15 Jan 2025
In today's economy, remittances are the main foreign inflow. For example, a migrant may try to send money home to help their family. A relative will try to sponsor his/her family in another country. This makes remittances a powerful tool. But what does this term mean? To help the reader, this article will cover what remittances are, their history, economic importance, and issues for the global financial system.
Remittance means transferring cash from a foreign worker to a relative or friend. Remittance is money sent by migrants to their relatives. Expats move abroad for work, education, or other reasons. Through media, it can be done in different ways, including banks, MTOs, mobile money, and online.
Such cross-border monetary remittances are mostly personal. They are not from commercial transactions but rather cash gifts, support, or welfare. This term identifies personal transfers as remittances. It briefly distinguishes remittance from institutional or business transactions.
Essentially, international workers’ compensation is essential within the world economy. New data from the World Bank says that global migration and remittance reached $794 billion in 2020, a figure expected to be affected by COVID-19. This is much higher than the figure for FDI in developing countries, which is always poised at $600 billion per year, on average.
Cross-border transfers are the lifeline for millions of families in developing countries. It is taken to cover essentials like food, health care, school fees, and shelter. In most cases, the remitted money is a household's primary income or a basic necessity in many countries.
It was established that remittances directly impact the eradication of poverty in the recipient nations. To many low-income countries, remittances are the key factor between life and the near-impossible task of making ends meet. At times, business circles can keep the spending power of the whole population as the funds cycle through different sectors within the community in question.
For example, the primary purpose of the funds that many recipients receive is to educate children or to pay for health care. Remittances provide an alternative to accessing such services in areas lacking quality public services.
This paper establishes that remittances could enhance local economic development. People who get foreign money to spend locally use this money to buy goods and services, creating demand and job opportunities.
In addition to their economic advantages, global migrant money transfers can have social and political impacts. Such a form of flow may help build a link between the migrant’s new location and home country. They promote social relations across borders and have the potential to shift the political structure of both the donor and recipient countries.
Women in most developing nations are the key beneficiaries of the worldwide remittances. Such financial support can increase women’s bargaining capability inside and outside the household, improving their social position and ability to make financial decisions.
Migration policies in many countries have been affected by the flow of remittances in one way or another. Occasionally, governments facilitate international migration to gain benefits from the remittances their nations receive.
For instance, remittance has become more convenient and available through technological and financial improvements. Both methods of online money transfer across borders also differ in their frequency of usage depending on the cost, ease of use, and time required to complete a transfer.
MTOs stands for Money Transfer Operators, also referred to as Money Transfer Services Providers, MTSPs, and International Money Transfer Services Providers, IMTSPs, or International Money Transfer Organizations, IMTOs or International Money Transfer Companies, IMTCs, International Money Transfer Companies, IMTRCs or International Money Transfer Agencies, IMTAs.
In this section, we are particularly interested in MTOs, which are defined as money.
Traditionally, the potential of remittances could be realized using MTOs such as Western Union or MoneyGram. These companies enable a person to transfer cash physically, through a network, or online so the beneficiary can collect it from an agent in the home country.
There is significant availability of MTOs, especially in under-banked regions of the world. They convey cash instantly, in many cases within minutes, and are preferred by the financially excluded segment who do not have access to banks.
The primary disadvantage of typical MTOs is still relatively high fees. These costs are relatively low and may vary between 5/10% and up to more depending on the flow amount and the countries involved. Moreover, exchange rate margins may cost recipients to transact at the fixed exchange rate.
Bank transfers are also some of the most common ways of transferring remittances. This is a form of wire transfer in which a sender can directly transfer funds to a recipient's bank account through banks that provide international money transfers.
Automatic bank transfers are safe and effective, especially for sums of money larger than most other transfers. They also apply to formal remittance systems so that both the sender and the recipient can always document the transaction.
Over-the-bank transfers are relatively slow regarding remittance charges and are comparatively expensive, especially if the recipient country lacks access to international banking services. Also, some countries impose political restrictions due to challenging banking rules and regulations.
