"With the implementation of “know your client” rules, anti-money laundering efforts, and so on, it has become increasingly difficult to have an efficient payments system. Many banks have retired from the business, for example, of handling remittances, which are a very important source of income for many emerging markets.” Guillermo Ortiz, Interview, 19 March 2015.

When migrants send money across borders to their families, it promotes economic activity and supports incomes in some of the poorest countries of the world. Annual cross-border remittances are running about US$600 billion, three quarters of which flow to low- and middle-income countries. To put that number into perspective, total development assistance worldwide is $150 billion. Indeed, for many countries, these transfers account for a significant fraction of people’s incomes. For example, in Guatemala, the Philippines and Senegal, remittances exceed 10 percent of GDP.

Yet, despite the remarkable technological advances of recent decades, remittances remain extremely expensive. In an earlier post, we extolled the virtues of domestic payments systems like Zelle, an inexpensive, bank-run means for person-to-person transfers up to several thousand dollars. The marginal cost of using Zelle is zero. That is, for customers of the bank, there is no charge.

Cross-border remittances are far from costless. On average, the charge for sending $200―the benchmark used by authorities to evaluate cost―is $14. That is, the combination of fees (including charges from both the sender and recipient intermediaries) and the exchange rate margin typically eats up fully 7% of the amount sent. It is less expensive to send larger amounts, with the global average cost of sending $500 at just under 5%. Even so, the aggregate cost of sending remittances in 2017 was about US$30 billion, roughly equivalent to the total non-military foreign aid budget of the United States!

In this post, we discuss remittances, why their costs remain high, and what might be done to lower them.

We start with a quick look at some data. The first chart below shows that the inflation-adjusted volume of remittances exploded over the past two decades. Today, these flows are triple what they were in 2000 and five times what they were in 1990. Furthermore, the economic importance of inward remittances has increased for low- and middle-income countries, rising from an average of 1.2% of GDP in 1990 to 1.6% of GDP today.

Aggregate volume of remittances (Billions of 2017 U.S. dollars), 1970-2017