As the global market continues to expand, cross-border payment systems are constantly evolving. Working overseas is becoming more common, and bank remittance services are increasingly sophisticated. In 2022, the top three countries for remittance outflows were the United States ($79.15 billion), Saudi Arabia ($39.35 billion), and Switzerland ($31.91 billion).
Expatriates and businesses involved in cross-border operations need secure and effective means to send money around the world. One such method is outward remittance. This article will explain what outward remittance is, how to do it, and the costs associated with different remittance channels.
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What is Outward Remittance?
Outward remittance is the process by which foreign workers or businesses transfer funds in foreign currency from one country to another. In today’s rapidly globalizing world, the scale of funds transferred this way is enormous, sometimes rivaling the amount of official development assistance received by some less-developed regions. Individuals typically make outward remittances to support family members living in different countries, while businesses use them to pay bills.
In most cases, many people choose to handle outward remittances through traditional banks. Overall, banks are the primary channel for outward remittances, but non-bank remittance operators also play a significant role. These include Western Union, MoneyGram, and Ria Money Transfer. These three companies have nearly 1.1 million locations in over 200 countries worldwide.
Traditional banks and various other remittance operators have different fee structures.
The Cost of Outward Remittance
Remittance involves high costs due to factors such as underdeveloped financial infrastructure, regulatory hurdles, a near-monopolistic market, and high barriers to collaborating with the banking sector and accessing mainstream financial markets.
Regardless of the remittance method used, there are costs associated with any global money transfer.
The general public is often not well-informed about the principles and operations of remittance, leading many to be overcharged unknowingly. Meanwhile, few realize that financial institutions profit from exchange rate spreads when processing outward remittances.
Although remittance has become more common in recent years and public understanding of its costs has improved, there is still a lack of sufficient knowledge about the factors that influence these costs. In general, remittance costs are affected by multiple factors, such as:
- The types of bank accounts held by the sender and receiver
- Transaction details
- Regulations in the sending and receiving countries
- Foreign exchange transaction margins
- Upfront bank fees
For a $200 remittance, the transaction margin can account for more than a third of the amount, which is generally higher than the payment costs in the overall cross-border payment market.
According to data from the second quarter of 2023, the average cost of sending remittances to developing regions remains as high as 6.2%, which is more than double the United Nations’ Sustainable Development Goal of reducing migrant remittance transaction fees to 3% by 2030. In addition, the cost of inward remittances for businesses cannot be ignored.
Exchange rates affect the average remittance costs in different regions. For example:
- The average remittance cost in Sub-Saharan Africa is 8.2%
- The average remittance cost in East Asia and the Pacific is 6.9%
- The average remittance cost in the Middle East and North Africa is 6.6%
- The average remittance cost in Europe and Central Asia is 6.4%
- The average remittance cost in Latin America and the Caribbean is 5.6%
- The average remittance cost in Southeast Asia is 4.9%
Furthermore, remittance fees vary among different banks. Fees involved in bank remittances include operational fees and exchange rate premiums. Intermediary and receiving banks may also charge additional fees.
Taking a few major banks as an example, UOB (United Overseas Bank) charges fees ranging from $10 to $300 for remittances, while intermediary and receiving banks may also profit from exchange rate spreads slightly higher than the market rate or other fees. In contrast, OCBC (Oversea-Chinese Banking Corporation) charges relatively lower fees, ranging from $25 to $55.
As the World Bank notes regarding remittance fees:
“The most significant factor contributing to high remittance fees is the lack of transparency in the remittance market.”
Therefore, when it comes to fees, it is best to communicate in detail with the bank if there are any uncertainties or misunderstood items.
SWIFT Network
An outward remittance may involve multiple banking institutions. Wire transfers from traditional banks are carried out through the SWIFT network. SWIFT is an international network of financial institutions that connects over 11,000 banks, securities institutions, market infrastructures, and corporate users in more than 200 countries and regions, ensuring the smooth flow of global transactions. SWIFT wire transfers are a very secure way to transfer funds, but their downside is that they are slower and more expensive.
Because multiple banks are involved, the sender may need to pay separate handling fees to the sending bank, intermediary banks, and the receiving bank, as each institution wants a piece of the pie. Even so, the recipient may still need to pay a fee to their receiving bank.
When dealing with international business, if a party has to pay a fee to receive the income they’ve earned, they might increase their price, which in turn raises the cost for the other party and could affect their decisions on where to conduct business.
To avoid the costs associated with using the SWIFT network for remittances, businesses can choose to use other remittance channels, such as third-party payment platforms like PayPal. These platforms use a network of local bank accounts to transfer funds across borders securely and quickly, thus avoiding the high fees required by the SWIFT banking network.
Outward Remittance Protocols
Some countries have established guidelines and protocols for outward remittances, such as India, which has a huge flow of remittance funds. Under India’s Foreign Exchange Management Act (FEMA), the Reserve Bank of India (RBI) imposes strict regulatory measures on foreign exchange transfers. According to FEMA’s Liberalised Remittance Scheme (LRS), the following guidelines must be followed for outward remittances in India:
- Foreign remittances must not exceed $250,000 per financial year (with no limit on the number of transactions).
- Only financial institutions with an Authorized Dealer (Category II) license can provide outward remittance services.
- The sender must submit details of their Permanent Account Number (PAN) issued by the tax department and state the reason for the remittance.
- Proof of identity, address, or any other necessary documents may be required based on Know Your Customer (KYC) requirements. For example, if paying tuition fees for a family member studying abroad, a fee request letter from the educational institution is needed.
