European and African leaders gathered in Valletta, Malta, last November set a goal of lowering the cost of remittances to 3% of the transaction value by 2020. Innovative technology combined with policy changes could make this happen.
The World Bank estimates there are 250 million migrants who have left their home countries mainly for economic reasons (only 6% are refugees from strife- and war-torn places like Syria; the rest are simply looking for work). Those migrants typically earn about $180 a month and send home $140 or $160. These payments will add up to more than $600 billion this year, the organization says. The number grows every year.
These small payments are expensive — on average, they cost 8% of the payment amount, according to the World Bank (in the U.S., it's 5%). This is due, industry observers say, to inefficient and paper-bound processes, oligopolies that can charge high prices, the networks of banks and money transfer operators involved in an international payment that each take a cut from the transaction, and excessive regulation. Technology is a big part of the answer.
"It's extremely easy to fix it," said Dilip Ratha, manager of the migration and remittances unit at the World Bank. "At a time when we're receiving real-time pictures from Mars and I can do a Skype or Facetime call to the other side of the planet, often for free, why is it so hard to transfer something like value? We always thought money was one of the most fluid things. Why is it so expensive to send money anywhere?"
This relates, he says, to a bigger question: Why are so many people in the world without a bank account? (Remittances are generally cheaper for bank account holders.)
'Monitor Every Transaction'
One source of cost is regulation, Ratha says. "The fear that we need to know the money flows to track criminals has a lot to do with keeping costs high," Ratha said. "It keeps smaller players from stepping into the remittance market, because if some of their transactions are flawed, regulators might put a heavy fine on them and overnight they'll go bankrupt."
Regulation of international payments ought to be risk-based rather than rules-based, Ratha said.
"Saying 'We'll monitor every transaction, and we want to know the sender, where the person got the money, who he or she sent money to,' all seems like a good thing on paper and doable because of the computing power we have," he said. "But shouldn't we go to a risk-based approach where we say, 'The remittance is under $1,000; that's a normal remittance to a family. Let's go slow on that'?"
Banks and money transfer operators could monitor every 20th transaction, to avoid even the appearance of ethnic profiling, he suggests. "Requiring every transaction to be monitored puts too much burden on small money transfer companies," he said. And the correspondent banks they use to transfer the money worry that they won't know all the individual transactions that are undertaken by their clients, so they're starting to pull out of remittance markets, he said.
"The main change that has to occur is to recognize that small remittances are not money laundering," Ratha said. "And they're not systemically important."
Alix Murphy, a senior mobile analyst at WorldRemit in London, agrees. "You have to take a risk-based approach," she said. "Unfortunately, so far some regulators still don't distinguish between the old, cash-based, agent-based models for remittance companies and the newer digital, online model."
WorldRemit provides an online remittance service for senders, drawing money from their bank accounts, debit cards or credit cards. The firm says it can manage risk more easily than brick-and-mortar providers and pass the cost savings to customers. (To use WorldRemit's service, customers have to open a bank account. Thus each bank does its own customer due diligence, but WorldRemit does its own. The company also works with Jumio's authentication technology, through which the customer takes a picture of her passport or driver's license, which Jumio checks for signs of fraud.)
A related issue is lack of competition for the large money transfer operator companies like Western Union and MoneyGram.
"Many post office systems have allowed their post offices to have exclusive partnerships for providing remittance services with one or the other money transfer company," Ratha said. The fees these post offices collect amount to a tax on poor people — the migrants sending and receiving money, he said.
"The governments could easily say, 'Post offices are to be shared by everybody, so there should be a choice of money transfer companies,' " he said.
The cash- and paper-intensive nature of remittances also adds cost, according to Murphy.