Last year, international migrants sent almost $600 billion back to their home countries, with much of that money coming from the United States. These cross-border exchanges, sometimes known as remittances, allow people living and working abroad to support their families back home and are a vital financial tool for millions around the globe.
However, the popular service remains expensive, slow and nontransparent at a time when other financial products, thanks to tech advancements, have come down in price. The money transfer organizations that dominate the business charge high fees and often offer scandalous exchange rates, resulting in a regressive tax on the world's poor.
In a world of globalized supply chains, in which trillions of dollars change hands every day, we can do more to drive down the costs of small remittances, which are often essential for the well-being of the recipients in workers' home countries. India, for example, receives twice as much in international remittances as it does in foreign direct investment.
Sure, banks and money-transfer organizations will point to anti-money-laundering laws and U.S. concerns about terrorism financing as justifications for the high costs of international transfers. But lack of transparency in pricing and excessive fees don't hurt the real malefactors. In fact, they could do the reverse by driving even legitimate remittances underground.
In rich countries like the United States, both regulation and new technology have brought much greater visibility and efficiency to the pricing of mortgages, credit cards and bank fees. The changes have resulted in cost savings and increased choice for consumers in these areas.
In the United States today, technology companies like Square and PayPal, for instance, allow us to fling money across the table at a restaurant to settle a bill, or across the country to support our children in college. These services cost little or nothing and complete their transactions near-instantly.
But the remittance industry remains an island of opacity and high costs despite tech advancements.
Every year, hundreds of thousands of workers in the United States send money back home to family in Mexico and elsewhere in Latin America. The amounts are typically small — perhaps $200 at a time — and transfer fees average 5% of the total, according to the World Bank. That cost has changed little in recent years, and even rose slightly in 2015.
The U.S. and Mexico are two neighboring countries that will conduct more than half a trillion dollars in trade in goods this year. You better believe that the multinationals conducting that trade aren't paying 5% transaction fees to send money north and south of the border.
Globally, the cost of remittances is just under 9% of the value of transactions, according to the World Bank. Four years ago, leaders at the G-20 resolved to bring it down to 5% or less, but too little progress has been made.
We need to pull back the veil on the international money transfer industry in order to accommodate the "New Americans" who send their hard-earned wages to finance food, housing, health, and education for their families back home.
That is why I recently teamed up with Dr. Noel Maurer, an associate professor at George Washington University, to take an in-depth look at who uses international money transfers. The white paper, "Mobile Money /Global Money: An In-depth Look at Modern Day Money Transfers," examines international money transfers and the significant difference they make in the lives of people around the world.
Regulatory hurdles and the lack of formal banking institutions in many parts of the world are just two of the obstacles to the international money transfer space moving forward. But these obstacles can be met head-on.
Regulators should task remittance organizations with delivering accurate consumer information upfront. Before any green exchanges hands, remittance senders and receivers alike should know how much the transfer will ultimately cost, how long the transaction will take and where they can access remittance money in their respective countries.
Any legal framework that covers remittances should apply equally to all service providers. Such nondiscriminatory regulation will foster a more competitive market.
If we want banking to reach the world’s poor, there is no reason for the remittance system to be stuck in neutral.
And if we want to make banking work for everyone — and to be seen to work for everyone — bringing transparency and efficiency to this vital lifeline for the world's poor would be a good place to start.