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IMF World Economic Outlook.
Globalisation and External Imbalances.
April 2005
Chapter II Two Current Issues Facing Developing Countries. 

World Bank Global Development Finance.
Managing Vulnerability.
6 April 2005

Remittances to Latin American & Caribbean countries topped $45 billion in 2004.
IDB fund reports money sent by migrant workers rose nearly 20 percent over 2003
22 March 2005

Articles

Sending Money Home – Remittances to Developing Countries from the UK
Douglas Pearce & Victoria Seymour, Department for International Development (DFID), United Kingdom

Sending Money Home – Remittances to Developing Countries from the UK
Douglas Pearce & Victoria Seymour, DFID

Remittances are amounts of money – typically between £50 and £500 - sent by people working in the UK back to families, friends and even the wider community in other countries. Money sent home by diaspora from high- and middle-income countries is the second largest financial inflow to developing countries behind foreign direct investment, exceeding international aid.

Estimates for total remittances sent from the UK to developing countries range from £463 million to £2.8 billion, with the most reliable estimate being £2.3 billion (for 2001)¹. This represents a tiny proportion of UK GDP (0.23%), but over three-quarters (78%) the total for official UK Overseas Development Assistance. The primary developing country recipients of UK remittances are India, Pakistan, the Caribbean (particularly Jamaica), China, Bangladesh, Nigeria and Ghana.

Remittances are also significant for the households that receive them, and can make up as much as half of their annual income. Studies show that low-income households spend remittances mostly on basic needs such as clothing, education, food, and health. Remittances are therefore helping achieve the Millennium Development Goals of reducing poverty and expanding access to health and education. Remittances also improve financial inclusion, with more people making use of banks and other financial institutions.

Information available to potential users of money transfer services is scarce and can be confusing. There is a lack of transparency in the market, with information on products and costs not available in an accessible or easily comparable format. This compares notably with the widespread use of transparent APRs (annual percentage rates) for loans, another financial service. It is therefore difficult and time consuming to find out about the full range of options and costs prior to making a transfer.

The Department for International Development (DFID) and the Banking Code Standards Board commissioned a survey² on money transfer products offered to diaspora in the UK in order to address this lack of information and transparency. A number of primary UK remittance destinations were chosen for the survey - Bangladesh, China, Ghana, India, Kenya and Nigeria. Better information on money transfer services should not only help remitters choose a service that best meets their needs, it should also promote healthy competition between money transfer providers that reduces the cost and improves the service for remittance senders. The results of this survey are summarised here in this note.

Cost of sending money transfers
All banks surveyed for the Sending Money Home report offer electronic transfer services, and most also offered bank drafts. Money transfer companies offer cash transfers primarily.  Detailed information on remittance products, costs, and other characteristics can be found at www.sendmoneyhome.org.

The cost of sending money transfers varies widely:

Fees for sending money transfers of £100 range from £2.50 to £40. This implies a percentage cost of between 2.5% and 40%. Fees for sending £500 range from £4 to £40, giving lower percentage costs between 0.8% and 8%. This is because fixed charges are much higher in percentage terms for smaller transfers. This illustrates the relatively high cost that can be faced by low-income migrants wishing to send small amounts back to families and friends.  A few banks and building societies surveyed (four out of the ten) also set minimum fees (the highest being £25). 

 he exchange rate charged on money transfers that are collected in local currency can be a significant additional cost that is often not obvious to those sending money transfers.  Money transfer providers tend to guarantee the exchange rate they offer, but not the amount that will be paid out to the receiver, as additional charges may be added at the recipient-end.  

Banks and building societies tend to be more expensive for low-value transfers than money transfer operators, although there are exceptions.  UK banks generally pitch their remittance services at higher value customers who hold accounts with them. The rates they offer on small money transfers tend to be higher than those offered by money transfer operators.

Money transfer operators (MTOs) tend to offer lower rates than banks for small remittances, as well as convenient services such as longer opening hours. Charges by money transfer operators such as First Remit, Chequepoint and Travelex for sending small remittances of £100 to countries such as Nigeria and Ghana are particularly low. 

Country-specific financial institutions also sometimes provide services that are cheap, convenient and appropriate to the needs of the customers.  For example, Sonali Bank UK charges just £2.50 to send £100 to Bangladesh, and Express Funds and Samba International £3 to send the same amount to Ghana.  ICICI Bank, in partnership with Lloyds TSB, as well as Remit2India, charge only £5 whether sending £100 or £500 to India.

Speed of sending money
Transfers through banks average 5 days, varying from 2 to 10 days depending on such factors as the transfer mechanism used and the processes of the receiving bank. It frequently takes less than 24 hours for a transfer through an MTO to take place, on the other hand, with some transfers taking place within 10 minutes.

Outlets/convenience
The coverage of money transfer providers in the UK varies greatly, from those with no outlets (these may be online services or may use agents) to those with 4000 (in the case of MoneyGram).  Some providers which have small numbers of outlets may, however, centre those outlets in areas where their target audiences live, work and shop, so their smaller numbers are not necessarily a hindrance to convenience.

Money transfer operators tend to offer better coverage in the receiving countries.  MTOs have varying numbers of outlets in receiving countries, though the largest brands, such as Western Union and MoneyGram, tend to have the most extensive networks (with over 196,000 and 60,000 agents/outlets worldwide respectively).

