What Is a Remittance?

A remittance is a payment of money that is transferred to another party. Broadly speaking, any payment of an invoice or a bill can be called a remittance. However, the term is most often used nowadays to describe a sum of money sent by someone working abroad to his or her family back home.

The term is derived from the word remit, which means to send back.

Key Takeaways

  • A remittance is money sent to another party, usually one in another country.
  • The sender is typically a foreign worker and the recipient a relative back home.
  • Remittances represent one of the largest sources of income for people in low-income and developing nations, often exceeding direct investment and international development assistance.
0:43

Remittance

Understanding Remittances

Most remittances are made by foreign workers to family members in their home countries. The most common way of making a remittance is by using an electronic payment system through a bank or a money transfer service such as Western Union. People who use these options are generally charged a fee. Transfers can take as little as ten minutes to reach the recipient.

Remittances play an increasingly large role in the economies of small and developing countries. They also play an important role in disaster relief, often exceeding official development assistance (ODA). They help raise the standard of living for people in low-income nations and help combat global poverty.

In fact, since the late 1990s, remittances have exceeded development aid, and in some cases make up a significant portion of a country's gross domestic product (GDP).

According to the World Bank's 2019 Migration and Development Brief, $529 billion in remittances were sent to low- and middle-income countries in 2018—an increase of 9.6% over the previous record high of $483 billion in 2017. This figure is significantly larger than the $344 billion of foreign direct investment in these countries, excluding China, in 2018. Including high-income countries, the total amount of remittances jumps to $689 billion, up from $633 billion in 2017.

Remittances are also used to help those living in less developed nations open bank accounts, a trend that helps promote economic development.

The 2020 Economic Crisis

The 2020 economic crisis had a severe impact on migrant workers and their families back home.

The World Bank estimated in late 2020 that remittances to family members would drop by 14% in 2020 compared to pre-epidemic levels. It foresaw rising unemployment among migrants, a slowing of new migrations, and an increase in returns of migrants to their home countries.

6.8%

The global average cost of sending a $200 remittance in the third quarter of 2020, according to the World Bank.

For a valid reason, there is a concern about the high cost of global remittances, especially with the elevated drive towards global financial inclusion. To promote transparency, some countries limit remittances to bank wires, but banks are the most expensive transfer channel, and wires are particularly among the highest, according to the World Bank.

In the first quarter of 2019, banks charged an average of 11% in transfer fees. Post offices charged on average more than 7%. The fees can exceed 10% when the destination is in Africa or a Pacific Ocean island.

Examples of Remittances

For low-income countries or those with struggling economies, remittances represent one of the largest sources of income for the native population. In 2015, for example, Mexicans abroad sent more than $24 billion back home, which was more money than the country generated from selling oil.

The collapse of the Venezuelan economy caused an enormous migration to other nations, and a corresponding increase in remittances to family members left behind. In 2017, more than $1.5 billion in remittances were sent to family members remaining in the beleaguered country.

According to the World Bank, the top remittance recipients in 2018 were India with $79 billion, followed by China ($67 billion) and Mexico ($36 billion).

Special Considerations

There are concerns among financial intelligence units that remittances are one of the ways in which money can be laundered or violent activities like terrorism can be sponsored.

The methodology countries use to record the amount of money people receive via remittances is rarely made public. While the majority of value transfers occur via web or wire where they can be easily tracked, a fair amount of money is transferred in ways that are more opaque.

Recent fintech waves in international money transfers are forcing fees down. Rising players include Payoneer, Wise, and Worldremit. Western Union is modernizing its tools. Regulation and oversight are yet to follow to ensure a safer financial inclusion.