EXPLAINER

Cutting Remittance Costs in a Click

A money changer services customers at Changi Airport. Photo credit:  Lester Ledesma/ADB.
A money changer services customers at Changi Airport. Photo credit: Lester Ledesma/ADB.

Digital technology is a game changer in reducing remittance costs between overseas workers and developing countries in Asia.

Introduction

Remittances are the hard-earned product of workers whose migration is usually driven by poverty and lack of job opportunities in their home countries. And, with over 240 million people living outside their countries of birth, remittances are the saving grace for many economies.

But the costs associated with transferring money are steep. Globally, the average cost of sending remittances stands at 7.6% of the amount sent as of the second quarter of 2016.1 On average, remittances to East Asia cost 8.5%, while fees to South Asia are less expensive at 5.6%.

Reducing remittance costs would have a huge impact on migrants and their families as well as a multiplying effect in terms of financing health, education and other spending beneficial to society.

Bringing down the cost of remittances has emerged as one of the sustainability goals of global policy leaders who recognized the importance of remittances both as a foreign exchange source and an economic lifeline. At the G-20 Leaders' Summit in Brisbane, Australia in November 2014, a commitment was forged to reduce the global average cost of transferring remittances to 5%.

This is where technology has become a game changer.

Through digital technology, money transfer operators are now able to offer remittance services at significantly lower costs than traditional over-the-counter services. Digital service providers are also able to pass on the benefit of being subjected to less stringent anti-money laundering and counter-terrorism financing regulations than those imposed on formal channels such as banks.


1 "Remittance Prices Worldwide," June 2016 issue, The World Bank.

How big is the remittance market in Asia?

In 2015, remittances exceeded $430 billion in 2015 worldwide, more than two-thirds of which went to developing countries, according to World Bank estimates. 

Of this amount, developing countries in Asia received roughly $200 billion in remittances—more than any other region.

In countries such as India and the Philippines, remittances can even exceed foreign direct investment inflows. In Nepal, a low-income country with a large proportion of overseas workers, remittances account for nearly 30% of the gross domestic product (GDP), the largest share in Asia.1

Below are the Asian countries ranked according to the size of their remittance market:

Country $ billions (2015) Share of GDP (%)
India 70.4 3.4
Republic of China 62.3 0.6
Philippines 27.3 9.6
Bangladesh 15.0 8.7
Viet Nam 12.0 6.4
Sri Lanka 7.0 8.9
Nepal 6.6 29.2
Republic of Korea 6.6 0.5
Thailand 5.7 1.4
Japan 3.7 0.1
Myanmar 3.1 4.8
Malaysia 1.6 0.5
Mongolia 0.3 2.1

Source: World Bank


1"Reducing Remittance Fees can Boost Asian Economies," Sean Creehan, Federal Reserve Bank of San Francisco

What is the cost of remitting money in Asia?

Among low- and middle-income countries, remittance costs totaled roughly $47 billion in 2015, according to the World Bank. Globally, the average cost of sending remittances is currently at 7.6%.1 On average, remittances to East Asia cost 8.5% of the transaction value as of the second quarter 2016 while fees to South Asia are less expensive at 5.6%.

Digital channels are helping reduce remittance costs, as mobile payment services charge roughly 4.1% transaction fees—more than 50% less than the average rate in East Asia.

In comparison, the average remittance cost through commercial banks stood at 11.3%, although bank-based transfers remain the most dominant mode of remittance in Asia due to the proliferation of banks.


2"Remittance Prices Worldwide," June 2016 issue, The World Bank.

What drives the cost of remittance?

The following factors are instrumental in driving up the cost of remittances:1

  • Underdeveloped financial infrastructure of countries
  • Limited competition
  • Lack of transparency
  • Regulatory obstacles
  • Lack of access to the banking sector by remittance senders and recipients
  • Difficulties for migrants to obtain the necessary documentation on their national identification

In addition, in 2014, concerns emerged that renewed focus on Anti-Money Laundering and Combatting the Financing of Terrorism regulations in Australia, the United Kingdom, and the United States are pushing up remittance costs. These came about after the closure of bank accounts of Money Transfer Operators and their agents due to rising global concerns about cross-border money transfers, and the subsequent risk of liability for breaching regulations. These developments were suspected to have increased remittance prices, reduced competition, and encouraged the use of informal channels.


1 Massimo Cirasino, World Bank, "Reducing the costs of transferring remittances: How realistic is the proposed target for Post- 2015?", presentation made at The 13th Coordination Meeting on International Migration, February 12, 2015. http://www.un.org/en/development

How are digital channels helping reduce the cost of remittance in Asia?

According to the World Bank, the cost of sending money to the Pacific has been dramatically reduced by over 62% with the use of digital channels.

In a May 2016 conference on "Financial Inclusion in the Digital Economy," organized by ADB, the Consultative Group to Assist the Poor, and the ADB Institute, representatives of various financial technology companies shared several examples of digital innovations that are drastically reducing remittance costs through a combination of new technology and government-led awareness campaigns.

  • Transparency initiatives such as SendMoneyPacific (http://www.sendmoneypacific.org) enable remittance senders to compare prices and learn about the benefits of innovative digital remittance providers. The Australian and New Zealand government-funded website looks at the fees and foreign exchange rates charged for money transfer services, and publishes this information for free to help remitters get the best deal possible.
  • The New Zealand online currency exchange platform KlickEx (http://www.klickex.com) connects banks, local businesses and consumers with the best possible exchange rates at any given time. Using the internet, customers find the best exchange rates based on the urgency (priority) of the transaction and current market conditions. KlickEx scans foreign banks and local businesses to locate funds at the selected rate. Once located, the exchange is instant, and the funds arrive in the other country immediately.
  • Digicel Pacific (http://www.digicelpacific.com) is a leading global communications provider with operations in 33 markets in the Caribbean, Central America, and Asia Pacific. Its technology allows people to send money to their families in Fiji, Papua New Guinea, Samoa, and Tonga. Money is received in Digicel Mobile wallets and loaded and sent via KlickEx Pacific.
  • Smart Money (https://smartpadala.ph) was launched in 2001 by Smart Communications, one of the dominant telcos in the Philippines, as a mobile financial service. With SMART Money, customers can use their mobiles to send and receive money domestically and internationally. Customers can cash in and out in branches and ATMs of Banco de Oro (BDO), Smart’s banking partner and e-money issuer; microfinance institutions; pawnshops; and money changers that are widespread across the country. For international remittances, Smart has business ties with international banks directly or through its local commercial bank partners in countries with high concentrations of overseas Filipino workers.

Resources

World Bank. The cost of remittances worldwide.

The economics of remittances

Video showing the importance of remittances

What drives the increase in remittance cost

 

   Last updated: September 2016

 

Meet the experts

  • Sabine Spohn
    Senior Investment Specialist, Private Sector Operations Department, Asian Development Bank

    Sabine Spohn works in ADB’s Private Sector Operations Department and is primarily responsible for managing the regional microfinance risk participation and guarantee program.

    Follow Sabine Spohn on

  • Jonathan Capal
    Director, Developing Markets Associates - Asia Pacific

    Jonathan Capal is a specialist in the field of international remittances with a background in managing remittances, financial literacy, migration and development projects, and foreign investments forums. He launched DMA’s Asia Pacific operation in Sydney, Australia and is involved in major remittances projects, including the World Bank’s ongoing global remittance prices database.

    Follow Jonathan Capal on




Disclaimer

The views expressed in these articles are those of the authors and do not necessarily reflect the views of the Asian Development Bank, its management, its Board of Directors, or its members.




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