Dilip Ratha has an idea for disrupting remittances that comes from his personal experience as a migrant.
Ratha, an economist at the World Bank, was one of the speakers at Quartz's "The Next Billion" conference in New York this fall. In his short but poignant presentation, he managed to convey how the power of a simple remittance sent from one family member to another could be magnified to improve the lives of poor people.
"Remittances are dollars wrapped with care," says Ratha, who used to receive money orders from his father as a college student in India and later mailed checks home to his father after moving to the United States.
These small amounts changing hands on a regular basis — multiplied by 250 million international migrants worldwide — drive entire economies, Ratha says.
"This year alone, remittance flows to developing countries will reach $440 billion," he says. That's more than triple what the countries receive in total development aid money, and unlike the aid, which goes to governments, remittances go directly to their beneficiaries. Remittances also tend to be more stable than private capital investments, which get cut off during times of economic or political crisis.
The $440 billion figure is for recorded remittances and does not include money sent through informal channels. Taking those into account, "worldwide remittances are more like $600 billion," Ratha says.
The problem with remittances that Ratha wants to solve is that the cost of sending them is "exorbitantly high."
When he would mail checks to India, Ratha says he would never ask his father how much money was actually received, what the exchange rate was or how high the fees were. But today — with the technology that exists to facilitate money transfers easily and cheaply — he is appalled at the difference between the amounts sent and received.
"To send $200 to Bangladesh, probably only $184 will reach the other side — $16 will be taken by the intermediary. Sending money to Africa costs 12% on average. Sending money within Africa costs more than 20%. And if you were sending money to countries like Venezuela, where there are exchange controls, and you are sending $100, you are lucky if the family on the other side receives even $5 dollars these days."
Ratha is on a mission to reduce remittance costs from the current 8% average to 3%. "This 5-percentage-point reduction can put $20 billion of savings in the hands of poor migrants," he says.
One of the United Nations' new sustainable development goals is to achieve this by 2030, but Ratha says he believes it can be done in the next three years.
Regulators can be part of the solution. Ratha is calling on them to relax regulations, which would help reduce remittance costs. Though he concedes regulatory relief is unlikely to happen anytime soon, Ratha argues that the poor are being unduly penalized by the intense scrutiny of money transfers.
"Small remittances are not money laundering," he says. "We cannot go after every person sending money home in the name of fighting money laundering, in the name of fighting terrorist financing. That is like looking for the needle in the haystack — only we increase the haystack."
Another tactic he is proposing comes with its share of controversy too: abolish the exclusive partnerships that national post offices in many countries have with the leading money transmitting companies. These partnerships stifle competition and keep costs high, he says. "On top of that, when the national arm of the post office collects a fee, it is not different than a tax on poor people."
But the main way Ratha proposes to lower costs — which does not depend on waiting for regulators or postal officials to help — is by creating a nonprofit platform for facilitating remittances.
He says any remittance provider — bank, credit union, money transfer company, or even a mobile phone company — would be able to use the platform for a low fee. He envisions placing a limit on the markups these platform users could charge, as the intent would be for the savings to be passed on to the consumer.
He is in the early stages of working on such a platform now, talking to philanthropic organizations and social-impact investors. Even so, he does not see the operation as a charity, but rather a financially sustainable model that charges just enough to cover its expenses.
"To very poor people sending money home, you will be giving them a $20 billion gift year after year by reducing remittance costs. And that technology exists. It can be done," Ratha says.