The Remittance Industry
Remittance is a sum of money provided as a payment or a gift. Generally, this money is gifted by family members, relatives or close friends on special occasions or as a support. It excludes remittance fees which must be added to the total remittance. By the end of 2022, the global remittance market is expected to be $630B.
To every remittance transaction, there is a cost, which is commonly referred to as the cost of remittance. As defined by the IMF: “The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country.”
Although remittances are a key solution to poverty in several countries, the remittance industry is still lacking the proper tools and services to make them accessible.
One obstacle is the remittance infrastructure, which does not enable practical services. Indeed, current remittance services lack full visibility on the transaction costs and the time of delivery. Consequently, this translates into delay in transfers, and extra charges for the users. These hidden fees are a plague and difficult to avoid.
Some families may go through illegal remittance to avoid them, others will prefer to pay for the higher price, as it is set by dominating companies. In this article, we are detailing these hidden fees, and offering an alternative, cheaper solution to users.
Read on to learn more about the remittance fees and the best way to avoid them.
How do wire transfers work
To understand the reason for remittance fees, one must understand how wire transfers work. A wire transfer of money is anything but a money transfer. In fact, it is just an electronic message providing the necessary information which is sent, and received by banks on a variety of networks. SWIFT, PEACH, ACH… you may have heard those acronyms already. Rest assured, this is nothing too barbarian! These are just different bank networks used to make fast (or not) and secured transfers.
Nowadays, sending money all over the world is possible, but what does it hide? How can such a service be free for some countries and not for others? Who do you pay for the bank to take your money and give it to whom you want? Money transfers are costly transactions.
First and foremost, all banking services have a hidden price that will either be covered by the bank itself (when it is cheap), or that the users will pay for.
Thus, to make a transfer from one bank account to another, all charges will be determined by the location and brand of the sender and the receiver’s banks. Therefore these situations can generate further expenses:
- when the sender and receiver’s bank accounts are not located in the same country
- when the sender and receiver’s banks do not belong to the same group
- when the sender and receiver’s currencies differ.
Most of the banks in Europe use the SEPA network to provide their customers with free and fast transfers all across Europe. This is what we call the SEPA zone.
How to send cash abroad
Sending cash abroad is slightly different from wire transfers. In order for cash transfers to operate properly, there must be a delivery intermediary. This cannot be done through a regular postal service for two reasons: firstly, some places don’t have a postal address, and secondly, there is a high risk of robbery. To send cash abroad, one must use a remittance service. You probably know a few of the most famous ones: Western Union, MoneyGram, TransferWise, Remitly…
Basically, these remittance services offer the possibility for person A to deposit cash in point A, country A and send it to person B who will be able to withdraw it safely in point B, country B. Remittance services will also use wire transfers to cover the cross-border transaction. This wire transfer may be going through a specific outside network or through an internal network available to the remittance service provider.
However, this is not free. Firstly, the remittance company has to make a profit margin (as small as it may be), and secondly, there will be a fee to the service itself. Let’s dig a little bit on this second part.
What are you exactly paying for?
Transfer and Vendor fees / Margin
A bank is a service provider. As a result, it charges everything it can to make profit and pay for their operating expenses. Wire transfers are also part of the taxed services they propose.
Some of the banks (neo-banks mainly) are working with third parties to provide their services. Either because they lack the technology or because they don’t have the compliance and the legal certifications to do so, they find other solutions.
It is totally legal, and, often, the third party is just a bigger bank that has all the logistics and accreditation to operate. In any case, adding a third party to transactions means more fees, as they have to take their margin on it too.
Money Transfer Operators
Money Transfer Operators (MTOs) are companies that make cross border transactions of funds. As they are usually not traditional banks, cross border transfers are often their main focus and their principal way of making revenue.
Western Union, Remitly, Wise… all of those companies are making you pay for the service they provide, seeking to be constantly more competitive in terms of pricing but still remaining expensive. On average to send money, you will have to pay between 5% to 7%.
As it is their main activities, MTOs are often cheaper than banks proposing the same service, taxing their customers with fees, and of course, conversion fees that are often not even taken into consideration by the customer.
If you are sending money using another currency than yours, you may notice that the conversion rate on currencies is often to the vendor’s advantage.
For instance, currently sending 100€ is equivalent to receiving 140 Moroccan dirham. However, through a remittance service, the amount received may be reduced due to hidden fees and high conversion rates. Therefore, even though person A may be sending 100€, person B might only receive 120 dirham, meaning: around 16.7% of the money has been lost in the process.
As you can see from the screenshots above, when using a remittance service conversion fees are significantly lower. Here, to change euros for Moroccan dirham, Western Union charges 5.6% fees. For 100€, these 5.6% fees might seem small, but if we were sending 5,000€, we would clearly be able to see the difference.