Indian residents face relatively strict restrictions on outward remittances. Currently, it seems that local residents may find it more convenient to make outward remittances through online banking.
How to Make an Outward Remittance
The specific process for an outward remittance depends on the remitting bank’s regulations, the type of remittance service, and the recipient’s method of receiving the funds. Generally, the steps for making an outward remittance are as follows:
Step 1 – Compliance Check
In countries with special outward remittance regulations, it’s best to first confirm whether you meet the corresponding remittance requirements. When making a remittance, you must provide all necessary relevant documents to justify the transfer. Additionally, residents of some countries have an annual limit on the total amount they can remit.
Step 2 – Choose a Service
When handling remittances related to business operations, it’s necessary to choose the most suitable service for your business model.
First, contact your bank. If the recipient has a current account (such as a checking or savings account), it’s best to contact the recipient’s bank branch to inquire about all possible remittance-related fees. This includes fees from using the SWIFT network (like intermediary banks) and costs arising from the difference between the bank’s exchange rate and the real-time exchange rate. By checking the real-time exchange rate on a currency converter, you can determine how much the bank is making on the exchange rate. It is recommended to compare several common banks that specialize in handling outward remittances, such as DBS, UOB, and OCBC, to make the most cost-effective choice.
In addition, internet-based outward remittance platforms that have emerged in recent years are also a good option, as their remittance fees are much lower than those of traditional banks.
If the recipient does not have a bank account, businesses can use a remittance service provider like Western Union. When remitting through such channels, the funds are deducted in real-time, processed through the provider’s system, and then delivered in cash to the recipient at a location they specify.
For business operations, remittance service providers like Western Union are not a cost-effective choice, as their fees are relatively high, and their platform’s exchange rates are higher than the real-time market rates.
Step 3 – Information Gathering
When making an international remittance, you must provide the necessary documents, which vary depending on the amount, recipient country, and purpose of the remittance. To ensure the funds are sent smoothly and arrive correctly in the recipient’s account, make sure the information you provide initially is accurate. Attempting a remittance with incorrect or insufficient documents will only lead to failure and incur more costs from repeated attempts.
Therefore, before sending the money, carefully check with your remitting bank or service provider to confirm the required documents. Also, it’s best to confirm all fees with the bank, not missing any potential hidden charges, and understand the gap between the bank’s exchange rate and the market rate. If you have enough time, you can also track exchange rate trends for a while to find the most cost-effective time to remit.
Some common information required for an outward remittance includes:
Sender
• Sender’s bank account number
• Sender’s name, address, and contact information
• Currency and amount to be remitted
• Purpose of remittance
• Potential fees and who needs to be paid
Recipient
• Recipient’s bank account number
• Recipient’s bank name and branch
• Name, address, and contact information
• SWIFT code and address
Step 4 – Arrange the Remittance
The final step can be completed online, by phone, or in person at a branch.
Some traditional banks require customers to visit a branch in person to handle the transaction. This is linked to the initial paperwork, as the bank needs the sender to confirm the document contents in person.
With the development of the internet, remittance transactions can now be completed online. Businesses or individuals can simply log in to their bank’s portal, follow the steps for overseas remittance, fill in all relevant information, and upload the necessary documents. After completing the process, the system will show the specific time the funds will arrive in the recipient’s account.
What Are Some Examples of Outward Remittance?
When making an outward remittance, the sender must state the purpose of the transfer. In most cases, the sender needs to provide supporting documents to justify the stated purpose.
Here are common examples of outward remittances, their possible purposes, and the supporting documents that might be required:
For Businesses:
- Employee Allowances – A non-resident entity paying salaries to a resident.
- Investment – Investing in stocks, bonds, housing, or other types of real estate.
- Overseas Spending – Purchasing overseas assets or donating to overseas organizations.
For Individuals:
- Overseas Education – To pay tuition fees, requiring proof from the school.
- Travel – To cover travel expenses.
- Medical – To pay for medical expenses.
- Living Expenses – To cover the living costs of family members or relatives.
It is important to note that all transfers between residents and non-residents are considered outward remittances.
What Are the Benefits of Outward Remittance?
One of the primary advantages of outward remittance is that it is secure, fast, and reliable. Outward remittance transactions occur within a secure banking system, meaning the likelihood of fraud or theft is very low. For those engaged in international business or needing to send money to friends and family living abroad, choosing outward remittance means low risk.
In some emergency situations, outward remittance can also play a crucial role. For example, if a friend or family member has an accident while traveling abroad, or if a child studying overseas runs out of money, outward remittance can ensure the funds arrive quickly to help them out of their predicament. However, in extremely urgent situations, there may be additional fees for immediate fund arrival.
The Importance of Outward Remittance in the Global Economy
Today, nearly every company is integrated into the global economic system, facing fierce competition from peers around the world. Outward remittance facilitates cross-border transactions and creates unprecedented business opportunities. Funds can be securely transferred to partners’ accounts without being constrained by national borders, and businesses can more easily procure goods and services from abroad.
For businesses with cross-border operations, outward remittance is a key tool for ensuring the smooth collection of accounts receivable after selling goods or providing services. For individuals, it is a vital source of funding for studying or receiving medical treatment overseas.
The key drivers for a steady outflow of remittances include the expansion of global business, the ongoing shift from cash to digital currency, and the cyclical fluctuations of currency exchange rates. The more businesses understand about remittances, the more effectively they can manage their financial situations in different countries and regions, making it easier to achieve global business expansion.
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