What Is a Remittance?

A remittance refers to money that is sent or transferred to another party. The term is derived from the word remit, which means to send back. Remittances can be sent via a wire transfer, electronic payment system, mail, draft, or check.

Remittances can be used for any type of payment including invoices or other obligations. But the term is typically used to refer to money sent to family members back in a person's home country.

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Remittance

Understanding Remittances

Payment remittances are money transfers made by people to another party. They can be made to satisfy an obligation such as a bill payment or an invoice when someone shops online. But they are most commonly made by a person in one country to someone in another. Most remittances are made by foreign workers to family in their home countries. They may also be payments that are made to a business. The most common way of making a remittance is by using an electronic payment system through a bank or money transfer service such as Western Union. People who use these options are generally charged a fee, but 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 are also seen as an important part of disaster relief and often exceed official development assistance (ODA). Remittances are often used as a way to help raise the standard of living for people abroad 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. If we include high-income countries as well, the total amount of remittances jumps to $689 billion, up from $633 billion in 2017.

On the plus side, remittances are also used to help those living in less developed nations open bank accounts, which helps promote economic development.

Key Takeaways

  • A remittance is money sent to another party, usually one in another country.
  • The sender is typically an immigrant and the recipient a relative back home.
  • Remittances reached a record high in 2018, according to the World Bank.
  • Remittances represent one of the largest sources of income for people in low-income and developing nations, often exceeding the amount of direct investment and official development assistance.

Special Considerations for Remittances

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 transfers where they can be more easily accounted for, a fair amount of money is transferred in ways that are more opaque.

As a result, 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.

7%

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

Many authorities are also concerned about the high cost of remittances. Sending small sums is often expensive. To promote transparency, some countries limit remittances to bank wires, but banks are the most expensive transfer channel, according to the World Bank. In the first quarter of 2019, banks charged an average of 11% in transfer fees. Post offices charge on average over 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 over $24 billion back home, which was more money than the country generated from selling oil.

According to the World Bank, the top remittance recipients in 2018 were India with $79 billion, followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion), and Egypt ($29 billion),

Plunging oil prices and production have also caused much of the Venezuelan population to migrate to other countries over the years. With so many refugees and immigrants living abroad, the result has been a surge in remittances. In 2017, over $1.5 billion in remittances were sent to family members remaining in the beleaguered country.