Technological advancement became the key driver of the change: mobile money services and digital transfer platforms. Innovations such as Argentina’s Mpesa, the Philippines’ GCash, and the United States’ Venmo have made transferring money via smartphones convenient. Such services are most effective in countries where the banking system remains underdeveloped.
Mobile money is cheap, fast, and flexible, especially for individuals and businesses in rural areas with limited physical cash. As more and more people own smartphones that provide these services, Mobile Money is good news for migrant workers who do not have conventional banking accounts.
Most digital transfers are cheap in terms of the amount charged as fees, but they may include transaction fees and can also attract international transaction charges. Mobile networks and the possibility of using mobile money services, for their part, also differ in countries.
While remittance has numerous advantages for both the source and the receiver, the value chain has several constraints.
As much as remittance is seen as a tool for economic development, perhaps the biggest stumbling block in the flow of funds is the high transfer cost. While most global operators provide a range of 5-6 % for making an international money transfer, the average charge by the World Bank remains high at 6.3% of the transfer value, which is still high compared to other financial services.
Remittances have various deterrent costs, particularly with few transfers, which are unbearable to low-income persons. This is regrettable because it poses a challenge to people who rely on using the services to send small amounts of money to their kin.
At other times, exchange rate margins or added charges may decrease the total sum of money the recipient has at his or her disposal.
The appearance of numerous platforms for digital activities and the growing popularity of mobile payments have raised concerns. Scammers often try to take advantage of the innocent, which includes people who might not be very fond of the financial sector.
Preliminary threats include fraud invasions, fake remittance services, and identity theft. While both senders and recipients should protect themselves from identity theft, they also worry about ensuring the payment services they employ are not scams.
In some parts of the world, some remittance service providers do not have appropriate measures to protect consumers; hence, the monetary loss resulting from scams is hard to reclaim. This area is prone to several regulatory and compliance issues for the company’s operations.
These services are primarily subject to the enforcement of anti-money laundering and know-your-customer rules and regulations, which are not the same in every country. Although these regulations curb illicit activities, they add stiffness to remittance.
Countries with very tight financial controls can restrict the usage of foreign remittance services. This can be very daunting to migrants and their families since they may experience a longer time to be attended to or even have to make more payments due to some policy gaps.
The mobile money model of remittances will progress through technological advancement and reforms in the financial system. With the current advancement of blockchain technology, cryptocurrency, and digital currency, there are many potential ways to make remittance transfers faster, cheaper, and more secure.
Remittance services are typically expensive and move slowly because they resist traditional service delivery models. Bitcoin, Ethereum, and stablecoins can become cheaper and more effective solutions than existing money transfer methods.
So, newcomers such as startups and financial technology firms are entering the market with innovations. These e-commerce companies hope to use artificial intelligence, machine learning, and data analysis to assist the process of sending and receiving money back with less cost passed on to customers.
Therefore, in my opinion, and considering the social entrepreneurial point of view, remittances are very important in the overall operations of the world economy, but more so for those people and families from developing countries. It helps eradicate poverty, develop social mobilization, and help promote the monetary inclusion of migrants. However, some factors like high cost of transactions, fraud, and legal repercussions are still issues with the industry.
A bank transfer is a process by which funds are transferred from one bank account to another. People or businesses use it to send money online from one party to another. Individuals and companies use it.
The remittance contemplating fee differs depending on the kind of remittance channel used, the amount remitted, and the countries to which the money is being remitted. Before choosing an FX or a payment provider, the fees and the exchange rate must be compared.
However, certain regulations and restrictions regarding remittances are in place to fight money laundering, and these regulations may differ from country to country.
The way of cash transfer determines the way of its receipt. Some standard options include:
The recipient can also pick up cash from a specific point of view.
They can easily be wired directly into the individual’s bank account.
These may be transferred to the recipient’s mobile wallet.
Receipts from migrants’ money transfers are essential for many developing nations. They can contribute to economic growth by:
It has become known that remittances allow people to pay for their basic needs and make some deferred payments.
The money can be invested in developing business undertakings, which help to employ people and advance the economy.
