A remittance, in simple terms, is the transfer of funds from one party to another, or the act of transferring funds itself. While this concept can broadly cover payments for various bills or invoices, in modern usage, it primarily refers to the act of overseas workers sending money to family members still living in their home country.
Key takeaways on remittances are summarized below:
- A remittance is the sending of money from one party to another, typically involving parties in different countries.
- Usually, the sender is working abroad, while the recipient is a loved one in the sender’s home country.
- For people in low-income and developing countries, remittances are a major source of income.
- The amount of remittances received by some countries often exceeds the amount of direct investment and international development aid received locally.
- Government intelligence agencies view remittances as a potential source of funding for terrorism.
Table of Contents
Understanding Remittance
Paying a bill is also a form of remittance. However, the term typically refers to personal remittances, where someone working overseas sends money to relatives in their home country.
The most common way to send remittances is through a bank or an electronic money transfer service like Western Union. While these institutions usually charge a handling or service fee, the advantage is that the transfer is fast, and the recipient can typically receive the funds in just a few minutes.
Remittances play an increasingly important role in the economies and disaster relief efforts of some small and developing countries, where the annual amount received often exceeds official development assistance (ODA) funds.
This is highly encouraging because remittances from high-income countries help improve the living standards of people in low-income countries and contribute to alleviating or even eliminating global poverty.
In fact, since the late 1990s, remittances have already surpassed development aid. In some countries, remittances have become a significant component of the Gross Domestic Product (GDP).
According to the World Bank’s Migration and Development Brief, remittances to low- and middle-income countries reached a record high of $547 billion in 2019. However, due to the impact of the COVID-19 pandemic, the amount fell to $541 billion in 2020. It rose again in 2021 to $599 billion. In 2022 and 2023, remittances continued to grow, reaching $645 billion and $669 billion, respectively. The amount is projected to increase to $690 billion in 2024. Excluding China, the remittances received by these low- and middle-income countries exceeded foreign direct investment and international aid funds.
Remittances also help people in less developed countries open bank accounts, and the increase in bank accounts can further stimulate local economic development.
How to Make a Remittance
Remittances typically rely on electronic payment systems or services.
- Individuals can go to a bank counter or credit union to make a remittance, or use an online remittance service, i.e., a wire transfer. Wire transfers are irrevocable, so it is crucial to double-check the recipient’s information when making one.
- During a wire transfer, you will need to provide the recipient’s bank name, bank account number, and the bank’s international wire transfer code. Common wire transfer codes include SWIFT Code (widely used internationally), Routing Number (generally limited to the US and North America), and IBAN (generally limited to Europe).
- Individuals can also use PayPal or other third-party internet payment service providers for international remittances.
- Remittances can also be made through international remittance service providers. Some of these institutions have physical locations, but most transfers can be completed online. Some well-known online remittance service providers include Western Union, Wise (formerly TransferWise), and Xe Money Transfer.
In addition to wire transfers, many banking institutions also offer money order services. When using a money order for remittance, please note:
- Money orders cannot be processed online; the sender must go to the bank in person to complete the necessary procedures.
- Money orders do not support credit card payments; the amount can only come from cash, a debit card, or traveler’s checks.
- The sender needs to fill out the money order form.
- A handling fee is required for the money order.
- The money order can be sent to the recipient via courier.
- After completing the money order process, be sure to keep the money order and any related mailing receipts safe.
Remittance Fees
6.4%
According to data from the World Bank, the average cost of a global remittance of $200 in the first quarter of 2021 was $200 x 6.4% = $12.8. Among these, bank remittances typically charge more fees compared to digital channels or third-party remittance services.
Specifically, remittance fees vary depending on the service provider and the details of the remittance transaction.
- International remittance fees are usually higher than domestic ones. In addition, besides the fee charged by the sending bank, the receiving bank may also charge a fee.
- International remittance service providers like Wise charge a small fixed fee of $4.15, plus a currency conversion fee. Other fees may also apply depending on the type of transfer.
