Remittance can be defined as a cross-border, person-to-person payment. Migrants who find employment in other countries often send part of their wages to their families who reside in their home countries. The amounts sent might traditionally be small but usually, account for a good percentage of their families fixed monthly expense. Remittance also helps in improving the families’ standard of living, improving health, and sometimes acts as a critical lifeline when there is need of money.
This could be seen in the recent inward remittance statistics (2018), where USD 78.6 billion was sent to India by the Non-Resident Indians (over 31 million in 2019 as per the data from UN Department of Economic & Social Affairs), and one major reason for such high numbers was the natural disaster that struck India (Kerala floods). As per the World Bank, a trend could be witnessed where there is an increase in the financial help that has been sent by migrant workers to their families over that period. The remittances to low and middle-income countries rose 9.6% from 2017 and recorded a high of $529 billion in 2018. In the below graph, the top 10 recipients of remittance globally in 2018 are pictured.
The World Bank estimates that the global average cost for sending remittance was 6.94% in Q1 2019, although this figure has declined by 2.73% since Q1 2009 (9.67%), it is still twice as high as the United Nations Sustainable Development Goal (SDG) target of 3%. The reason for such high remittance costs is because banks consider the remittance sector as high-risk. Cross-border remittance requires multiple credits and debits across multiple transactions before the amount reaches the final recipient. In the case of money transfer operators, the money transfers go through a network of agents across the globe and the cost of maintaining the agent is passed to the consumer who is transferring money. In the below chart, we have compared the average percentage of the total amount for sending USD 200 and USD 500 through banks, MTOs, and FinTech companies from the USA to India.
(Source: The World Bank, Remittance Prices Worldwide, available at http://remittanceprices.worldbank.org and MEDICI Research)
InstaReM (0.50%) provides the cheapest mode of remitting money from the USA to India (USD 200), while Transfast (0.77%) is the cheapest in MTO and Wells Fargo (1.21%) is the cheapest among banks.
The average time taken to remit money through bank account transfer is over 1.5 days; 1.3 days for cash, and approximately 1 day for debit/credit cards.
On average, the foreign exchange rate applied in addition to the inter-bank exchange rate for the transaction is 2.31% more by MTOs, 1.53% more by FinTechs, and 2.48% more by banks.
The highest fee levied by the remittance providers is ‘In-Branch Transfer’ through SBI California (USD 15), remittance through debit/credit card in Ria Transfer (USD 9), and remittance through an agent by MoneyGram (USD 11).
FinTech firms have impacted the remittance market by reducing the cost that was earlier decided by banks and MTOs. The new-age companies are using technology to give better services by creating automated digital platforms with better user interface, providing multiple payments, multiple currency options, and value-added service such as cash pickup. While banks and MTOs face challenges to cope up with strict regulations to be AML and CFT compliant, FinTech companies are using technology such as e-KYC and biometric verification to reduce their cost.
As FinTech companies adopt new technologies to reduce their cost and increase the coverage areas, it won’t be long before the highest amount remitted would be through FinTech.
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