Uniting families and supporting economies: the hidden value of remittances
When we talk about gross domestic product (GDP) most people think of the grinding gears of the manufacturing sector or the billions of people working within the global services industry. Few will be aware of the contribution made by the millions of working people worldwide who send money to family back home.
These payments – remittances – are a major contributor to the financial health of many nations around the world. According to a new report by the Visa Economic Empowerment Institute (VEEI)1, 28 countries received more than 10% of their GDP in remittances in 2019. Almost a third of them generated 20% or more through this channel (Tonga receives almost 40% of its GDP this way). In 2020, numbers dropped as the COVID-19 crisis hit the livelihoods of ex-pats everywhere but, in 2021, numbers are rising steadily once more; the UK and Germany are among the top 10 countries in the world for sending remittances.
The VEEI’s research has uncovered the true value of global remittances, which hit a record high of approximately €593bn in 2019 – the equivalent to the entire GDP of Switzerland. “At present, there are 200 million migrant workers that use remittances to send financial support back to their countries of origin,” explains Ruben Salazar Genovez, Global Head of Visa Direct, which enables fast payments to a billion cards worldwide. “Every time an individual leaves their country of origin, they are likely leaving because they are seeking a better life. They want better jobs. They want to live in areas that are safe. But when they leave, they often leave dependent family members behind. Remittances pay for medical bills, utilities, and basic needs whilst helping to reduce poverty.”
Reinventing the remittance model
To keep these vital payments flowing, many players within the financial ecosystem are working tirelessly to bring down the associated cost. The aim is to get remittance costs2 down to 3% by 2030. Right now, the cost stands at between 4% and 7% – sending payments via mobile money is currently the most cost effective way to send money, but remittances initiated with credit or debit cards have been on the best cost trajectory over the last couple of years.
There are barriers to further improvements: digital remittances (those that are initiated and paid for online or via app) are on the rise, but many places around the globe don’t have reliable access to the internet. Timothy Summers, VP of Digital Product at Visa explains: “Enabling migrant workers to digitally send remittances is definitely moving costs in the right direction. The real opportunity, though, is enabling digital receipt of those remittances. Right now, the vast majority of digital remittances are still picked up in cash on the other end. We think that's adding 100 to 300 basis points in costs. When we have true digital receipt at the receiving end, then the costs can come down further.”
Building a fairer world
The widespread digitisation of remittances could have many socioeconomic benefits, boosting inclusion for marginalised groups. “Carrying cash can be a serious impediment for women to do business,” explains Barbara Kotschwar, VEEI Executive Director. Female business owners who worry about carrying cash to banks, or withdrawing funds from ATMs, could be empowered through digital payments, she adds. “Being able to receive remittances digitally can be a big factor in helping women, in particular, manage their businesses in a safe manner.”
Yet, for these cross-border transactions to remain fit-for-purpose, organisations within the financial ecosystem must work together to further digitise the process, to make sending and receiving remittances as easy as posting on social media or receiving a text. Governments too must streamline the rules to enable banks and other organisations operating across multiple jurisdictions to focus on innovation, rather than navigating scores of regulatory and licensing regimes.
“Policy makers should focus on helping enable this progress in two ways: streamline the regulatory environment associated with cross-border payments and simplify the process for bringing new products to consumers and communities,” says Chad Harper, Global Payments Fellow, VEEI.
Safeguarding the future of payments
Remittances are a vital part of the financial ecosystem and will remain so over the coming years. Take India, which is currently struggling to cope with a steep rise in coronavirus infections, it also receives the highest flows of remittances, according to the World Bank.3
There has never been a better time for banks and money transfer organisations to bring their resources and expertise to bear. One in nine people across the globe are currently supported by these payments, according to the United Nations4: that is a customer base of nearly a billion.
Remittances are so much more than payments. They are university fees, food on the table, cash in a crisis and a reminder that loved ones care. They have an important role to play in the lives of both senders and receivers. Therefore, they need to be faster, more inclusive, much more transparent and cheaper. VEEI’s Harper concluded: “We want digital remittances to work for everyone in every possible country pairing you can think of globally.”
Read the full report by the Visa Economic Empowerment Institute here.
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1 Source: Visa Economic Empowerment Institute, the rise of digital remittances
2 Source: UN Sustainable Development Goals #10
3 Source: World Bank Annual Remittances Data, Inflows & Outflows (October 2020)
4 Source: UN Remittances Matter: 8 facts you don’t know about the money migrants send back home
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