- For international remittances via PayPal, if you pay with your balance, the fees include a 5% handling fee and a currency conversion fee. If you pay with a credit or debit card, an additional 2.9% handling fee plus a fixed fee is required.
- For money orders, in addition to the bank’s handling fee, postage costs will be added if mailed.
The Impact of the Economic Environment on Remittances
The 2020 Economic Crisis and the COVID-19 Pandemic
The 2020 economic crisis and the COVID-19 pandemic had a severe impact on overseas workers and their families.
Compared to the pre-pandemic period, the amount of money overseas workers sent to their families in 2020 decreased significantly, immigrant unemployment rates rose, the number of new immigrants fell, and the number of immigrants choosing to return to their home countries increased.
With the development of global financial inclusion, concerns are growing about the rising costs of international remittances. Some countries, in an effort to increase transparency, have restricted remittances to bank wire transfers, but banks are the most expensive channel for transfers, and within banking services, wire transfers are the costliest.
In the first quarter of 2021, the average cost of remittances to the Middle East and North Africa fell to 6.3% from 7% a year earlier. In Sub-Saharan Africa, the cost averaged 8%, down from 8.9% the previous year. In Latin America, the cost averaged 5.5%, down from 6% the previous year.
Current State of International Remittances
For low-income countries or those with economic difficulties, remittances are one of the largest sources of local income. For example, in 2015, Mexicans living abroad sent over $24 billion back to their home country, exceeding the $23.4 billion the country earned from oil sales.
The economic collapse in Venezuela has led to a large number of migrants flocking to other countries, and correspondingly, remittances from Venezuelans living abroad to their family members who stayed behind have also been increasing. In 2017, residents in Venezuela received over $1.5 billion in remittances.
In 2023, the largest recipient of remittances was India ($125 billion), followed by Mexico ($67 billion) and China ($50 billion).
What to Pay Special Attention to When Remitting?
Remittances and Crime
Financial intelligence agencies are concerned that remittances are one of the methods used for money laundering or sponsoring violent activities such as terrorism.
In countries around the world, the amount of money local residents receive through remittances is rarely disclosed and is often difficult to investigate. Although most remittances are made through online or bank wire transfers with corresponding transaction records, a significant amount of funds is still transferred in more clandestine ways.
The Impact of Fintech on Remittance Fees
With the development of financial technology (Fintech) and its application in international remittances, fees for international transfers are gradually decreasing. In recent years, Fintech companies like Payoneer, Wise, and WorldRemit have emerged. Governments are also continuously strengthening regulation and supervision to ensure safer fund flows.
Summary
What is a remittance?
A remittance is the sending of money from one person or entity to another. Although this definition also includes funds used to pay bills, it currently refers more to a person in one country sending money to relatives or friends in another country.
How to make a remittance?
Common methods for making remittances include bank wire transfers and remittance service providers specializing in domestic and international transfers. With the development of internet finance, applications like PayPal have also become a major trend for international remittances. These electronic services support the rapid transfer of funds, often arriving within a day. Additionally, remittances can be made via money order, but the arrival time of the money order depends on the chosen courier service and the distance between the sender and the recipient.
What is the difference between a remittance and a payment?
According to the definition above, although making a payment after receiving a bill is a form of remittance, the two terms are not entirely equivalent. This is because remittance is also used to describe the sending of funds internationally. For example, when a foreigner working in the United States sends money to family or friends in their home country, we can only call it a remittance, not a payment.
Remittances and the Global Economy
A large volume of remittances flows around the world every year. These remittances play a very important role in the economic development and disaster relief efforts of various low- and middle-income countries. The amount of remittances received by some countries in a year may even exceed their local GDP.
However, remittances can come with high costs. Organizations like the World Bank are closely monitoring this issue because the money that migrants send home “greatly supplements government cash transfer programs to support families facing economic hardship” locally. Therefore, reducing remittance costs and encouraging remittances to families in underdeveloped regions should be a key focus of government policies worldwide.
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