Tag Archives: remittance advice

How to Save Money on your Foreign Remittance

Sending money overseas is getting cheaper. There’s no question that for many migrant workers that there are new ways to send money back home, but in order to save people will need to start changing their financial habits. Part of what has traditionally restricted people to send money around the world with ease is that the traditional banking system is not standardised across the world. Yes, it is pretty standard across many western and developed economies but many less developed and rural regions of the world do not have the same rules to transacting. To understand this, it’s firstly important to understand what the role of banking is.

A bank is an agent who settles a transaction. Accounting for your balances is simply a by-product of settling your transactions but has become standard in the industrialized world. The primary role of a bank is to authenticate the monetary trade between to parties and exists in more primitive forms throughout the world. Within traditional western banking, the settlement of transactions and account registration go hand in hand but in many less developed regions, account registration is not so formalized. Take an individual money changer in a less economically developed or rural of the world.

Informal money exchanges are the norm across many countries and account access is achieved through a third party exchanges or money brokers. These are people who less formally exchange money but operate in the field. They will send money abroad converting cash to credit under their won accounts.  This inherently conflicts with western KYC and anti-money laundering/terrorist financing regulation because of its less formal nature. It also ends up increasing overall rates for the end user. Money brokers in less developed regions have have professional networks across the world but the way that their western counter-parties interact with traditional institutions is problematic. Their entire business model can’t comply with traditional regulation by its inherent nature of informal dealings. This is only one of several opportunities that lie for operators within the field. Political relations have also been an obstacle for agents remitting internationally but is less of a controllable factor for money exchange businesses.

The way that foreign remittance is currently getting cheaper is through the improved access to global financial markets whether formal or informal by end users. People only need access to the internet to have access to a financial markets to trade Dollars for Euro or even M-Pesa for Bitcoin. SMS technologies are even now evolving to include payment services which is granting access to using sophisticated devices. This is huge for two thirds of the world because they can now access global financial markets cheaply.

What this means for much of the world is they will now have access to financial services because the new types of institutions are setting up using digital currencies. These are for the most part, currencies that are designed to be crowd sourced meaning anyone can transact in them without needing any outside authority. This is  a less formalized process which is better suitable for less formal economies, countries or regions. A the moment, the bulk or the infrastructure is needed for intermediaries (agents or brokers) between the digital economy and the formal financial system, but it is coming.

For people who do currently do have access to banking in first world nations, sending money abroad has also changed. We now have companies like Payonner and CurrencyFair who are specializing in foreign remittance and have cut cost significantly for end users by not having physical branches. CurerncyFair is an internet company designed for the new online world. They focus on providing excellent rates for remittance within more developed countries. This has lowered cost significantly by focusing large efforts in developed economies with online payments. Payonner on the other hand is a little different than traditional money exchange. With them, you basically send money anywhere that has postal service and ATMs. They will send pre-paid MasterCars anywhere in the world and it can be refilled. It’s like sending a cheque to your family back home and they can actually cash it then use it whenever you refill it. For sending money to less developed areas, Payonner can be a good option because the intermediary can literally be a bank machine or point of sale (POS).

What I’m suggesting, is that to save money when remitting payments back home, understand that the entire industry is blossoming and becoming more competitive. New type of financial institutions are starting up worldwide to meet your need, regardless what they are. No longer does your remittance have to be a side operation of your bank because you can deal with a wider variety specialist that can connect to world markets.  Understand your needs and the most suitable company will save you the most money sending foreign remittance.

What is remittance and why does it exist?

When foreigners go to work in a country other than their own and send money back home to their people, this practice is known as remittance. It is a normal concomitant to migration and it’s estimated that approximately 5% of the world’s population live outside their home countries. As the world continues to be integrated and essentially become a global village, movement between countries and continents increases and remittances continue to grow as workers move abroad in the hopes of securing jobs.

Remittances have since the 20th century played an important role in the economies of countries like Spain and Italy when emigrant workers would send money back home. However, in recent years remittances to developing countries have grown due to the increased immigration of workers from these countries to developed nations like the United States and the United Kingdom. The Remittance Prices Worldwide Database established in 2008 by the World Bank offers remittance advice and shows that 60% of total remittances are to developing countries. For some of these developing nations remittances can be as high as 10% of their GDP and in 2013 a new record was set with $400 billion going to these nations out of $500 billion of global remittances. The leading source of remittance has been the US for years followed closely by Switzerland, Saudi Arabia and Russia in recent times. On the other hand, the leading recipients have been Asia (China and India) and Africa (Nigeria, Kenya and Sudan)

Reasons for why people send money back home have been studied for years despite the reasons being quite simple. The altruism model suggests that the most basic reason for remittance is to aid family and friends back home. Pure concern for relatives and dependants in the home country drives migrant workers to send money. The well-being of their families is of paramount importance especially in periods of natural disasters and conflicts which see increased influx of remittances to families in affected countries.

For most families that send their children abroad to study and consequently work there, financing the initial costs of the migration is an expensive venture. Since the migrant is unable to cover the cost of travel and maintenance alone, they receive a lot of financial support from the parents which at times leaves them financially strained back home. Once the migrants secure jobs, they in return send money back home in essence to mitigate the financial toll it took on the family and help the family make invests assumed they would have made had they not spent their savings on the migration process.

The desire to themselves invest in the home country and develop assets is another reason for the continued sending of remittances. Some migrant workers go back home after living aboard for a while and start their own businesses. Working in developed nation exposes them to how successful businesses are run and with this in mind, they are able to notice opportunities at home to invest in. They therefore send remittance to secure such assets as land, financial assets, and real estate. Some send money to invest in public assets that might improve their popularity especially if they have interests in a political seat when they return home.

Remittance is a source of much needed funds to governments in developing countries who have difficulty borrowing money in most cases due to instability of governments. In some countries remittances exceed aid such as USAID sent from developed countries and important in the home economy’s growth. Funds from abroad help develop the domestic financial system with many wire transfer and banks getting into competition by providing favourable rates which encourage continued remittances. Governments have also in many countries developed policies to encourage their citizens in the diaspora to invest in their home countries through remittances which aside from exemption from taxation include dual citizenship and a chance to vote in presidential elections.

Due to the difficulty in tracking remittances and the reluctance of certain governments to release such information, money from remittances can be fertile ground for laundering money and can be used to finance terror. Many countries have tried to develop systems to track how this money is spent but this is difficult because most of it is sent to private persons who have discretion of expenditure.

Although it is thought that remittances decrease when the attachment to family gradually weakens or as migrants determine to permanently reside abroad, they do not altogether stop. This is especially encouraging to countries that continually depend on these as a source of funds and the billions of people who directly or indirectly benefit from remittances.