The Cost of Sending Money & the Impact of Technology

Remittances are a vital source of foreign exchange income for many countries and families in Latin America and the Caribbean (LAC). After many years of fast growth, remittances to LAC saw a steep drop in 2009 due to the global economic and financial crisis. The flows of remittances to the region started to recover last year, and this year growth is expected to be around 7%. To talk about the cost of sending money to LAC and the use of new technologies in this process, Business News Americas' Ulric Rindebro interviewed one of the world's leading remittances experts, Manuel Orozco, who is the remittances and development director at the Dialogue.

BNamericas: How does the cost of sending remittances to LAC compare with other regions in the world?

Orozco: LAC is not the lowest, but it is among the lowest [in the world]. Money sent from Russia to Central Asia and from some Gulf states have the lowest costs, with LAC in third place.

BNamericas: Which countries in LAC is it cheapest to send remittances to today?

Orozco: Mexico, Central America, Colombia and Ecuador have the lowest average rates in LAC at between 4% and 5% of the amount sent.

BNamericas: Why is sending money to these countries cheaper than to other countries in the region?

Orozco: There are two important reasons for this difference. First, there's more competition [in the remittances industry] in these countries, which helps to bring down sender costs. Secondly, in several of these countries there is no commission charged on the exchange rate, and this makes it cheaper to send.

BNamericas: Is there room for further reductions in the cost of sending money to LAC?

Orozco: It's very difficult because the remittances industry is currently operating at the margin, or at the break-even point. The whole infrastructure of the money transfer industry has a significant fixed cost that cannot be reduced much further because it would produce losses for the companies in the remittances industry.

BNamericas: What impact do you expect new technologies, such as the internet, to have on sender costs?

Orozco: The new technologies are already changing the industry significantly. On the emigrant side people are increasingly using the internet to send home money, and the remittances industry is increasingly marketing these technologies to their customers as a way to reduce their costs.
So the new technologies may not automatically lead to lower sender costs, but they will help to reduce operating costs for the remittances industry. More and more people will also realize that it's more convenient to send money through the internet, and this will be an important driver in the future for increased internet usage in sending money to LAC.

BNamericas: How do you see the future role of card giants such as Visa and MasterCard in the remittances industry?

Orozco: They've been focusing on this market for quite some time now. However, they aren't processing [the transactions] themselves, but are working with financial institutions and retailers to promote card use in the remittances industry. This is also a trend that's growing, and it's set to continue to grow in LAC.

BNamericas: Finally, do you expect banks to increase their share of the LAC remittances market in the next few years?

Orozco: Not necessarily. Banks' market share has stayed at around 5% for some time now, and what's growing most today is the internet, which has a market share of around 10%. However, many people who are using the internet also have a bank account, so this could indirectly lead to greater participation by banks in the sending of remittances.