Latin America Advisor

Financial Services Advisor

A Daily Publication of The Dialogue

Are Remittance Costs Coming Down in Latin America?

Photo of money changing hands The United Nations sustainable development agenda calls for lower transaction costs for sending remittances. // File Photo: Mexican Government.

For the 12-month period through August, Mexico’s level of remittances grew 20 percent to reach a new record amount of $56.6 billion, nearly twice the sum that the country received from oil exports, according to the country’s central bank. The United Nations’ 2030 Agenda for Sustainable Development, adopted seven years ago, included a goal—SDG 10.c—of reducing transaction costs of migrants’ remittances to less than 3 percent. How far away are Mexicans, and other Latin American immigrants living abroad, from seeing remittance transaction costs of less than 3 percent across the board? How achievable is that goal for Latin America by 2030, and what obstacles are standing in the way of it? Will pressure to lower costs force some companies out of the market or compel some to cut back services to hard-to-reach customers?

Chad Harper, global payments senior fellow at the Visa Economic Empowerment Institute: “Remittance inflows for 2021 reached $773 billion globally and $605 billion for low- and middle-income countries. In addition to being a critical lifeline for families, remittances are critical to many countries. Last year, 30 countries received more than 10 percent of their GDP in remittances, and eight of them are in Latin America and the Caribbean: Dominica, the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Jamaica and Nicaragua. El Salvador and Honduras received more than 25 percent of their GDPs via remittances. Money transfer operators (MTOs)—both established operators with updated digital business models and the new breed of digital-first MTOs—saw digitally initiated remittances more than double during the pandemic. These newer services offer a variety of advantages for senders and receivers, but still only a third of remittances are initiated digitally, and only one-third of those are received digitally. As of the second quarter of this year, World Bank remittance price data show that cash-funded remittances cost 6.52 percent, while digital ones cost 4.8 percent. In Latin America and the Caribbean more specifically, a cash remittance costs up to 6.2 percent, while a digital remittance costs 5.09 percent—18 percent less. These positive trends are confirmed by some Visa Economic Empowerment Institute modeling and highlighted in a new paper: ‘The economic empowerment of digital remittances: How to unlock the benefits of innovation and competition.’ Given the cost advantages of digital remittances, our focus needs to be on how to enable more of them while keeping the digital cost trajectory moving downward.”

Manuel Orozco, member of the Financial Services Advisor board and director of the Migration, Remittances and Development Program at the Inter-American Dialogue: “Sending costs to Latin American and Caribbean countries are 3.5 percent for sending $200, but when paid in U.S. dollars, it drops to 3 percent or less. Sending money has a cost like anything else, and the percent cost relative to the amount ‘bought’ is often criticized without proper benchmarking. Some refer to average costs without considering the basic weights that the average consumer considers, such as the sending vehicle, payment in U.S. dollars only, and whether the funds are deposited into a bank account or picked up in cash. What is more problematic is that remittance transfer companies are often held to a standard that is not justified by any procedure—the 3 percent benchmark has no empirical, financial or economic foundation. It is an arbitrary assessment. Differences in exchange rate offerings vary across companies and remittance service providers. However, when compared to the exchange rate offered by leading financial institutions in each country, the average remittance service provider exchange rate is not so different from that of the financial institution. That means that there is no gauging or speculation with the currency. There is simple competition. In countries where margins are above 1 percent, exchange rate margins are higher among other financial service providers, too. The real cost—the amount people pay according to the actual amount—not the reference amount, is below 3 percent. It is important to point out that fees have dropped despite inflation in the United States. There is competition and transparency in this market; people know how much they are paying.”

Julia Yansura, program director for Latin America and the Caribbean at Global Financial Integrity: “Remittance costs matter, but the heavy focus on pricing has overshadowed other aspects that are equally if not more important: financial inclusion, consumer protection, regulatory environments and anti-money laundering and countering the financing of terrorism (AML/CFT) risk management, among others. The U.S.-Mexico remittance corridor is among the largest, cheapest and most competitive in the world. According to the World Bank, the average cost to send to Mexico is 4.5 percent for $200 and 3.1 percent for $500; the latter is more relevant since the average transaction is currently around $400. However, these percentages are unweighted averages of all the types of services available and do not necessarily reflect what people are actually paying for the most commonly used services. Remittance costs are complex and depend on multiple factors, including the company used, payment method, speed, sending method, currency and even the way the remittance is received. For example, remittances that are directly deposited into the recipient’s bank account are among the most economical. This comes back to the importance of financial inclusion. The real challenge—and opportunity—for the region lies not in a myopic focus on lowering remittance costs by a few fractions of a percentage, but rather in ensuring that people have access to financial services, starting with accounts. Financial inclusion efforts would certainly lower remittance costs and would go much further in terms of building economic prosperity.” 

Kai Schmitz, partner at Crestone Venture Capital: “The cost of sending remittances to Latin America hasn’t fallen significantly in the past years. The traditional U.S. sending market has been competitive for a long time, and new online providers have similar prices than many of the physical providers. They have lower origination costs but often must invest more in customer acquisition. It therefore seems unlikely that prices will reach 3 percent based on the current payment infrastructure and processes. New technology, however, has the promise of lower cost, in particular real-time payment (RTP) systems and maybe cryptocurrencies. Cryptocurrencies started with the claim to enable frictionless international payments. The reality to date does not bear this out: processing costs of many cryptocurrencies are high, and the conversion between crypto and fiat continues to be expensive. Since most traditional financial institutions do not offer, or are not allowed to offer, the exchange of fiat for cryptocurrency due to compliance concerns, it remains difficult to build a low-cost international remittance service based on crypto infrastructure. Latin America is making fast progress on RTP systems, however. The PIX system in Brazil already processes more electronic transactions than credit cards, and the Brazilian central bank plans to launch international services. Colombia has a privately-owned RTP known as Transfiya, and the Colombian central bank just launched the process to build a government-operated system. Mexico has CoDi, which has low adoption but offers the rails for RTP. Several other countries are exploring similar initiatives. RTP systems allow the instant transfer of money between people’s bank accounts based on simple identifiers or wallets at very low or no cost. So far, this works only domestically. But connecting RTPs directly or allowing service providers to utilize the infrastructure for international person-to-person remittances can bring down the cost to a fraction of what it is today.”

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