moneyswitch
Published in

moneyswitch

Remittance Flows

In our increasingly interconnected world, hundreds of millions of people from developing countries migrate to other countries in search of better job prospects, leaving their families behind at home. The money earned by migrant workers serves as a lifeline, both for their families and for their home countries. This piece analyzes why this is the case and the current problems associated with these remittance flows.

What are Remittance Flows?

Whenever migrants send home a part of their earnings to support their families and loved ones, these payments are called workers’ remittances or remittance flows. As migration has become increasingly prominent, these remittance flows have grown over time and now represent the largest foreign income source for many developing countries. According to the World Bank, remittance flows to low and middle-income countries amounted to nearly $589 billion in 2021 alone. With the uptick in remote work and the growing freelancing culture, remittance flows have further increased as companies make payments to remote workers worldwide.

Why Are They Important, and who are They Important To?

Remittance flows are critical to households in low and middle-income countries since these households rely on these flows for their survival. Since these remittances are made from person to person and are specific to each household, they are targeted to individual needs and tend to reduce poverty in most cases. Case in point: Research by the IMF has shown that remittance flows helped reduce poverty by nearly 11% in Uganda, 6% in Bangladesh, and 5% in Ghana. These remittances also contribute heavily to many countries’ GDP; for example, Haiti’s remittance flows constitute 20% of the national GDP.

These flows become particularly important for lower-income households in these countries, with remittances used to buy essential goods and pay for food, housing, education, and health care. Remittances also tend to be countercyclical- they increase during periods of economic downturn when other forms of foreign capital inflows decrease. While layoffs and wage cuts usually accompany periods of economic downturn, migrants often absorb this by cutting down on their living and rental expenditures and continue sending money home as often as possible.

Therefore, remittance flows are vital to low- and middle-income countries since they form a large part of their capital inflows. For low-income households in these countries, remittance flows are indispensable for they provide the means of subsistence and lead to an overall reduction of poverty.

Issues with Remittance Flows

However, the process of sending remittances is fraught with issues. For instance, whenever a worker wishes to send money back home, they incur a flat service fee and a currency conversion fee (FX fee). While these rates can be low if large amounts of money are being sent through an individual remittance flow, this is usually not the case with low-income migrant households. According to the World Bank Remittance Prices Database, the average worldwide cost of sending $200 is 6.4%, 8% for remittance flows sent to Sub-Saharan Africa, and up to 20% in certain corridors. Workers pay a large chunk of their income through remittance fees, cutting into their already modest incomes. These transaction fees are material to migrants, specifically, their family members. When factoring in the difference in purchasing power, fees translate into tangible differences in the living standard of the recipients.

Additionally, because of the low level of competition within the remittance flow market, the few banks and firms that operate in this industry can charge exorbitant fees and usually take a long time to process transactions, compounding the difficulty associated with these flows. Remittance flows can often take as long as five days to reach the recipient, as they must travel through correspondent banks, and this issue grows more acute the more underserved the community.

Conclusion

Remittance flows constitute an essential part of the foreign inflows for any low or middle-income country and allow hundreds of millions of families in these countries to meet their expenses. Migrant workers make considerable sacrifices to earn a wage that gives them enough to survive and send money home. Certain cross-border payment providers such as Western Union have profited from the hard work of migrants for too long, charging exorbitant fees and offering slow settlements. Given the importance of remittance flows and the sheer volume of the industry- nearly $589 billion- there is a dire need for this industry to be modernized.

MoneySwitch

MoneySwitch leverages DeFi to offer the solution. Cross-border payment providers provide services but can only operate within the current framework for making international settlements- currently dependent on the SWIFT network, correspondent banks, and the pre-funding mechanism.

MoneySwitch offers cross-border payment providers access to real-time liquidity, thus abolishing the colossal capital requirement of pre-funding, which has facilitated monopolization by a few in the cross-border payment industry. MoneySwitch allows organizations to be more capital efficient and opens the door to new and younger companies ready to push the industry forward.

MoneySwitch uses blockchain technology. Therefore, it is always available, and the current constraints, such as holidays or working hours, cease to exist. MoneySwitch allows cross-border payment providers to move towards a more efficient on-demand model, offering instantaneous settlements and increased transparency, thereby ushering in a renaissance era for remittance flows.

Want to learn more about MoneySwitch and the changing reality of global payments? Please join us here, and for further information on how to help power the cross-border payments of tomorrow whilst earning yield on your stablecoins, visit us here.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store