In 2020, about $600 billion will be sent back to home countries by people working abroad. They will be charged exorbitantly. This needs to be fixed.
Despite many years of technological advancement, the cost of sending money abroad is still too damn high.
On average, the charge for sending $200 — the benchmark most people use to evaluate cost — is $14. This includes fees (both the sender and recipient are charged) and the exchange rate margin. This typically sums up to 7% of the amount sent. Sending larger amounts is less expensive. The global average cost of sending $500 is just under 5% (World Bank 2017). Even so, the aggregate cost of sending remittances in 2017 was about $30 billion. To put this in perspective, the total non-military foreign aid budget of the US was around the same amount!
But… why though?
At a time when we’re receiving real-time pictures from Mars and I can do a Facetime or WhatsApp call to the other side of the planet often for free, why is it so hard to transfer something like money? We always thought money was one of the most fluid things. Why is it so expensive to send money anywhere?
One reason is government regulation (Aka KYC). Regulations require money transfer services to make sure that their services are not being used for money laundering or sending money to terrorists. The administrative costs associated with these checks may discourage bad actors, but they also drive up the cost for the millions of people legally receiving money, turning many to informal markets. Making these regulations less cumbersome would be worth the risks — particularly for smaller transactions.
Another reason why remittances are so expensive is that people don’t have many choices (Aka lack of competition). For example, many post office systems have allowed their post offices to have exclusive partnerships for providing remittance services with one or the other money transfer company. The fees these post offices collect amount to a tax on poor people — the migrants sending and receiving money. Since the post office is the most accessible place to collect their remittances for many people, particularly in rural areas, this means they are facing a virtual monopoly. Monopolies mean higher markups on such payments and less money in the pockets of the rural poor.
What can we do?
Education and competition are two major ways we can help consumers make better choices. By giving them many more options and them being sufficiently informed about these options, that they only use the cheapest available services. Moreover, as noted by Beck and Martínez Pería, corridors with more migrants and more competition exhibit lower costs.
Cryptocurrencies also promise a major way to significantly bring down costs. Cryptocurrencies can greatly simplify the entire process of sending money abroad, by removing unnecessary intermediaries. But cryptocurrencies also come with their problems. They are far too volatile and can get sometimes confusing to use by average people. A service that can make the process of cryptocurrency remittances as simple for the end-user as possible, by providing all the benefits of cryptocurrency, and limiting the risks, would be a game-changer and can greatly help reduce the cost, while also increasing the speed and efficiency of cross border money transfers.