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Why remittances are “dollars wrapped with care”

Why remittances are “dollars wrapped with care”

When I was growing up in Mexico, my mother made it very clear to my siblings and I that we couldn’t afford everything we asked for. My father lived and worked very hard in the US for half of the year to support our family of 5. Each time my father sent money from the US, my mom used it to pay bills, buy food, clothing, fund our education and so on. Because my mother was good at budgeting and tried to stretch each dollar as much as possible, she had no problem saying ‘No’ to our pleas for toys or gadgets. This situation is a common experience for millions of families all over the world. When an individual from an immigrant community sends money to his or her home country, this transaction can be defined as a remittance. Millions of families’ economic livelihoods depend entirely on remittances.

Remittances are an important and fairly stable source of income for millions of families. However, if remittances continue to slow […] poor families in many parts of the world would face serious challenges including nutrition, access to health care and education.
— Augusto Lopez-Claros, Director of the World Bank’s Global Indicators Group

SHOW ME THE NUMBERS

Remittances are used for food, necessities, building houses, funding education, funding healthcare or special occasions such as weddings. Typically, the amount sent each time can be small, a couple hundred dollars, but because they are sent consistently each month, the global numbers quickly amount to significant figures.

According to the World Bank, there are currently about 250 million international migrants in the world. In 2015, these migrants sent 581 billion dollars to their country of origin. 432B of the 581B were remitted to developing countries. Unsurprisingly, the U.S. is the biggest source of these funds with a 56B outflow last year. But, where does all this money go? The top recipients of remittances include India, with the biggest share of the pie at 69B, China (64B), the Philippines (28B), Mexico (25B) and Nigeria (21B). 

HOW FUNDS ARE TRANSFERRED

Remittances are generally sent through money transfer companies such as Western Union, MoneyGram and Xoom, to name a few. These transfer companies charge a fee per transaction. Depending on the company, the fee can be a fixed amount or a percentage of the total sum sent. In the last quarter of 2015, the average global cost to send money home was 7.4%. This percentage might not seem all that high but when you can only afford to send 200 dollars home every month, this fee poses a strain on the total money received by the family in need. While researching this topic, I found out that the cost to send money is quite high due to the world’s largest commercial banks hesitancy and avoidance of the remittance business. Unfortunately, remittances can also be used for money laundering and terrorist financing.

While PayPal is a great way for tech savvy millennials to transfer funds, this isn’t so much the case for the families whose lives depend on remittances. In most rural places, including Santa Rosa, the village I grew up in, remittances are picked up at the post office. Yes, the post office because Internet and telephone access is limited or nonexistent. Going to the local bank to pick up the cash isn’t really an option either. The nearest bank to my village was about 4 hours away… Hence the post office acting as a financial institution. Post offices establish exclusive partnerships with money transfer companies like Western Union in most parts of the world. These partnerships make it convenient for families to receive the funds but at a cost. I’ve only sent money to Mexico a handful of times but each time I used Western Union and I paid a whooping 10%!  

Since the current methods to send money can be expensive and unsafe, there is room for competition with the giant transfer companies. That’s where Regalii, steps in. Regalii is a play on the Spanish word regalo (gift) and the company aims to revolutionize the way global remittances are sent. Instead of transferring cash that needs to be picked up in person, Regalii offers the service to pay these bills from abroad by text message. The company claims to be 40% cheaper than the current transfer companies and has partnered with familiar brick and mortar stores that immigrants shop at every day and use to send money. The company started offering its services in beta mode in the Dominican Republic but has since expanded to 10 countries in Latin America. I am rooting for this company because it is not only owned and run by Hispanic entrepreneurs but its sole purpose is to streamline and decrease the cost of remittances. 

THE IMPACT OF REMITTANCES

Remittances empower people as they have a huge impact on economies and families in need. Dilip Ratha (remittances expert and economist with the World Bank) says that “remittances are dollars wrapped with care”. For example, in El Salvador, the school dropout rate is lower in families that receive remittances while in Mexico and Sri Lanka, the birth weight of children is higher among families that receive remittances. In a recent study published by the Inter-American Development Bank, it was found that for every 1 percent increase in the number of Mexican households that received remittances, the homicide rate reduced by 0.5%. These findings are powerful because Mexico’s murder rate is one of the highest in the world (8.7% in 2015) due to the ongoing drug war.

The same study concludes that remittances are a great way to raise living standards across the world as they act as stabilizing forces for developing economies. According to one estimate, completely opening borders would add $39 trillion to the global economy in a 25-year period. This is more 500 times the annual amount spent on foreign aid! The estimate claims that reducing global poverty can be achieved through migration.

My family moved to the U.S. in 2002 partly to escape the drug war and to seek better education and employment opportunities. But, not everybody living in poor areas of the world is as fortunate as my family. For them, their lives will continue to depend on remittances. This is why companies like Regalii matter. Because as Ratha said in his compelling TED Talk, remittances represent “a hidden force in global economics.”

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