What Is a Foreign Remittance?

Foreign remittance is a transfer of money from a foreign worker to their family or other individuals in their home countries. In many countries, remittance constitutes a significant portion of a nation’s economic growth as measured by gross domestic product (GDP).

The United States is the leading source of foreign remittances, followed by Russia and Saudi Arabia. The top recipients of foreign remittances are India, China, Mexico, and the Philippines. The G8 and World Bank are attempting to monitor and regulate remittance costs due to the enormous flow of funds.

Key Takeaways

  • Foreign remittance is a transfer of money from a foreign worker to their family or other individuals in their home countries.
  • Foreign remittances transferred back to a migrant's home country are typically used for living expenses, such as food and clothing.
  • In April 2020, the World Bank warned that foreign remittances are likely to decline by 20% due to the global economic downturn.

Understanding Foreign Remittances

Foreign remittances that are transferred back to a migrant's home country are typically used for need-based expenses, such as food and clothing. Foreign remittances are the private savings of migrant workers that have left their home country to find work in another country, such as the United States. Emerging economies or developing nations rely heavily on foreign remittances from citizens working abroad.

Although the vast majority of the money from foreign remittances is used to help those in their home country, there are concerns about fraud. Remittance payments can be difficult to track, leading to concerns that the money could be used nefariously for terrorist financing and money laundering. Money laundering is, in part, the process of transferring money earned from illegal acts through legitimate bank accounts to hide the fact that the money was obtained illegally.

Total Amount of Foreign Remittances

Record-high foreign remittances were sent in 2018 as reported by the World Bank in 2019. The annual total was $529 billion for low and middle-income countries, while the high-income countries pushed the total up to $689 billion.

However, in April 2020, the World Bank warned that foreign remittances are likely to decline by 20% due to the global economic downturn. The loss of employment and income for millions of migrant workers in their host country is expected to push foreign remittances down to $445 billion for 2020.

The reduction in remittances to developed nations will likely add to their economic woes. Foreign remittances are a critical financial lifeline for many of the world's working-poor and economically-vulnerable countries.

Benefits of Foreign Remittances

Many economists and social scientists believe that since remittances are so widespread, they have implications that extend beyond an individual’s finances. For example, since remitting involves financial institutions, people who send and receive remittances are likely to have bank accounts, which promotes economic development.

Remittances can be lifesaving in emergencies, such as natural disasters and armed conflicts, when the recipients' other sources of income disappear. Also, if the home country experiences an economic downturn, remittances can help to alleviate economic hardship.

Foreign Remittance Software Apps

Several tech startups have developed software applications (or apps) to facilitate foreign remittances by making the process more user-friendly, as well as removing the high costs associated with some of the traditional formats such as MoneyGram and Western Union. Typically, foreign remittance fees through traditional banks average 11% of the transfer amount, according to the World Bank.

Two such examples are TransferWise and Wave. Both apps charge relatively low fees and exist outside of traditional banks. Also, both companies are focused on encrypting financial messages so that users' data is safe and not vulnerable to hackers.

TransferWise

TransferWise is based in London and operates as a licensed and regulated U.K. Financial Services institution. TransferWise began with the premise that sending money abroad is deceptively expensive, given significant hidden charges. To eliminate additional fees, TransferWise boasts that the company uses real exchange rates or as they call mid-market rates, which are designed to have less of a mark-up built into the rates.

TransferWise sends $5 billion in payments each month on behalf of their 7 million customers. The company also offers a multi-currency account allowing people to receive and send in a foreign currency. TransferWise charges a small fee for using its platform, which varies depending on the currency being transferred.

TransferWise was founded in March 2010 by Taavet Hinrikus and Kristo Kaarmann. The executive team had experience spanning startups, international operations, and financial services. TransferWise is available in 59 countries.

Wave

Wave has a similar model to TransferWise but specializes in handling transfers from the U.S., U.K., and Canada to East and West Africa, including Ghana, Kenya, Nigeria, Senegal, Tanzania, and Uganda. Wave is able to facilitate an international transfer in 30 seconds from a sender’s smartphone to recipients' mobile wallets. Wave boasts over 100,000 customers on its website and charges a 1% fee for each transfer.