Here is how much you pay in fees when you send money home! Every day millions of migrants from Diaspora send a portion of their hard-earned money back to their families. Beyond having a very hard time working, living and surviving abroad, they must also put up a plan to save and provide for their relatives, so each cent counts.
Remittances play a crucial role in the life of the families who receive them. Up to 50% of the money is used for basic human needs, like food, medicine and a roof over their heads, that is why remittances are a surviving element for low income families.
Global remittances are growing but remain expensive
As seen in the picture below, global remittances hit a new high with $706 billion in 2019, surpassing foreign direct investments (FDI) as a source of income for developing countries.
Source: World Bank World Development Indicators, 2019
Today, people use money transfer organizations and banks to move money from one country to another. Unfortunately, the international remittance industry is still extremely expensive. This happens because of middlemen fees, hidden fees, exchange rate mark-ups or other additional fees that cut a big chunk out of the money intended to be transferred. According to a recent report from Edgar, Dunn and Company, over £150 billion is paid in fees to traditional banks each year. The same research shows that a staggering 96% of bank customers are unaware of the fees charged for their financial transactions, leaving only 4% who have a grasp on what these charges entail.
Remittance Costs
Remittance costs have been in the special focus of policy-makers for decades now. Some could say it’s the most-discussed “case study”. Why? Well, because of the various issues of cross-border payments, which include lack of transparency, slow processes, and extremely high costs which come from regulatory compliance requirements and, in some cases, a lack of competitors.
Remittance flows, or the money sent by migrant workers to their home countries, are a significant source of income for many households worldwide. According to the International Monetary Fund, global remittance flows reached a record high of $703 billion in 2019. Access to bank accounts can facilitate these transactions, but high transaction costs can be a barrier. Despite this, migrant remittances remain a cost-effective option for international money transfers. Additionally, remittances can signal economic health, attracting foreign direct investment.
As shown in the picture below, remittances undergo numerous steps or middlemen as they go from country A to country B. Every new step introduces extra compliance & regulatory checks, more fees, a lack of transparency and predictability. Remittances via banks can sometimes take days, and the sender can’t even tell when their funds will arrive.
Source: VEEI study team analysis
This is only the tip of the iceberg
Almost every bank or money transfer operator is telling you that they have the lowest commissions/fees for transferring money. Who are you going to trust? So, let’s assume that you want to send € 1000 from Germany to Albania/Kosovo or the way around and you choose an MTO to do that.
There are currently 3 main MTOs operating in Albania and Kosovo. Western Union, MoneyGram and Ria Money Transfer. All 3 of them operate in the same way. You go physically there, give cash, pay in fees and the other person receives the amount. Don’t forget that you have seen the ads and apparently everyone has the lowest cost of sending money. ?
But how much do you pay in fees? You will probably be charged with:
- International Transfer Fee which varies from 5% to 12% of the amount you send
- Exchange Rate Markup if the amount needs to be exchanged into another currency
- Additional Markup Fee for the local E-Money company through which the MTO operates
- Other fees in case of cancellation or other different reasons
Don’t forget, MTOs also make money from currency exchange. That means that they use their own exchange rate and not the one who is the only real exchange rate – aka the mid-market rate. So when you need to check the real exchange rate, just google it and you will see the real one.
Can people still move money without being charged with high fees?
The answer is YES. In most countries, FinTech companies such as Wise (ex. Transferwise), Revolut or similar ones, have already started to disrupt the financial industry for good by offering money transfer services way cheaper than the traditional competitors. But unfortunately they are not yet available in some developing regions such as the Balkan. However, despite being present in the global market for some years now. People are not going to wait for FinTechs to make up their minds and penetrate the market. Moreover, they are taking things in their own hands.
What could completely transform the global remittance industry and be an answer to the current expensive financial industry? The answer is Crypto.
Crypto Remittances
Remittances with cryptocurrencies (or Crypto remittances) is a newly emerged topic. Moreover remittances with cryptocurrencies (or Crypto remittances) have gained a lot of attention in recent years. That’s because it is by far faster, more secure and comes at a lower cost than the traditional solutions we have seen such as Western Union, Moneygram or Ria or even bank transfers. And it works despite the fact that it is in the early stages of mass adoption.
In the previous article, where we talked about the journey of money, we mentioned stablecoins as a financial instrument, which is revolutionizing the way people send money to each other. And that is true. Stablecoins, other cryptocurrencies and blockchain in general allow migrant workers to save money on fees by eliminating intermediaries, drastically boost the speed of sending money, and enhance security and peace of mind while moving their hard-earned wages across borders back to their family.
The future is bright
The thing is, it is very difficult for traditional financial institutions to transform into innovative organizations, despite their massive efforts with the so-called “digital transformation”. For the very clear reason that this would require a big change in their business model and overall business mentality and shared values. Digital transformation is nothing else than putting physical old financial products to digital channels. No more no less. And the banking industry with its defining elements as we know it today has existed for centuries now.
What we need today is going back to the concept of first principles, like Apple did with the iPhone. We need to design our financial system and especially the remittance industry from scratch. And we should ask ourselves the question – if we would do that, how would everything look like? Our new financial world but re-imagined.
And this is not sci-fi but is happening as you read this. The real action is in emerging markets or developing countries where legacy systems and infrastructure are poorly designed.
Looking and learning from the developing markets where this is currently happening will help us realize that we are not binded anymore by traditional financial organizations but we are ready to embrace new alternatives in the era of financial freedom.
