News Releases

May 10, 2006

Remittances scorecard report: money transfer costs drop but migrants and their families remain unbanked

New research on remittances to Latin America and the Caribbean released by IDB’s Multilateral Investment Fund

Average costs of remittances from the United States to Latin America and the Caribbean have dropped by nearly two-thirds over the past six years, saving migrants and their families billions of dollars, according to a report released today by the Inter-American Development Bank’s Multilateral Investment Fund.

However, the research also shows that a majority of Latin American migrants and their families in their countries of origin are still unbanked, and therefore excluded from services and opportunities available to better-off clients of formal financial institutions.

The report, International Flows of Remittances: Cost, Competition and Financial Access in Latin America and the Caribbean – Toward an Industry Scorecard, was conducted for the MIF by a leading scholar of money transfer markets, Manuel Orozco of the Inter-American Dialogue, a Washington, D.C.-based think tank.

Since the MIF started working on the issue of remittances in the year 2000, the cost of sending $200 from the United States to Latin America has fallen from more than 15 percent to about 5.6 percent, mostly due to increased competition among service providers.

Commenting on the report’s findings, MIF Manager Donald F. Terry said the drop meant migrants and their families last year saved some $5 billion more than they would have if remittances costs had remained at pre-2000 levels.

“In just six years Latin America and the Caribbean has gone from being perhaps the world’s most expensive remittance market to one of the least expensive,” Terry said. “While there is still room for further decreases, the numbers clearly show that cost is no longer the central issue.”

Latin America and the Caribbean received some $53.6 billion from its expatriates last year; nearly three-quarters of that total was sent from the United States. Most of these resources go to low-income households to pay for daily expenses although some families manage to save or invest some of the money.

“Much more could be done to leverage these resources, and particularly to provide these transnational families access to the formal financial system,” Terry said. “But there still are cultural assumptions, a lack of adequate products and services as well as legal and regulatory obstacles preventing poor people from being welcomed into the financial sector.”

A surprising conclusion of Orozco’s research concerns where recipients pick up their money. Until now, a common assumption was that since remittances generally involve cash-to-cash transactions, they were mostly distributed through money transmitter licensees such as a bodega (convenience store).

According to the scorecard data, 54 percent of remittances are distributed through banks, credit unions, microfinance institutions or other types of deposit institutions. This means every month some 10 million beneficiaries pick up their money at bank branches, but few efforts are made to turn them into account holders.

“In effect, banks in Latin America are behaving pretty much in the same way as bodegas,” Terry added. “In most cases they are only acting as paying agents for money transfer companies and not taking advantage of the opportunities to cross-sell deposit products to remittances clients.”

By contrast, credit unions, microfinance institutions and a few banks such as Banco Solidario in Ecuador and Banco Salvadoreño in El Salvador have better records in recruiting remittance recipients as account holders. Besides making concerted efforts to attract those clients, these institutions have tailored products and services to the needs of this segment.

Costs, Competition and Access

In his report Orozco collected data from 50 companies that provide money transfer services and compared their fees and exchange rate commissions, the transfer mechanisms and technology they employ, competition in their markets, number of locations in the United States, types of agents in Latin America and the Caribbean and customer satisfaction levels. In future evaluations, he plans to measure how these companies support local development, the transparency in their charges and how they comply with regulations.

Regarding costs, some of the sharpest drops over the past years happened in Colombia, Bolivia, Mexico and Haiti. Competition was the single most important factor in bringing down fees and charges, as the number of participants in the sector exploded this decade before giving way to some consolidation.

Satisfaction levels varied widely, from 98 percent of respondents in Ecuador saying that they were very pleased with the service to 74.4 percent in Haiti.

There are also stark differences in terms of access to formal financial services. In the Dominican Republic about 66 percent of the people who receive remittances have deposit accounts. At the low end of the range, only 10 percent of Nicaraguan remittances recipients are banked.

Bank participation in the distribution of remittances ranged from 67.5 percent of the total in El Salvador to 7 percent in Guyana, where the postal system is a major player.

In his conclusions, Orozco highlights an opportunity for banks to increase their services to remittance recipients, as money transfer companies prefer to be partners with financial institutions rather than with retail stores.

“Strengthening the links between money transfer companies and financial institutions to offer remittances and financial services will yield benefits to everyone,” Orozco said.

As part of its cluster of remittances projects, the MIF has promoted competition among providers of money transfer services and assisted microfinance institutions and credit unions to become more involved in this market. It has also supported projects to develop remittances-backed mortgages and to provide business training to migrants who plan to return to their homelands to start microenterprises.

 

Conference

The MIF and the Annie E. Casey Foundation will hold a conference on Remittances and Transnational Families on Friday, May 12, 2006 at IDB headquarters, where Dr. Orozco's report will be presented and discussed.

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