We need to fix the leaks in remittance transfer systems around the world

Policymakers need to step in to reduce transaction costs on migrant workers' remittances. Massimo Cirasino suggests how
iran banknote
High transaction costs reduce the amount of money migrants send home Photograph: Atta Kenare/AFP/Getty Images

The most visible impact the diaspora has on development comes in the form of remittances – the US $400bn (£254bn) migrant workers sent home to their families in 2012. And every year, that soaring sum keeps breaking records. Food, housing, education, healthcare and more are paid for every day by workers who make their living abroad. But, like a faulty tap, there is a leak in migrant workers' remittances.

Here's where the leakage happens. A large proportion of the money is drained away by the transaction costs of sending money internationally. Given the typically low incomes of migrants and the small amount of each remittance transfer, too much is being spent on these transactions – and too little of the money is reaching migrants' families.

In the same way a plumber would fix a dripping tap, the professionals who work in the global financial system have a responsibility to ensure money is safely transferred from Point A to Point B in every transaction, and that leaks from remittances are fixed.

The World Bank monitors remittance costs through the Remittance Prices Worldwide database. Globally, remittance prices average 9% of the sum being transferred. When migrants send $200 home, for example, the transaction cost is an average of almost $18. These costs should be lower. In some regions of the world, theyare indeed lower. For example, sending money from the United Arab Emirates costs an average of about 4%. However, there are regions, such as Africa (pdf), where remittance charges average about 12%. Even more staggering is the fact that for some migrants, the cost of sending money home is more than 20%.

The problem of exorbitant remittance prices has long been most intense in Africa. The World Bank's Send Money Africa database shows that the cost of sending money to Africa is too high – averaging 12% in December 2012. And trends show that the cost has been going up, not down. In July 2011, the average remittance price to Africa was 10.9%.

This is a serious issue for the development community because it takes money away from the world's poorest. About $60bn (£38bn) in remittances was sent to the African continent in 2012; more than $7bn (£4.4bn) was drained in fees.

The World Bank is supporting international efforts on the 5x5 Objective, which has been endorsed by the G8 and G20 and aims to bring global remittance prices down to 5% by 2014. Achieving that goal would save migrants as much as $16bn annually. So what should the global development community, remittance-service providers and public authorities do to bring down costs?

1. Improve efficiency

First, public authorities should make payment system infrastructure more efficient so as to eliminate inefficiencies in the flow of funds, both internationally and domestically. A comprehensive reform of the Rwandan payment system, for example, has helped reduce the average cost of sending money to Rwanda from 19% to less than 15% in the past two years.

2. Provide access to information

Second, remittance information should be made more easily and widely available to consumers. Transparency on prices and conditions can increase consumer awareness and empower them to make informed decisions. Remittance price databases, such as the ones developed in Australia and Italy, are transparent information sources for remittance senders. In addition, solid consumer protection, as well as good governance and sound risk-management practices, can increase consumers' trust in the system.

3. Foster innovation

Regulators should create an enabling environment to foster innovation and access to the market, while protecting customers and systems from financial risks. The Philippines, for instance, set up a proportionate legal framework years ago, allowing for both innovation and stronger consumer protection.

4. Increase competition

Vigorous competition can help reduce costs for consumers, improve the quality of service and ensure that existing infrastructures are used to their full potential. Banning anti-competitive exclusivity agreements can help spur competition. Russia, which is now the least expensive G8 country to send money from, shows the progress that can be made when anti-competitive restrictions are halted.

Focusing efforts on these areas could bring down remittance prices, and increase the amounts that reach migrant worker's families by millions of dollars each year. Indeed, simple plumbing repairs can fix the faulty flow of international transactions and stop the leakage so that more money can end up where it's needed the most – in the pockets of the world's poorest people.

Massimo Cirasino is the manager of the financial infrastructure and remittances service line at the World Bank. He blogs on the Bank's private sector development blog.
