What Is A Remittance And Its Impact On Global Economies?
A remittance is money that is sent from one party to another. Broadly speaking, any payment of an invoice or a bill can be called a remittance. However, the term is most often used nowadays to describe a sum of money sent by someone working abroad to their family back home.
The term is derived from the word remit, which means to send back.
Key Takeaways
- A remittance is money sent to another party, usually in another country.
- Typically, the sender is a foreign worker and the recipient is a relative in the recipient’s home country.
- Remittances represent one of the largest sources of income for people in low-income and developing nations.
- Remittance amounts often exceed the amount of direct investment and international development assistance that a country receives.
- Intelligence agencies view remittances as a potential source of funding for terrorism.
Understanding Remittances
Remittances can be money sent as payment for a bill. However, most remittances involve sending money to relatives. They are often sent by foreign workers to family members in their home countries. The most common way of making a remittance is by using an electronic payment system through a bank or an electronic money transfer service.
Remittances play an increasingly large role in the economies of small and developing countries. They also play an important role in disaster relief, often exceeding official development assistance (ODA). They help raise the standard of living for people in low-income nations and help combat global poverty.
In fact, since the late 1990s, remittances have exceeded development aid and in some cases make up a significant portion of a country’s gross domestic product (GDP).
According to the World Bank, $508 billion in remittances were sent to low- and middle-income countries in 2020. This was followed by $605 billion in 2021. In 2019, they reached an all-time high of $548 billion but declined thereafter due to the Covid pandemic.
Remittances to these countries are expected to grow to $630 billion in 2022 and $659 billion in 2023. The amount is larger than the foreign direct investment and official aid funds sent to these countries (excluding China).
Remittances are also used to help those living in less developed nations open bank accounts, a trend that helps promote economic development.
How to Send a Remittance
Remittances typically are sent using an electronic payment system or service. Here are the common steps:
- Visit a bank or credit union or use an online platform to initiate a wire transfer or an ACH transfer. Transfers can be quick but may take up to several days.
- Provide the recipient’s bank details—bank name, bank account number, and routing number.
- You can also use apps such as PayPal and WorldRemit to send money internationally.
- Money transfer services like Western Union can be used either in-person or online.
- For U.S. Postal Service money orders, visit a postal location, provide the amount using cash or a debit card, fill out the money order, and send it by mail.
Remittance Fees
Fees for sending money internationally vary by provider and service. Here’s a breakdown:
- Banks and credit unions: Up to $45 for outgoing domestic transfers and higher for international transfers.
- ACH transfers: Generally lower cost, especially when remittance goes directly into a recipient’s account.
- Money transfer services like Wise: Can charge a flat fee plus a small percentage of the transfer amount.
- PayPal: Fees for international transfers include up to 5.00% of the transaction amount and a currency conversion fee.
- U.S. Postal Service: Charges an issuing fee plus a variable processing fee based on the destination country.
6.4%
The global average cost of sending a $200 remittance in the first quarter of 2021, according to the World Bank. It costs more to send remittances through banks than through digital channels or money transfer services.
Financial Impact of Remittances
The 2020 Economic Crisis and COVID
The 2020 economic crisis and COVID-19 had a severe impact on migrant workers and their families back home.
The World Bank estimated in late 2020 that remittances to family members would drop significantly due to rising unemployment among migrants and returning to their home countries. The cost of sending global remittances continued to be a concern.
In 2021, transfer costs for remittances to regions like the Middle East, North Africa, and Sub-Saharan Africa declined slightly but were still considered high.
Examples of Remittances
In low-income countries, remittances represent one of the largest sources of income. For instance, in 2015, Mexicans abroad sent over $24 billion back home, surpassing the revenue from selling oil. Similar trends were observed in Venezuela in 2017, where over $1.5 billion in remittances were sent to family members remaining in the crisis-stricken country. The top remittance recipient countries in 2021 were India ($89 billion), followed by Mexico ($54 billion), and China ($53 billion).
Special Considerations
Remittances and Crime
There are concerns among financial intelligence units that remittances can be used for laundering money or sponsoring terrorism. Although most value transfers occur via web or wire, a significant amount of money is transferred in ways that are harder to track.
The Impact of Fintech on Fees
Recent technological developments in fintech are reducing fees for international money transfers. Key players like Payoneer, Wise, and WorldRemit are making significant contributions in this field.
Common Questions About Remittances
What is a remittance?
A remittance is money sent from one person or entity to another. It can be for bill payments or more commonly, it is money sent by someone in one country to relatives or friends in another.
How do I send a remittance?
You can send it using a bank wire transfer, ACH transfer, money transfer service, or apps like PayPal. Alternatively, you can send a money order by U.S. mail.
What’s the difference between a remittance and a payment?
While a remittance can be a payment for a bill, it often refers to funds sent internationally, such as money sent to family or friends in another country.
The Bottom Line
Remittances are vital for the economies of many low- to middle-income nations, acting as a critical lifeline in times of disaster. Reducing fees and facilitating the transfer of these funds should be a focus for policymakers worldwide.
Related Terms: wire transfer, ACH transfer, foreign aid, developing nations, gross domestic product (GDP).
References
- The World Bank. “Migration and Development Brief 36.”
- World Bank. “Migration and Development Brief 33”.
- USPS. “Sending Money Internationally.”
- Wise. “International Money Transfers.”
- Paypal. “PayPal Consumer Fees.”
- The World Bank. “Remittance Flows Register Robust 7.3 Percent Growth in 2021.”
- World Bank. “COVID-19: Remittance Flows to Shrink 14% by 2021”.
- NBC News. “Mexico Got More Money from Remittances Than from Oil Revenues in 2015”.
- Bloomberg. “Venezuelan Refugees Send Billions Back Home, Helping the Lucky Survive”.
- Migration Data Portal. “Remittances.”
