Remittance Service Providers (RSPs), the businesses providing remittance services for a fee to migrant workers and their families, encompass a wide array of financial and non-financial organisations. They include Money Transfer Operators (MTOs), postal networks, banks, Mobile Network Operators (MNOs) and multi-channel operators. Factors such as having a bank account, trust, cost, speed, convenience and security define whether a migrant worker will prefer to use one service instead of another.
Today, there is no single integrated global remittance market; instead, there are multiple markets acting as networks connecting a varying quantity of country corridors, along which global, regional and national RSPs operate under different legal and regulatory frameworks.
An estimated 3,000 RSPs worldwide charge more than US$30 billion to process approximately 2 billion transactions annually. They use a range of traditional and technological methods to initiate and deliver remittances from the “first to the last mile.”
Remittances are expected to remain a stable source of finance to meet the immediate needs and aspirations of millions of families around the world. If legal and regulatory frameworks facilitate the use of technology and innovation, mobile phones, digital money, Internet-based mobile and Web applications will continue to drive down costs, strengthen financial access, and improve the possibility to deliver additional services.
High transfer costs have understandably attracted the most concern and controversy among policymakers (particularly in sending countries), development organizations, the civil society and the private sector. The cost of transactions is the only specific indicator on remittances within the SDGs (10c). Twenty years ago, these costs averaged over 15 per cent, and sometimes exceeded 20 per cent (e.g. US$40 to send US$200).
By 2008, average costs fell below 10 per cent. Today, migrants pay on average US$15 (7.45 per cent) to send US$200. Going forward, the 2030 goals of the United Nations (SDG 10.c) and those of other international organizations is to reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent). This would save migrants approximately US$20 billion per year in transfer costs.
Remittance transaction costs depend on a number of factors, including operating expenses, commission fees, differentials in exchange rates and market features. RSPs build into their pricing the cost of commissions to agents (around 50 per cent), financial crime risk, location-related costs, settlement charges and call centres, among others. If companies shift from cash-based models to electronic-based transactions there is the potential to substantially reduce pricing.
Market forces, competition and regulations (see Enabling environment section) are other intertwined factors influencing transfer costs.
The use of technology has proven effective in increasing efficiency, reducing remittance costs and opening opportunities to improve financial access. However, improved trust and comfort levels towards digital money will be required before technology can reach its full potential. Some of the areas that digital technology can impact are: