The chart below shows the countries that are the largest receivers of remittances and importance of inflows relative to GDP.
Source: World Bank
As one of the most important destinations of global migration, North America, which includes Canada and the U.S., represents the largest source of outbound remittances globally.12 The opportunity to send remittances home is one of the most important motivations for migrants. It is fueled by economic opportunity, job growth across a variety of industries (e.g., agriculture, health care, transportation, etc.), access to networks - both physical cash-in and digital networks, a variety of channel offerings coupled with strong value propositions, and favorable and compliant regulatory policies. In turn, the flow of remittances can affect economic growth, labor markets, poverty rates and future migration rates in North America as well as in recipient countries.
Remittances have become deeply embedded into the everyday routines for many migrant workers living in the U.S. and Canada – and represent a sizable opportunity for those banks and financial services providers who cater to their needs.
The sector proved resilient amidst challenges, performing far better than anticipated
Remittances to some countries have remained strong despite initial expectations.
A summer 2020 report from the International Monetary Fund set out the risks: “The pandemic will deliver a blow to remittance flows that may be even worse than during the financial crisis of 2008, and it will come just as poor countries are grappling with the impact of COVID-19 on their own economies. Migrant workers who lose their employment are likely to reduce remittances to their families back home. Recipient countries will lose an important source of income and tax revenue just when they need it most. In fact, according to the World Bank, remittance flows are expected to drop by about $100 billion in 2020, which represents roughly a 20 percent drop from their 2019 level.”13
In April 2020, the World Bank predicted that 2020 remittance flows to LMICs would contract by 20 percent. In fact, they reduced by 7.5 percent (with a further 7.5 percent forecast for 2021).14 It is still a significant contraction, but several factors were at play which helped reduce the impact.
Mexico, for example, experienced one of the lowest decreases in remittances among Latin American countries at 2.6 percent (in April 2020). The buoyancy was partly driven by a favorable exchange rate between the Mexican peso and U.S. dollar. According to the Pew Research Center, Mexico and the Dominican Republic received more remittances through the first half of 2020 than in the first half of 2019. Pew also found that other regions experienced a decline during the first six months of 2020, then showed signs of a rebound. “For example, remittances to the Philippines and Bangladesh, two countries that are among the world’s top sources of international migrants, were down 4.2 percent and 1.4 percent, respectively, compared with 2019, with especially sharp declines in April. But monthly remittances to both countries rebounded in June.”15
Given the stellar results cited by digitally enabled operators, it would be logical to assume that the availability of digital solutions played a factor in the early rebound and the way the sector defied expectations.
Here we set out five points to consider when developing a digital remittance program:
#1 - It must be quick – and it must be transparent
Increasingly, consumers expect – and deserve – near real-time cross-border money transfers.
All of us have become accustomed to instant gratification with full transparency in other areas of consumer experiences (like with your taxi app, for example, that tells you where your driver is and when they will arrive). It should be the same for remittances – giving clarity, certainty and convenience to senders and receivers alike.
However, cross-border payment methods like wire transfers and ACH payments are traditionally processed in batches and may take hours or days to settle – and this is how many cross-border payments continue to be made today.
A better approach for most payments would be to integrate existing real-time enabled bank networks and infrastructures with those operated by the cross-border specialists. This would mean that banks in both send-markets and receive-markets could add value – enabling consumers to benefit from quick, convenient, transparent payment choices to reach recipients via cards and bank accounts.
#2 - It must be interoperable
Traditionally, the world’s cross-border remittance services have operated as a series of parallel tracks – limiting their potential reach and adding to the overall cost-base.
In addition, countries around the world employ custom cross-border payment standards, and transmitting funds and data requires a great deal of translation, coordination, and investment. Reliance on legacy payment systems can therefore delay sending money between cross-border corridors, making P2P payments more inefficient and more expensive for both senders and receivers. Meanwhile, the growing number of domestic real-time payment schemes, including the Real-Time Payments network in the U.S., the Real-Time Rail by Payments Canada and the New Payments Platform in Australia are accelerating the demand for equivalent, interoperable systems that make it seamless to move money and data across borders.
The clear need here is for a global, interoperable, real-time payments platform that allows service providers to transfer funds from an originating account to a recipient account via any card (using a 16-digit PAN) or any bank account (using routing/account numbers). It also needs to handle multiple use-cases and provide strong risk controls, security management protocols, network reliability and settlement/exceptions handling services, with gateways to all global card networks, as well as to local debit/ACH/RTP schemes.
#3 - It must have real reach
It is not enough for a cross-border payment solution to reach remote agent locations. It must go further and reach the recipients themselves. In addition, this presupposes that they need some form of an account – to deposit their funds. Yet, an estimated 30 percent of adults worldwide do not have a transactional bank account.16
A requirement for a truly interoperable service should be to reach as many endpoints as logically possible, whether they be traditional bank accounts, prepaid accounts, digital wallets, and so on. Consider, for example, that through the Visa ecosystem alone, there are more than 5 billion potential endpoints, all of which are reachable by a simple, standardized, globally supported 16-digit account numbering convention.
This push-to-card approach has considerable follow-on benefits, by providing a gateway into financial services. As well as encouraging people to open an account, the receipt of remittances encourages them to use it. In one Visa study, for example, we found that those debit card users who had received a cross-border remittance into their account via Visa Direct* went on to show a 55 percent increase in transaction activity and volume, with at least five incremental transactions.17
#4 - It must deliver security and compliance
For service providers, this is perhaps the biggest area of complexity – and cost.
As transfer speeds increase, for example, fraudsters can more quickly take advantage of vulnerabilities, by moving funds to fraudulent accounts on real-time payment rails and potentially disappearing before attacks have been detected.
Adopting digital security systems capable of vetting fraudulent transfers in real-time can alleviate this risk but requires significant investment in areas such as authentication methods, behavioral biometrics, velocity and aggregation tracking. Similarly, transaction and algorithmic tools to flag suspicious activity as well as checking global databases are essential components of any real-time payment solution.
A requirement for any cross-border payments platform should, therefore, be a considerable commitment to security which covers three dimensions:
- Compliance controls and tools to promote a secure and trusted network for real-time money movement
- Deep and rigorous due diligence of any entity that wishes to connect to the platform
- Ongoing vetting of all participants monitoring, for example, adherence to operating rules, transaction controls, sanctions screening protocols and post transaction monitoring and compliance actions