The long and winding road: Remittances and financial inclusion

Additional Authors include:

Patrizia Baudino - Senior Advisor, Financial Stability Institute, Bank for International Settlements, Jonathan Fishman - Assistant Director, Office of Terrorist Financing and Financial Crime, US Treasury,  and Richard Audu Maikai - Principal Manager - Trade and Exchange Department, Central Bank of Nigeria

The 16th June was the International Day of Family Remittances. This important UN day reminds us of the significance of family and friends’ networks to poverty alleviation and economic development. Remittances are primarily sent to support loved ones back home and surpass Official Development Assistance as a means of humanitarian support. This flow of private funds is consistent, even during the hardest of economic times, and plays a crucial role in humanitarian relief and sustainable economic growth.

As we draw closer to 2030, the target date for achieving the Sustainable Development Goals (SDGs), the International Day of Family Remittances provided an opportunity to reflect on the progress made to achieving global targets for improving the market for international remittances.  SDG 10.c was established to ensure that the cost associated with sending money home is not exorbitant and that as much as possible of the money sent goes to the beneficiary. Cost reduction targets such as SDG10.c can be really helpful for uncovering the underlying causes and market dynamics that may perpetuate high-cost services. A competitive, well-served marketplace also tends to be low cost; so, where we see remittances services that are unusually costly for the consumer, it can reflect underlying market failures or bottlenecks.

By tracking costs against these global targets, policy makers can be provided with the evidence they need to address remaining barriers and improve market conditions. With seven years to go until 2030, the global average cost of sending $200 is recorded at 6.09% or $12.18, which remains above the 3% SDG target. A significant proportion of remittances corridors continue to have average costs higher than the 5% minimum cost target stated in SDG 10.c. The good news is that global efforts to improve cross border payments more broadly are underway with the G20 Roadmap for Enhancing Cross-Border Payments.

A new joint publication between the World Bank and the Bank for International Settlement takes stock of the varied and extensive work program undertaken by the standard-setting bodies, international financial institutions and national authorities to help improve global remittances markets in efforts to meet these global targets. Behind the scenes, the World Bank’s Payment Systems Development Group have been assessing individual remittances markets against the General Principles for International Remittances, to identify challenges and offer recommendations at the receive country level. Because these assessments are rarely made public, the learning from them doesn’t go beyond the relevant jurisdiction. This new publication takes stock of the assessments undertaken over the last 10 years and incorporates additional insights from the Mutual Evaluation Reports (MERs)  published by the FATF, and FATF’s work on cross-border payments, correspondent banking and unintended consequences. The paper then draws out trends in market challenges to help inform global policy makers and development professionals of these remaining barriers.

The paper highlights a few key areas for ongoing and future work. These are relevant to improving the market for sending as well as for leveraging this flow of funds for greater financial inclusion (which is recognized as a critical enabling factor for several of the SDGs):

1. Greater price transparency (particularly relating to foreign exchange rates and margins), and consumer education:
   While much progress has been made in making remittances transparent and in ensuring consumers of remittances services are adequately protected, senders may not have enough information on the foreign exchange aspects of their transactions, the terms of the remittance service and the very real and growing risk of fraud. Specific financial consumer protection regulation on these aspects has proved effective in specific country cases, as has a focus on greater financial and digital literacy of remittances services customers. 
   
   Commitments by G20 countries through the Global Partnership for Financial Inclusion importantly recognize this, with clear plans for how to address these remaining issues.
    
2. Leveraging remittances data for greater financial inclusion:
   Utilizing the transaction data collected on the flow of remittances to beneficiaries could provide the basis for access to additional financial services, such as credit. This would require effective legal and regulatory frameworks that safeguard customers when their data is shared. Similarly, the importance of protecting this flow of funds, through the application of well-developed, well-regulated insurance products and services is an important lesson from the COVID-19 pandemic.
    
3. Increased recognition of the mutually beneficial relationship between large volume flows such as remittances and greater financial inclusion: 
   Recognition of the importance of remittances to financial inclusion within national strategies would facilitate greater engagement with key stakeholders in both the public and private sectors, which would in turn facilitate market implementation of tools and techniques to help bring remittance beneficiaries into the regulated financial sector.
    
4. Greater digitalization of remittances transactions: 
   The importance of digitalization of remittances to greater financial inclusion is also well documented. In many ways, the COVID-19 pandemic has accelerated the shift to regulated digital remittances channels by users. What remains is ensuring that policy makers actively leverage remittances for greater financial inclusion by driving greater adoption and usage of transaction accounts.
    
5. Standardized licensing and supervisory processes: 
   Applying a proportionate and risk-based approach to regulation and supervision is essential and will allow for easier entry into new markets as well as enhancing competition, customer choice and the quality of service received by consumers.
    
6. Actual implementation of the risk-based approach to AML/CFT: 
   A concern continues to be the possibility that undue or ineffective Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) requirements that are out of sync with underlying risks might prevent certain remitters from accessing registered channels. Efforts are underway to create strong and effective AML/CFT systems that will support the provision of transparent services to legitimate users. Improvements in the quality of supervision can help reduce restrictions on remittances markets and promote inclusion. The FATF is therefore considering work to reinforce global understanding and implementation of a risk-based approach.
    
7. Modernized and interoperable payment systems: 
   Efforts are also underway to facilitate cross-border payments by integrating payment systems or by making them interoperable and interconnected on a regional basis for areas where regional transfers are relevant. Advances  in Central Bank Digital Currencies and Fast Payment Systems are very relevant to these discussions. Efficient cross-border payments can also be facilitated by allowing different types of remittance providers to access payment systems originally set up for banks. In this way, more operators can rely on a well-developed and robust payment network.