Reducing Remittance Costs: A Matter of Competition, Technology — and Post Offices

 

Sub-Saharan Africa has some of the highest remittance costs in the world, according to the World Bank, which reports that it costs migrant workers in South Africa $48.17, on average, to remit $200 to relatives in Malawi, where these agricultural workers are shown harvesting groundnuts. IFAD and other organizations are sponsoring the African Postal Financial Services Initiative to reduce the cost of getting remittances to people in rural regions of southern Africa. Photo by Swathi Sridharan via Wikimedia Commons.

Ten years ago, it was typical for 20 percent or more of the money a migrant worker sent to his or her family in a developing nation to be eaten up by transmission costs. Thanks to factors including increased competition and technological advances, that percentage has dropped steadily over the past decade, so that the World Bank reports that for the first quarter of 2013, the global average stood at 9.05 percent.

That average masks wide disparities between and within countries, however, and further reducing the cost of remittances – the money migrants send home – has emerged as one of the most-effective ways to combat poverty around the world. That’s because remittances to developing nations, estimated by the International Fund for Agricultural Development (IFAD) to total roughly $450 billion this year, are five times greater than the value of the official development assistance (ODA) provided to those countries. Further, remittance levels are growing robustly, with 2013 amounts expected to be approximately 10 percent above those for 2012. IFAD estimates that over the next five years, cumulative remittances to developing countries will exceed $2.5 trillion. Given that volume, just a one percent reduction in average remittance costs means another $25 billion going directly to the world’s poorest people – without the fiscally beleaguered governments of the developing world having to increase their aid budgets.

Pedro De Vasconcelos says that such additional reductions will require even more competition among financial service providers, a favorable regulatory environment, greater use of technology, and new means of reaching and serving the rural poor.

De Vasconcelos has worked on remittance issues since 2000, when he began formulating initiatives for the Inter-American Development Bank in Latin America and the Caribbean. In 2007 he joined IFAD, a specialized agency of the United Nations, to launch its Financing Facility for Remittances (FFR), a multi-donor campaign that uses a call-for-proposal process to identify and co-finance innovative, sustainable projects that reduce the transfer costs of remittances, build institutional partnerships, provide banking and other financial services to the poor, and promote productive investment of migrants’ capital in the rural areas of their home countries. The FFR currently supports almost 50 such programs in more than 40 countries in the developing world. When one of those efforts proves particularly successful, the FFR enlists other divisions within IFAD or partner organizations to scale up or replicate the program.

In a recent interview with this blog, De Vasconcelos – IFAD’s Fund Manager for the FFR – said he expects the size of the remittance market to go a long way toward ensuring increased competition. “In 2000, it was extremely expensive for migrant workers to send remittances home, with costs in the range of 20% to 25% even from capital to capital. A major problem was that there were no reliable figures on the amounts involved. For many years, remittances were hidden in the errors and omissions section of a central bank’s balance sheet. As a result, there was very little competition for this type of transaction. Then, as reporting got better, and the central banks adjusted their figures and the remittance numbers were published, financial institutions beyond money transfer organizations started to become interested,” De Vasconcelos notes. In recent years, he adds, many banks that initially decided to process remittances to generate modest fees have reduced or even waived those fees as a means of enticing senders or recipients to maintain deposits or seek loans.

Despite that welcome development, too many markets remain dominated by just one or two money transfer organizations or banks authorized to handle remittances. “This is where the regulatory framework in the recipient countries really needs to change to encourage competition and to reject exclusivity agreements,” De Vasconcelos notes. He cites lack of competition as the main reason transaction costs remain at or above the 20 percent mark in some countries, as compared to costs hovering around the two or three percent level elsewhere. The breadth of those disparities is illustrated by the World Bank’s ongoing monitoring of remittance costs for 220 “country corridors” globally. The bank’s latest data show that the cost of remitting $200 varies from $4.02 from the United Arab Emirates to $48.17 from South Africa to Malawi. Indeed, the five most-expensive country corridors are in sub-Saharan Africa and often involve contiguous countries, such as the South Africa-Botswana corridor ($42.14) and the Tanzania-Rwanda corridor ($42.57).

In many cases, De Vasconcelos adds, high transaction costs are driven not so much by the country in which a recipient lives but by where within that country he or she resides. “Approximately 40% of the people receiving remittances live in rural areas, and the costs they incur are more than double, on average, those incurred by people in the same country who live in urban areas. This is where you’ll still see transaction costs of 20%,” he explains. Additionally, IFAD has reported that, compared with their urban counterparts, rural recipients incur hidden costs involving travel time and expense, and the risk of being robbed while traveling long distances from a payment center to their home.

In response to those challenges, IFAD is co-financing several projects to extend the financial infrastructure from major cities into rural areas, and to encourage use of mobile technologies. It also recently launched the African Postal Financial Services Initiative, a program designed to reduce the cost of remittances to and within Africa, reduce transaction times, broaden the network of rural locations, and deepen the range of financial services available to Africa’s rural poor. The $7 million initiative – co-sponsored by the World Bank, United Nations Capital Development fund, World Savings Bank Institute/European Savings Bank Group, and the U.N.’s Universal Postal Union – will expand the role of postal networks in the rural areas of up to 10 African countries.

De Vasconcelos explains that African postal services are a natural focal point because they constitute an existing network in rural areas. The Universal Postal Union reports that more than 80 percent of post offices in sub-Saharan African countries are located outside each country’s  three major cities, giving postal services a rural presence and reach that large banks can’t rival. The initiative will offer technical assistance, support for pilot projects, and access to external resources to help postal services modernize and facilitate provision of remittances and other financial services in a manner designed not to favor or penalize specific market players.

As the African postal initiative and other effort elsewhere around the world unfold, De Vasconcelos emphasizes that reducing transaction costs – while critical – is only a first step. “Yes, you have to build up financial markets and services to reduce costs, but unless that is accompanied by increased financial literacy and increased opportunities to invest – rather than just spend – you will miss opportunities,” he notes.

Sending $200 (USD) Home: Most- and Least-Expensive Country Corridors

Most   Expensive		Least   Expensive
South Africa to Malawi	$48.17	United Arab Emirates to Pakistan	$4.02
Tanzania to Rwanda	$42.57	Saudi Arabia to Pakistan	$5.17
Tanzania to Uganda	$42.34	Saudi Arabia to Bangladesh	$5.42
South Africa to Botswana	$42.14	Saudi Arabia to Yemen	$5.96
South Africa to Zambia	$42.07	United Arab Emirates to Sri Lanka	$6.36

Source: The World Bank. http://remittanceprices.worldbank.org/.