Remittances are the shining light of development policy. While debate rages in austerity-hit Western capitals about spending on aid, remittances cost tax-payers nothing. Remittances to developing countries are worth nearly half a trillion dollars – that’s three times the level of aid – and they’re rising fast, quadrupling since the turn of the century. And remittances work. It’s hard to imagine a more efficient targeting system than people sending money home to their own families and the facts bear that out; remittances are linked to improved economic, health and education outcomes. And as if those benefits weren’t enough, remittances are a huge driver of financial inclusion, acting as a gateway to banking for the people sending and receiving them.
But people sending money home to many parts of the world, particularly sub-Saharan Africa, are paying far too much. They face what is, in effect, a remittances ‘super tax’. A worker sending $200 from London to Lagos can pay fees of over 13%, more than fifty percent above the global average. And within Africa it’s even worse, sending money from South Africa to Malawi could cost upwards of 20%. Of course we all expect some fees for financial transactions but there is strong evidence that these costs are excessive and are restricting the poverty-zapping remittances that reach poorer countries. Reducing fees for sub-Saharan Africa to the global average for instance would mean an extra $1.3 billion reaching families in the region.
And we’re not moving nearly fast enough to reduce fees on remittances. We’ve known about the issue for a while; the G8 committed in 2009 to the ‘5x5 goal’ of reducing the global average fee for remittances to 5% within 5 years. But despite some progress, we’re still at close to 8% globally and 12% for sub-Saharan Africa. Indeed, if the cost of sending remittances could be reduced by just 5 percentage points relative to the value sent, remittance receipts in developing countries would receive over $20 billion dollars more each year than they do now. That amount of money could educate 18 million children and buy enough vaccines to prevent 8 million children dying from diseases like malaria.
To fix this situation, we need action on three fronts.
First and foremost, we need to increase competition in the global remittance market and empower migrants by helping them make informed choices about the services they use. This is probably the most effective way to drive down costs and will require action at all levels and in countries that are net senders and net recipients of remittances.
Regulation of international money transfers is complex, and has been tightened in some areas because of understandable concerns over illicit flows of money from criminals and terrorists. But there are things we can do while maintaining those safeguards. One is to require higher standards of transparency from money transfer companies on how they charge – on exchange rates, fees and taxes for both sender and recipient – so that it’s easier for consumers to shop around and know what they’re getting. Another is for governments to unpick exclusivity agreements which tie particular banks to particular money transfer companies. And a third way to boost competition is to reduce restrictions which prevent post offices and micro-finance institutions, which are much more accessible in many rural parts of the world than mainstream banks, from performing money transfers. None of these actions alone will reduce fees overnight, but together they would increase choice and help push costs down over time.
Second, we need to encourage technological innovation. Mobile money is already transforming the financial sector in many countries: you can now use your phone to buy a round of drinks in Nairobi, or pay Ebola health workers in Sierra Leone, or give farmers access to weather insurance in Tanzania. Emerging technologies have the power to extend direct person-to-person, phone-to-phone money transfers across national and currency borders, lowering costs at the same time. We need to back these innovations and let the best thrive. Again, it’s about striking the right balance of protecting consumers while letting new technologies emerge, and it might take some creativity on the part of regulators to get it right.
Third, we need to keep up the political pressure for reform. We know that remittances are a large and growing part of the development landscape. And we know what we have to do to make them even more effective. Reducing the cost of remittances comes down to political will – this is a global issue and it needs a collective global response.
And we’re seeing early signs that when the case is made strongly the money transfer companies listen. For example, in London a group of companies are committing to a first ever World Remittance Day where they will commit to a day with ‘no fees, no margins’ on all transfers as a signal of intent to lowering costs in the future. This is accompanied by financial education and inclusion for Londoners; in a city where around one in three are foreign born, the potential impact is huge.
That’s the really good news: we know what we need to do. If we can unite on this issue we can repeal the super-tax on remittances and improve the lives of millions of families around the world.