overseas workers to their home countries, which are often developing nations. However, the uses of remittances are diverse. Besides being used for daily household consumption, they can also be used for business investments, such as financing small businesses in rural and remote areas, especially where local capital participation is limited, for instance, after a natural disaster.
According to a World Bank survey, up to 15% of remittances sent to developing countries are used to start or grow businesses. Due to the positive role of remittances, the World Bank has been working in recent years to reduce the global average remittance fee to 3%. However, as of the second quarter of 2023, the average cost of international remittances is still more than double this target, especially in Sub-Saharan Africa, where remittance costs are as high as 7.9%, compared to the global average of 6.2%.
Here is an example of remittance costs:
Mr. L is an Indian working in the United States. He remits $200 every two weeks to his business partner in India to support their small tailoring business. According to the World Bank’s Remittance Prices Worldwide database, the average cost of a cross-border transfer is 3.1% of the total amount, which is $6.2. For his partner to actually receive $200, Mr. L should send $206.2.
Remittance Types and Methods
Remittances are divided into two types: inward and outward.
Outward remittance refers to funds sent from overseas to the home country, while inward remittance refers to funds received from overseas or from another bank within the same country.
Inward remittance example:
Ms. K is Malaysian and bought an apartment in Kuala Lumpur, the capital of Malaysia. She moved to Brunei to develop her career and rents out her Kuala Lumpur apartment for income. During her stay in Brunei, the monthly rent from her Kuala Lumpur apartment is remitted to her account. This rent is considered an inward remittance.
Some common remittance methods include:
- Bank Transfer: The most commonly used method. Funds are transferred from one bank account to another through the banking system.
- Online Payment Platforms: Platforms like PayPal, Payoneer, and Skrill that allow users to send and receive money online.
- Money Transfer Operators (MTO): Companies specializing in international remittances, such as Western Union, MoneyGram, and Ria Money Transfer.
- Mobile Remittance: Allows individuals to send and receive money using their mobile phones. It is popular in developing countries with limited banking resources and services.
- Cash Remittance: Sending cash to a recipient through a courier or a trusted acquaintance.
Remittance Fees
Remittance fees are charges that may be levied by remittance service providers or financial institutions when making an international money transfer. These fees vary depending on the service provider, the amount of money being sent, and the recipient’s country. Generally, the smaller the remittance amount, the relatively higher the fee; the larger the amount, the relatively lower the fee. Some remittance service providers set different fee tiers based on how quickly the customer wants the funds to arrive.
How Does a Remittance Work?
A step-by-step guide to remittance:
- An individual living overseas can send a remittance to a remittance agent (such as Western Union, Wise, or OFX) via cash, check, debit card, credit card, or money order. The remittance instruction can be sent via phone, email, mobile app, or website.
- The remittance agent contacts a corresponding agent in the recipient’s country to complete the transfer.
- The paying agent in the recipient’s country pays the recipient or beneficiary.
Typically, when a remittance is settled by an agent, no actual immediate fund transfer occurs. The remittance agent periodically settles payments with the paying agent through commercial banks, sometimes using informal methods like settlement through trade in goods.
Remittance agents usually charge the sender a service fee for each transaction and a currency exchange fee when different currencies are involved. When exchange rates rise, they may even charge the recipient an additional fee to cover losses due to currency fluctuations.
Remittance agents, especially banks, invest the funds they receive before disbursing them to the recipient to earn interest or profit from floating interest rate differentials. In countries with high overnight interest rates, the income generated from floating rates can be substantial.
How to make a remittance payment?
Remittance payments can be made in three main ways.
- Wire Transfer: Wire transfers occur between banking systems and may involve the sending bank, the receiving bank, and other intermediary banks. International wire transfers typically take up to 5 business days and are costly. SWIFT (Society for Worldwide Interbank Financial Telecommunication) transfers are a common form of wire transfer.
- Online Transfer: Also known as Electronic Funds Transfer (EFT), this is a convenient way to remit money. Compared to wire transfers, online transfers have lower service fees and currency exchange costs. The sender can submit payment instructions via debit card, credit card, bank app, or websites like PayPal, and the funds can often be received instantly.
- Cash Transfer: Remittances can also be paid in cash, but this requires the assistance of physical remittance agent branches like Western Union and MoneyGram. The fees and processing time depend on the amount, currency, and type of service.
What is a remittance advice?
A remittance advice is a proof sent by Party A to Party B after completing a payment. While sending a remittance advice is not mandatory, in most cases, Party A will send it as a courtesy. Sometimes, Party B will include a remittance advice with the invoice, so the customer doesn’t have to spend extra effort preparing one.
Remittance advice may seem less significant in the current era, but some parties still maintain the habit of sending them to suppliers for tracking historical payment records. In the past, remittance advice was mainly sent by mail, but now it is more common to send it via email.
Whether necessary or not, if the sender wishes to continue the practice of sending remittance advice, it is essential to ensure it includes the following information:
- Payment amount and channel
- Invoice number
- Sender’s name and address
- Recipient’s name and address
- Remittance date
- Expected arrival date
Although remittances play a positive role in improving the living standards of families in underdeveloped regions, promoting local economic development, and disaster relief, remittance services often come with the risk of fraud. When conducting cross-border business, it is best to choose internationally recognized and well-known financial institutions or remittance service providers to ensure funds arrive safely in the supplier’s account.
Frequently Asked Questions
What is a remittance?
A remittance is the transfer of money by individuals living and working abroad to their friends and family in their home country. Typically, the sender (often called the “remitter”) sends funds through a remittance service to a recipient (often called the “payee” or “beneficiary”), who can receive the money through a bank account or by cash pickup. Remittances are commonly used to support the daily living expenses of friends and family or to pay for costs such as healthcare or education.
What is a typical example of a remittance?
A typical example of a remittance is when a person living abroad sends money back to their family in their home country to support their livelihood. The remitter can send the money through a bank transfer or a remittance service provider like Western Union or Wise.
What does remittance mean?
Remittance refers to funds sent back by a person working in a foreign country to their home country, with the recipient usually being a family member. These funds can be sent through various methods, such as wire transfers, online payment platforms, or cash transfers. Remittances are a major source of income for many families in developing countries and are crucial for supporting basic needs like food, housing, education, and healthcare.
Are remittance and bank transfer the same concept?
A remittance is the transfer of funds from one person to another, often involving cross-border money movement. A bank transfer is one way to send or receive a remittance. However, a bank transfer usually refers to moving funds between accounts at the same bank or different banks within the same country, while a remittance typically involves international or cross-border fund transfers. Therefore, while they are related, they are not the same concept.
How long does a remittance take?
The processing time for a remittance depends on various factors, such as the payment method, the bank or financial institution processing the payment, and any potential issues or errors that may arise during the process. Generally, an electronic transfer using the ACH (Automated Clearing House) system may take 1 to 3 business days to process, while a remittance made with a paper check may take longer, often a week or more, depending on postal delivery times and bank processing procedures.
Regardless of the remittance method chosen, it is best to check with the respective remittance service provider or bank to get an accurate timeline from payment initiation to fund arrival.
What is the difference between a remittance and a payment?
A remittance refers to the transfer of funds from one party (an individual or company) to another, where the sender and recipient are often in different countries or regions. Overseas workers frequently use remittance services to send money to family members living in their home country.
A payment refers to one party (an individual or company) paying for goods or services received. Payments can take various forms, such as cash, check, credit or debit card, bank transfer, etc.
Both remittance and payment involve the transfer of funds, but remittance usually refers to a cross-border money transfer, while payment typically refers to a domestic transaction.
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