Transaction costs in remittances

One oft cited criticism of development economists is lack of a proper financial system to transfer remittances. So say someone earning in Delhi has to transfer his savings to his home in rural Jharkhand, there is no proper system. Same is the case for transfer of remittances from developed country to developing country. So it mainly happens through informal channels which are not reliable and costly as well.

World Bank’s Payment System Development Group have written a nice paper (HT PSD Blog) analysing transaction cost in remittances. More detailed data can be accessed on the Remittance Prices website.

Highlights:

  • The World Bank estimates that remittances totaled $420 billion in 2009, of which $317 billion went to developing countries, involving some 192 million migrants or 3 percent of the world population.
  • The global average total cost for migrant remittances has reduced to 8.72 percent, down from 9.40 percent recorded in Q3 2009.
  • The volume of migrant remittances from a sending country and the average total cost are highly correlated. Large volume of remittance outflows typically implies lower average total cost. Countries with large volumes have seen a number of new products and services launched that play a role in keeping costs down.
  • In general terms, it is more expensive to send remittances through commercial banks. The global average total cost for sending remittances through commercial banks was 12.38 percent in Q1 2010, compared to the global average total cost of 8.72 percent. On average, Post Offices and Money Transfer Organizations (MTOs) were  the cheapest at 6.72 and 7.09 percent respectively.
  • The average total cost of sending remittances to the countries in South Asia and Latin America is the lowest when compared to the global average total cost and other regions. Both regions have shown a drop in the average total costs since 2008.
  • Countries in Europe and Central Asia Region also display a trend that is lower than the global average, however when Russia is excluded from the data, the average total cost trends a lot higher than the global average.
  • Countries in East Asia and Pacific (EAP), Sub Saharan Africa (SSA), and Middle East and North Africa (MENA) regions have demonstrated higher average total costs for migrant remittances compared to the global average. The MENA region has seen the sharpest drop in the average cost, with the latest iteration showing a 2 percent drop in average costs since 2008.
  • The average total cost of sending remittances from G8 countries is almost at par with the global average total cost. However, this number would be a lot higher than the global average if Russia were excluded from the data.
  • The South-to-South corridors demonstrate higher average total cost for migrant remittances when compared to the global or regional averages.

Very useful stuff. So, on an average out of every $100 sent, about $8.7 go to the intermediary. This is very high given the amount of utlility each $ matters for the poor. And when you see commercial banks’ it is at 12.4%. No wonder Ryan Hahn at PSD Blog says – Even worse than ATM fees.

However, in some areas like India, Pakistan etc commercial banks have worked to lower the intermediation costs. So it is all depends on areas. Some countries like Mexico have invested in remittance payments system, costs are much lower comapred to global average at 7.42% in Q1 2010.

In China, though volumes are high the transfer costs remain high as there is poor infrastructure.

So, we have a mixed evidence as far as countries are concerned.

What are the suggestions to lower costs further? Simply improving payment infrastructure will not help.

Countries that have consistently shown low average total cost for migrant remittances are not necessarily the ones with the most advanced retail payments infrastructure. Whereas, the quality of retail payments infrastructure is very important in ensuring efficiency, safety and security of a payment transaction and more choice for the consumer, there are other factors that are also equally important in ensuring low cost of remittances.

Countries like India and Pakistan have demonstrated an active role by the public authorities that ensures the low cost of migrant remittanc from high volume corridors.

Mexico has invested heavily in the promotion of transparency and consumer protection in addition to improving the retail payments infrastructure.

Russia and Nigeria made exclusivity agreements illegal, thereby promoting competition in the market, which might have had an influence on lowering the average cost of remittances.

The Philippines simplified legal and regulatory environment to promote non-bank operators to provide innovative remittance services that includes mobile payments and prepaid cards.

Great insights. It would be great to read a study on India as well. How much do these charges differ between various states?

I am just checking the huge database on the Remittance Prices website. See this list of remittances to India.

3 Responses to “Transaction costs in remittances”

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  2. Law Offices of Howard G. Smith Announces Investigation On Behalf of Shareholders of Stanley, Inc. | Hot Penny Stocks | Finance news and hot penny stock tips Says:

    […] Transaction costs in remittances « Mostly Economics […]

  3. How European crisis could impact India? Understanding the linkages….. « Mostly Economics Says:

    […] In case of remittances, we see a decline in crisis period Oct 08 – Mar 09 but see improvements as crisis eases. There were huge concerns of remittances collapsing because of the crisis. In some countries they did collapse worsening poverty status. In India, despite the decline it manages to remain in positive. (see this study on remittances) […]

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