Remittance refers to the transfer of money from foreign migrants to their families cross-border to their home country.
In simpler terms, it can be defined as the transfer of funds to a distant location, usually between parties that lives in different geographical locations. Remittances are not a new concept; their existence has been an integral part of the history of migration.Currently, developing countries are the ones that depend on the most on remittances from migrants in developed countries.
Remittances are an important source of income for developing economies and there is strong evidence of a positive relationship between remittances and socio-economic growth. According to the Worldbank report, Remittance flows touched a record high of $548 billion in 2019.
With the rise of Mobile phone penetration in developing countries, more and more people have started using their mobile phones in order to send money to their families. key aspects of remittance payments are transfer costs and time that have been going down as money transfer technologies get more advanced. Indeed, with more competition between the different remittance players, users have been demanding a better service at a lower cost.
Example of Remittance companies:
Traditional MoneyTransfer (western union and moneygram)
- multinational financial services corporation that provides money movement and transfer services.
- present in over 200 countries and territories, operating in almost every country on the planet
- deals with over 130 different currencies.
Fintech Startups (Worldremit, Transferwise)
- Each startup has come up with a new way of improving remittances while focusing on a specific consumer base or geography.
- WorldRemit serves a considerable share of African migrants, while Ria Money Transfer targets migrants from Latin American countries, and Azimo focuses on the European Market.
- Another success story is TransferWise, Through their borderless and global expansion strategies, they have been able to quickly reach over 6 million users and process £4bn in monthly transactions
SCENARIO IN DEVELOPING COUNTRIES
- People rely on remittances as a critical financial inflow, which can account for a primary income source relative to GDP
- Many families don’t have bank accounts or can’t get access to banking services so they rely on informal channels to receive money
- remittance market is highly regulated and in some countries restricted to select Money Transfer Operators. As a result of limited competition, these Money Transfer Operators charge excessively high fees per transaction.
Major Concern in Existing Remittance Industry
- The majority of the remittance industries rely on third-party intermediaries and financial institutions, which makes the current system quite inefficient.
- Secondly, the payment of remittances through traditional banking channels is that the recipient should have a banking account to receive the payment. But what if people receiving money do not have a bank account?
- Moreover, such traditional services are expensive and slow as the transferring funds may take days or even weeks.