Instead of receiving 52,206.72MAD, our Moroccan friend would only receive 49,280.33MAD. This fee amounts to 2926.39MAD, which is equivalent to 280.27€.
To operate a transfert, a bank uses a secure network which allows banks to “communicate” together and share the information they need, like explained in our previous examples. These networks are banks’ preferred transaction pathway as it is often faster and safer than other methods.
When two banks are part of the same network, fees are negligible (and often covered by the banks themselves). However, in the case of an international wire transfer, network fees can add up to $40.
Here are some zones & network you may know:
SWIFT (Society for Worldwide Interbank Financial Telecommunication): Based on the BIC (Bank Identifier Code) SWIFT allows banks to communicate with each other and facilitate the arrivals and departures of the information needed to make a transfer.
SEPA (Single Euro Payment Area) zone: This zone allows European countries’ banks to communicate easily between them. The goal of SEPA is to facilitate and optimize European transfers and make them as easy as domestic transfers. SEPA is notably using PEACH (Pan-European ACH) network to provide its services.
ACH (Automated Clearing House): ACH is an electronic transfer network used in the United States. As the SWIFT in Europe, ACH allows the interbanking communication of information to facilitate the transfers
Now that we know more about the various fees operating during a money transfer, let’s see what would happen to Person A, living in Paris, France willing to send 100€ to their friend, Person B, living in Bogota, Colombia.
First and foremost, we know that 100€ is equivalent to 436,889.08 Colombian pesos.
Let’s see how much will be deduced from this amount due to fees.
The first expense is a fee to the platform Person A is using. This fee falls under the Vendor fees we saw earlier and would generally be around €2 to €3 .
The total amount sent after platform fees is now 97€.
Next, the platform will also take profit on the conversion rate it is using. Warning: this rate is not always specified on transactions, so beware of the chosen platform.
For example, following its policy to become more competitive, Wise is not charging any conversion fees contrary to Western Union. These fees mainly depend on the currencies one is exchanging.
Considering our scenario, Person A will find an average of 10% conversion fees.
The total amount sent after conversion fees is now 87.3€.
Last, Person A may be charged a few network fees. However, as they generally cost only a few cents, those are negligible.
In the end, Person B will receive the equivalent of €87.3 which is 382,242.66 Colombian pesos. In the transaction, 54,646.42 Colombian pesos have been charged, which amounts to almost 13€.
How to avoid remittance/wire fees
As previously mentioned, one part of the fees are due to profit margin purposes. Obviously, as there is little to no visibility on transactions from a service to another (and considering how many actors are involved, this adds on to the number of transactions), it is hard – almost impossible – to determine how much one will be charged when sending cash abroad.
Generally, families will try multiple remittance services until they find the appropriate one for them. Yes, try, as it is nearly impossible to compare remittance rates. This is how families minimize fees in their international cash operations when using a remittance service. However, let’s list out a few other ways outside of remittance service providers.
Outside of sending money through a postal service, there is another way to provide cash physically to another person. That is: to bring it to them in person.
Obviously, this method can be more troublesome as it requires a physical move from the sender’s part. However, this often happens when the “sender” is traveling to the “receiver”’s home country, especially when they are family.
As diasporic families do not live with one another on a daily basis, they generally take the time once or twice a year to go visit their relatives in their country of origin. They use this opportunity to bring them money physically for the rest of the year.
An alternative to that is also asking another family member or trusted friend visiting the said-country to bring the cash with them.
Sending money to a local bank account
Another alternative to remittance service is having a local bank account in the country of origin and sending the money from this bank account to the local relative’s bank account – or have them withdraw it in cash directly.
This method is pretty cheap and efficient as it follows the local living and consuming habits. However, the sender must acquire a bank account in the country. This might be accessible when one’s family is located there, but more complicated if one isn’t a local citizen.
Paying for a service or product directly
Last, when a family member or friend needs the remittance to cover some specific expenses, the sender can pay the service provider directly. For instance, to cover an electric bill, the sender can provide their IBAN for the payment to be issued from their bank account directly.
Another case would be if the receiver needs to buy a certain product. Then, instead of sending the money for the loved one to buy the product, the sender can purchase it directly online and have it sent to the receiver’s house.
Limits of alternative methods
These methods can work to some extent, and only under certain conditions. For instance, to physically bring money, one must travel to said-country, or know someone trustworthy enough to rely upon them for the money transaction.
Local bank accounts are a good alternative. However, as previously observed, often the inhabitants of developing economies will have little to no access to banking facilities. This makes this transaction method more complex. Furthermore, to have a local bank account open in some countries, one must have some kind of settlement in the country.
Last, paying for the products and services directly can be a good solution in theory. In practice, it is all the more complicated for marginalized communities, as their only access to products and services are through local cash spending. Furthermore, in some remote areas, people may not even have a proper address.