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The power of low-cost remittances in developing countries

Jan 30, 2020

Economic migrants sending money back home is one of the most substantial drivers of regional economic growth, but its effect is being compromised by costly transaction fees

One of, if not the major reason that adults in developing countries are unbanked is because they don’t feel that they have sufficient funds to warrant opening an account. Without having the finances at your disposal to make any significant transactions, storing your money in any form other than cash doesn’t seem worthwhile. Ditto having access to other financial services such as credit facilities.

One of the most significant economic factors assisting people in developing countries to grow their wealth to a point where having a bank account is worthwhile is remittances; according to the World Bank, economic migrants sent $689bn home in 2018, of which $462bn was sent to low- and middle- income countries such as India ($79bn), and Mexico ($36bn). More finance was injected into low- and middle-income countries via remittances than foreign direct investment ($344bn).

So we can see why migrants sending money back home is a key lever to promoting financial inclusion, establishing a personal finance foothold, and contributing the economic growth of regions across the globe.

It could be argued, though, that the impact remittances can have on regional growth is being adversely affected by negative characteristics of many cross-border payments methods. Only when the sender can transfer the greatest possible value to any recipient, regardless of their banking status, will we see the greatest possible benefit for regional economies

Simple, low-cost remittances as the solution to financial inclusion and regional economic growth

Many methods of remittances rely on the recipient having a bank account, which is a significant issue for a percentage of overseas workers trying to send money home. According to the World Bank 1.7 billion adults are currently unbanked, of which 46% live in just seven countries (China, India, Indonesia, Mexico, Nigeria, Pakistan, and Bangladesh). These countries are also among the largest remittances markets in the world; some sources cite them as being seven of the top 11 remittances markets by value.

So this blocks off one avenue of remittances for those that wish to send money home in order for their loved ones to become financially included. And if a desired recipient of a remittance doesn’t have a bank account, opening one isn’t as simple as asking for one. Often people do not have the documentation required to open a bank account or critically the funds to acquire them without access to the finance first.

Of course, there are alternatives to sending money back home to those that require a bank account. But these less sophisticated money transfer services can be exorbitantly expensive. To realise the full economic potential of the remittances market, recipients must receive the maximum value of the transfer, and therefore have not the greatest possible flexibility and incentive when it comes to accessing financial services, but also be able to inject more value into their local economy through spending. By compromising on the value they are sending home, the impact remittances might have on regional economies is limited.

Ultimately, for economic migrants to maximise the benefit of the finances they are transferring overseas, using a remittances solution that is both low-cost and has a simple user experience that jsn’t structured around a traditional bank account, is essential.

Expanding the gig economy in developing countries

And it isn’t only the beneficiaries of economic migrants that can impact regional economies via the removal of transaction fees. One of the fastest growing employment sectors in developing countries is freelance specialists selling digital services such as website design or coding to overseas companies that want to outsource. For this form of the gig economy to be viable and grow, service sellers in developing must prioritise a) making invoice settlement as efficient for overseas businesses as possible, and b) remain competitive in the rates they charge, in the knowledge that cost savings is one of the most likely reasons any business is outsourcing these services overseas in the first place.

Avoiding traditional overseas bank transfers that require a lot of sensitive financial information to be shared and stored is one method for combatting the former. Where an email address is the only piece of information required to make a transaction, both the buyer and the seller are free from the rigmarole of securely storing and recalling multiple pieces of personal data.

When it comes to the latter, one tactic service providers in developing countries can employ to keep their prices low is to maximise the value they receive when being paid in a foreign currency. Where a freelancer is losing a portion of their fees to marked up foreign exchange rates, they may be forced to pass the cost on to the business commissioning the work. Likewise, the business will have to absorb the cost of the transaction fees; where this is substantial the overall expenditure increase makes the freelancer a less attractive proposition.

So paying invoices for overseas freelancers by bank transfer might become a too expensive business; so much so that businesses think twice about outsourcing cross-border. And the greater the volume or value of the work a business wishes to outsource, the greater the likelihood the high cost of settling invoices with cross-border payments becomes a factor.

The gig economy is already playing a significant role to grow economies in many regions of developing countries, low cost cross-border transactions can play a huge role in helping this industry flourish. The immediate and trickle-down effects of growing this sector would be substantial for financial inclusion and sustained economic growth.

Skrill Money Transfer enables people to send money overseas conveniently, and for free. To find out more visit the Skrill website.

Tags:
  • Cross-border payments,
  • Digital wallets,
  • Remittances,