What Is a Remittance?

What Is a Remittance?

A remittance is money that is sent from one party to another. 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 their 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 in another country.
  • Typically, the sender is a foreign worker and the recipient is a relative in the recipient's home country.
  • Remittances represent one of the largest sources of income for people in low-income and developing nations.
  • Remittance amounts often exceed the amount of direct investment and international development assistance that a country receives.
  • Intelligence agencies view remittances as a potential source of funding for terrorism.
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Remittance

Understanding Remittances

Remittances can be money sent as payment for a bill. However, most remittances involve sending money to relatives. They are often sent 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 an electronic 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 Migration and Development Brief, $508 billion in remittances were sent to low- and middle-income countries in 2020. This was followed by $605 billion in 2021. In 2019, they reached a then, all-time high of $548 billion but declined thereafter due to the Covid pandemic.

Remittances to these countries is expected to grow to $630 billion in 2022. The amount is larger than the foreign direct investment and official aid funds sent to these countries (excluding China).

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

How to Send a Remittance

Remittances typically are sent using an electronic payment system or service.

  • Individuals can visit a bank or credit union or go online to initiate a wire transfer or an ACH transfer. Funds, in large amounts if necessary, can be transferred and available by the next day but may take longer. Wire transfers cannot be reversed so it's important to be sure you're sending money to the intended recipient. ACH transfers can be reversed, if need be.
  • If wiring money, be prepared to provide the recipient's bank name, bank account number, and routing number.
  • Individuals may also use apps such as PayPal and WorldRemit to send money internationally.
  • Money transfer services can also provide assistance sending remittances abroad. This can be done in person or, typically, online. Online services include Western Union, Wise (formerly TransferWise) and Xe.

Remittances can also be sent by U.S. Postal Service money order. For international money orders:

  • Visit any U.S. Postal Service location. You can send up to $750 per money order.
  • Be prepared to provide the amount of the remittance using cash, a debit card, or a traveler’s check. Credit cards cannot be used.
  • Fill out the money order.
  • Pay the dollar value of the money order plus the issuing fee.
  • Send the money order by first-class mail or package, or Priority Mail or Express Mail.
  • Keep the receipts for your money order and the mailing.

Remittance Fees

Fees to send money internationally vary according to the provider and the service.

  • Banks and credit unions can charge up to $45 for outgoing domestic transfers in the U.S. and $10 to $20 or more (e.g., $50 to $65) on top of that for outgoing international transfers involving U.S. dollars. Recipient banks can also charge a fee.
  • ACH transfers are usually a low cost option for consumers—much less than wire transfers—especially when the remittance goes directly into a recipient's account. Check with your bank for specific details.
  • An international money transfer service provider such as Wise charges a small flat fee of $4.15 plus a variable percentage (currently 0.47%) of the transfer amount for currency conversion. Variable fees can also apply depending on transfer type.
  • PayPal's fees for international transfers from a PayPal balance include a fixed fee of up to 5.00% of the transaction amount when sending from the U.S. plus a currency conversion fee that can range from 3.75% to 4% of the transaction. If funding the transfer with a credit or debit card, an additional funding fee of 2.9% and fixed fee will apply.
  • The U.S. Postal Service charges an issuing fee of $49.65 plus a processing fee that depends on the country to which a money order is sent.

6.4%

The global average cost of sending a $200 remittance in the first quarter of 2021, according to the World Bank. It costs more to send remittances through banks than through digital channels or money transfer services.

Financial Impact of Remittances

The 2020 Economic Crisis and COVID

The 2020 economic crisis and COVID-19 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.

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 wire transfers, but banks are the most expensive transfer channel, and wire transfers in particular are among the highest cost, according to the World Bank.

In the first quarter of 2021, average remittance costs for transfers to the Middle East and North Africa fell to 6.3% from 7% a year earlier. In Sub-Saharan Africa, costs averaged 8%, down from 8.9% for the same period. In Latin America, costs averaged 5.5%, down from 6%.

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.

The top remittance recipient countries in 2021 were India ($89 billion), followed by Mexico ($54 billion), and China ($53 billion).

Special Considerations

Remittances and Crime

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 tracked easily, a fair amount of money is transferred in ways that are harder to follow.

The Impact of Fintech on Fees

Recent fintech (financial technology) waves in international money transfers are forcing fees down. Rising players include Payoneer, Wise, and WorldRemit. Regulation and oversight continue to be strengthened to ensure a more secure movement of funds.

What Is a Remittance?

A remittance is money sent from one person or entity to another. It can be money sent for payment of a bill, for example. However, today, it's more commonly seen as money sent by a person in one country to relatives or friends in another.

How Do I Send a Remittance?

You can send it by visiting your bank and requesting a wire transfer or ACH transfer. Or, you can send it using a money transfer service that specializes in transfers, domestic and international. You can use an app such as PayPal to send a remittance to another country. These electronic services move money quickly, often within a day. If you prefer, you can always send a money order by U.S. mail but how soon it will arrive at its destination depends on which service you use (e.g., first-class international mail or Express mail).

What's the Difference Between a Remittance and a Payment?

Although a remittance can be a payment sent in response to receiving a bill, it's a term that's also used to describe funds sent internationally. For instance, when money is sent by someone in the U.S. to family or friends in another country, they are sending a remittance.

The Bottom Line

Remittances are sent all across the globe in huge amounts. They play a very important role in the economies of various low- to middle-income nations, as well in disaster relief. The amounts that are transferred yearly can exceed the GDPs of some countries.

Remittances can be expensive to send. That's a concern for organizations such as the World Bank because funds sent home by migrants "have greatly complemented government cash transfer programs to support families suffering economic hardships."

Reducing the costs and encouraging the flow of remittances to households in countries where they provide economic relief should be a focus of government policies around the world.

Article Sources
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