What the data doesn’t show us about sending money home
This piece is one of a series about the financial lives of the unbanked as the economic analyst for Mosendo. It has been astonishing to learn of all the ways that people move money without the banks. This piece is also a call to action, feel free to see the tl;dr at the bottom.
Remittances are love.
In my last piece, I talked about the complex financial lives of the poor. I took many insights from the book Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Researchers used diaries instead of data points and found a complex story under the numbers.
Inspired by the research in Portfolios, I have been collecting my own. I have arrived at this thesis: tracing the complicated reality under the data is crucial for fixing cross-border payments. The unbanked are not the unserviced. As I will demonstrate, when regulated and measured financial services fail to be relevant, communities design their own. They have a special set of costs and benefits, and anyone looking to enter this market ought to understand them.
The Transaction Cost of Love
The curvy and complicated reality of the remittance world can be seen when I compare the data online with my own personal interviews. Let’s start in Myanmar. If you visit the World Bank’s website on remittance costs, you’ll see this:
Notice that the cost of sending $200 USD from Thailand to Myanmar is 2.9%. Really, that doesn’t sound so bad. We can all go to sleep tonight without one ounce of concern for the millions of migrants who send money home from Thailand to Myanmar, because 2.9% may be beatable, but it’s not terrible.
Or how about to Argentina? Let’s check on Transferwise:
The “Total fees” amount to about 3.42%, and the exchange rate is actually better than what google shows, which is 44.94 USD to ARS.
So why are we complaining?
When I first saw these numbers, I wondered: why the crypto community is so excited about remittances solutions? These rates are reasonable. We’re talking about sending money across borders and also converting currency, I don’t expect it to be free. Beatable, yes, but hardly a killer app.
But I discovered that it is not so simple
I started talking to people behind the numbers.
Wong Lurn is a student at Chiang Mai University and runs the Burma Study Center in Chiang Mai, Thailand. He has lived in Thailand for several years, and earns Thai Baht.
My jaw hit the floor when he explained how he sends it home:
He knows someone personally who owns a business in Myanmar. Naturally, this business receives revenues in the local currency, the Myanmar Kyat (pronounced like “Jet,” which was embarrassing for me when I spoke to him, because you can imagine how I was pronouncing it to start.)
Wong Lurn will tell his friend / business owner in Myanmar that he wants to send money home. He will then transfer money from his Thai bank account to his friend’s Thai bank account. This particular business owner has a bank in Thailand and also prefers to store his savings in Thai Baht.
The business owner will then take some of their Kyat revenues, put it on one of the daily trucks that goes into the rural areas of Myanmar, and make sure the money is delivered to mom.
How many times has this failed him and he lost his money? Zero times.
How many dollars of this transfer are regulated and measured? Zero dollars.
How much does he pay for this service? Ten percent.
Why is this necessary? Why wouldn’t he use the services listed above for 2.9%? Well, those rates displayed above require that both parties have access to the portals. In Wong Lurn’s case, his mom lives in a rural area with no banking infrastructure at all. The only way to get money to her is to physically send it. Except for one very charming solution:
Many children migrate to Thailand. So the parents are back home. So another way to do a remittance is for the family to exchange money — Two children might swap money in Thailand, and two parents would do the corresponding swap in Burma.
This would also be done with an agreed fee, paid on whichever side it made sense to pay, of 10%.
If the cost is too high, it just doesn’t happen
In Argentina, the freelancers I spoke with like Indira, 27, have access to bank accounts. Yet they face significant issues when receiving payments from clients.
The reason that digital freelancing has gained in popularity in Argentina is because of limited options in a struggling economy. Exporting services represents a major value for these digital workers, but getting paid presents a major barrier. So high, in fact, that Indira was taking my call from Cambodia. She became a digital nomad and has lived in SE Asia for 9 months.
Indira explained to me that receiving money in-country meant taking these considerations:
- The best option depends on the country their client lives in
- This means a lot of jumping through hoops for each client
- When the client pays, the bank typically takes over 10%
- Overseas payments are typically taxed over 10%
- Finally, freelancers must provide invoices to the bank to prove they earned the money.
This freelancer forum in Argentina is page after page of questions about how to receive money and file the necessary paperwork. It seems that each freelancer has a second job: financial and legal expert.
If we look at the transaction costs for a freelancer to do one week of work for a client, the fixed and variable costs together probably reach 25%-35% of the total invoice. Between arranging these services, navigating the complicated tax rules, and paying the high fees there is far less room for Argentinians to remain competitive. This means a lot of transactions that could otherwise occur do not, and all parties are worse off. In economics, we call this “deadweight loss.”
Conclusion
Conventional data does not capture a significant portion of the real remittance market:
The unrecorded remittance flow to developing countries through formal and informal channels is significantly larger, possibly even double the estimated figure or more in some regions, say experts at the World Bank and UN agencies. (Source: Financial Times¹)
Not only does the official data severely underestimate the total value of remittances, but solutions that seek to offer cheaper remittance rates typically do so by plugging into the banking system. Banks fails to be relevant for many of these people, and the remittance rate is not the reason for that. I am committed to making our payment app Mosendo relevant from the ground up.
Tl;dr & a Call for help
Sending money appears to be easy, but further research shows it’s not. I’m looking for people to help me find more of these problems so we can solve them. I think the first step to designing the Mosendo app will be to learn what people actually do in the real world, so we can help them to do it better.
Please e-mail me directly at Clayton@mosendo.com if your inner nerd is giddy and would like to help.
References
- Financial Times Moving money: The true costs of expat workers; sending cash home remain hidden Accessed 4/28/19.
If what we are doing resonates with you, there are a few ways to continue this conversation and bring this vision to life.
