Last week the New York Times featured an editorial suggesting that the World Bank should become a remittance center. Remittances are the "largest and arguably most effective antipoverty effort in the world.....financed by the poor themselves...,” it stated. “But the cost to transfer those billions is likely to rise soon...[as] big banks are leaving the money-transfer business, including Bank of America, Citigroup and JPMorgan Chase."
"If banks can’t profitably transmit remittances — and won’t do so as a low-margin courtesy — then other secure, low-cost options must be found. One solution would be for the World Bank to become a remittance center.”
Two related questions jump to mind: What is the role of banks in the global remittance market? And, should the World Bank become a remittance center?
On the first question, I am not aware of any hard data on the share of remittances going through banks. Let me hazard some guesses:
- All remittance transactions except those using hawala channels are finally cleared through inter-bank settlement and clearance systems - thus banks get involved in all officially recorded remittance transactions . The volume of officially recorded remittances to developing countries was $404 billion last year, and those worldwide (including flows to high-income countries was $542 billion (see Migration and Development Brief 22).
- Unrecorded flows - most of which are flows through informal channels such as the hawala - are estimated to be around 50% of official flows, or $200 billion. These flows are cleared between sending and receiving hawala dealers via bilateral arrangements (and often involve leaving dollars in offshore accounts or smuggling of gold).
- Of the recorded flows mentioned above ($404 billion and $542 billion), bank-to-bank transfers are perhaps 25% for flows to developing countries or roughly $100 billion, and almost 100% of flows among high-income countries (roughly $140 billion). Thus, bank-to-bank transfers are roughly $240 billion out of the global total of $542 billion. The rest of the flows are though money transfer operators working at one or both ends with banks for settling the payments.
- For the US, we estimate that the outward remittance flows are significantly larger (roughly $120 billion a year) than the data published by the government ($51 billion approximately per year). Of the $120 billion, probably $100 billion is via official channels, and of this, a quarter ($25 billion) is perhaps bank-to-bank.
Regarding the question of the World Bank becoming a remittance center, the Times explains, “It has the expertise. And it would not take business away from the big banks, which have thrown in the towel on reasonably priced cash transfers. What it would do is ensure that more of migrants’ hard-earned money reaches their families, and, in that way, advance the mission of the World Bank to alleviate poverty."
The World Bank is a development bank, not a commercial bank nor a retail bank. It is, therefore, not equipped to directly play the role of a remittance center for millions of retail migrant customers, or even for hundreds of money transfer operators. Yet, the World Bank can work with commercial banks and government regulators worldwide to streamline the anti-money laundering regulations that are at the root of the commercial banks’ hesitation in staying in the remittance business. It can persuade organizations with large retail networks – including Amazon, Facebook, Google, Walmart, national post office systems in rich and poor countries – to get into the money transfer business and make a lot of money for themselves while helping the poor.
I also hope that private charitable foundations (notably the Gates Foundation) would consider starting a non-profit remittance center. Given the size of the remittance market and the simplicity of the remittance operation, such a start-up can become financially independent relatively quickly, and even make money (although I’d prefer that it remains non-profit). A non-for-profit remittance company can also help mobilize charitable contributions from the diasporas interested in fighting diseases and global public goods. And it can help sell diaspora bonds and insurance products for financing development back home.
[Shall we perhaps call the start-up “Effisend?” Or “Efficent?”]