Remittances Market in Latin America: Will mobile money facilitate financial inclusion?

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According to the recently-released Migration and Development Brief 26, Latin America and the Caribbean region achieved the most rapid growth in remittance inflows, which rose by an estimated 4.8 percent in 2015, owing to the recovery in labor markets in the United States.

However, the growth of remittances varied widely across countries, ranging from a rise of 13.2 percent in Guatemala and 11.4 percent in Colombia, to a decline of 2.8 percent in Ecuador. Remittances to Mexico reached $24.8 billion in 2015, the top remittance recipient in the region by far, followed by Guatemala.The remittances market in Latin America is being impacted by two developments:

Derisking

As reported in the Brief, de-risking behavior by major international banks continues to pose a major challenge to the provision of remittance services. Complaining that remittance transactions are prone to the risk of money laundering and other financial crimes, banks have been closing the correspondent banking accounts of many money-transfer operators (MTOs). Remittance service providers and banks need not only to apply “know-your-customer” (KYC) regulations, they also need to know their customer’s customer. According to the World Bank’s survey on this phenomenon in the G20 countries, MTO account closures by banks was widespread. This situation has continued this year, in which banks are closing the bank accounts of MTOs. A risk based approach is what the Guidance on financial inclusion of the Financial Access Task Force (FATF) recommends when dealing with AML/CFT systems. Nevertheless, several financial institutions do not want to take any risk and prefer to close the accounts of money transfer operators (MTOs).

Mobile Money and Digital Payments

Although the establishment of digital payment systems for remittances instead of using cash for the transactions are of enormous benefit to the poor in developing countries, it presents challenges from both the supply and demand side. They include safety and reliability safeguards, interoperability of bank and nonbank financial service providers so different types of systems work with each other, adequate physical infrastructure to offer digital payments, availability of cash-out points, stability of prices, and sequencing in the adoption of digital payments and mobile money.

Latin America still lags in mobile money compared to Sub Saharan Africa. New players using mobile remittances find it difficult to send remittances within and across Latin America due to outdated payment systems, lack of interoperability and the regulatory framework.
Ecuador and Peru are moving ahead in establishing national shared payment platforms for increasing digital payments and financial inclusion. “Modelo Perú” is a partnership between 34 financial institutions that have launched “Bim platform” (short for Billetera Movil, or Mobile Wallet).  According to Better than Cash Alliance, “Modelo Perú is the world’s first attempt to enable a fully interoperable national mobile payments system with a specific focus on financial inclusion”.

These new technologies can contribute to cost reduction in domestic remittances as well as in cross-border remittances.

 

Authors

Sonia Plaza

Senior Economist, Trade and Competitiveness Global Practice, World Bank

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