Only a few UK banks have a branch network of their own in developing countries, although most have correspondent or partner banks. While by no means all correspondent banks have large branch networks, Lloyds TSB has developed a partnership with ICICI Bank in India that offers fast transfers at no fee to account holders and at a low fee for other users, with 500 branches and 2000 cash machines across India.

Customer Preferences
Security (trust) was found to be a principal factor in choosing a money transfer provider. People often choose a provider based on the recommendation of someone else that has used them to send a money transfer.

Banks are seen as more trustworthy and better known, and thus benefit from this customer preference. Banks also offer a wider range of financial services than money transfer operators.

Independent money transfer operators are seen to offer a consistently better service to customers though – perhaps because they are focused on money transfer products, rather than offering the wide range of financial services that banks do. They were reported to have better-polished, speedier procedures and more readily available literature and targeted leaflets. MTOs seem to be more geared to the regular and low-value transfers that are the most common form of remittances to developing countries.

Where a transfer needs to be made quickly, customers seem prepared to pay more for the service. Trust, speed and cost are traded off against each other depending on the priority of the customer for that particular money transfer. The distribution network in the receiving country – for example whether the money can reach a relative in a rural area – is another decision factor.

Identification requirements
ID requirements are viewed as either confusing or onerous, particularly at UK banks and building societies. Once ID requirements had been explained to them, most remittance senders surveyed then saw the requirements as much less of a barrier. However, only an average of 6% of bank, building society and MTO staff approached by the mystery shoppers in the survey informed customers that two items of documentation were required, indicating that clarity on ID requirements can be improved.

Remittances to developing countries as an attractive market
In addition to the thriving and growing formal remittances market highlighted by this survey, there is a substantial market still to be tapped. People often send money  with friends or family members who are travelling back to the country of origin, or through other ‘informal’ methods. Money is also sent through agents (sometimes called ‘Chop’ or ‘Hawala’) that may not be registered.

How banks and money transfer operators might make money transfers more attractive to potential diaspora customers
In conclusion, we would offer the following suggestions for how to better serve this growing market:

• Charges for small transfers can be high relative to their value, and lower charges could attract a higher volume of transfers – particularly through banks, which are seen as trustworthy but more expensive.  Consider introducing a charging structure that does not penalise low value transfers.
• Make client identification requirements clear and not excessive.
• Expand collection and distribution outlets in the UK and receiving countries. Convenience and access is an important consideration for senders and recipients. In receiving countries, this may be achieved through new partnerships e.g. with post offices, microfinance institutions, or using cash machine networks.
• Provide targeted marketing communications and train staff to view remittances as a normal day-to-day financial service. Better train front office staff in providing information on money transfer products, and in dealing with people from ethnic minorities who may not be familiar with UK banks. 
• Build a trusted brand, that people recognise and feel secure sending money through.
• Provide automatic acknowledgement of receipt from the recipient’s bank or other outlet.
• Develop marketing strategies that build remittances as an entry point to offering a wider range of financial services. Diaspora may need savings, loans, and other financial services in addition to money transfers. Banks are particularly well placed to build market presence in UK diaspora groups.

 References/Further Information

• For the full report ‘Sending Money Home? A Survey of Remittance Products and Services in the UK’ and country-specific leaflets, see www.sendmoneyhome.org
• DFID and remittances: http://www.sendmoneyhome.org/Contents/about%20dfid.html

 ¹DFID has commissioned the first of several household surveys to provide improved UK remittances data, and is working closely with the Office of National Statistics.
²This survey ‘Sending Money Home? A Survey of Remittance Products and Services in the UK’ was conducted by NOP World, NOP World Social and Political and NOP World Mystery Shopping and edited and printed by Profile Business Intelligence.

Caixa decides to play a role in migrant remittances
Wilson Risolia, Vice President, Caixa Economica Federal, Brazil

Remittances are an important contribution to economic growth and development and it is estimated that global volumes of formal and informal flows of migrant international transfers amount to over $US 200 billion per annum.
There is both a business and a policy case for promoting access to fair value remittances. Caixa Economica Federal outlines their experience:

Nowadays, remittances sent by Brazilians living abroad are mostly made through informal means, due to the fact that many of them do not have legal status in the countries where they reside. Such unconventional financial operations result in very expensive costs, usually up to 8 percent per transfer. Most of the remittances come from the US—an estimated 55 percent. Japan is in second place with 27 percent of the remittance flows to Brazil. It is estimated that there are 2.5 million Brazilians living abroad. Last year, they sent US$2.9 billion back to Brazil, according to the Brazilian Central Bank, as Inter-American Development Bank assesses, from estimates that included values of remittances not captured by official statistics, the total amount reached US$ 5,8 billion in 2004.

In order to offer solutions to these emigrants, Brazil’s state-owned CAIXA ECONOMICA FEDERAL, the third largest bank in Brazil, has created an instrument by means of which Brazilian emigrants are able to open accounts through the Internet outside the country. This instrument was designed to streamline the remittance process by allowing Brazilian emigrants to establish accounts, thereby avoiding high tariffs and fees charged by private banks and financial services.
Using a credit card, the emigrant who lives abroad can send about R$ 10.000 to Brazil per month at very low costs, about 2,52 % the remittance value. Moreover, another possibility for remittances was recently created. Caixa Econômica Federal and Millennium bcp, formerly known as Banco Comercial Português have created a partnership to handle remittances flowing into Brazil from the United States and Canada at competitive costs.

Such actions will help boost Brazilian emigrants remittances via a lower cost basis, benefiting Brazilian economy as a whole and allowing emigrants to improve their personal savings.