reducing remittance fees - world bank

Following the discussion in chapters 4 and 5,on the macro- and microeconomic importanceof remittances, chapter 6 focuses on a specificpolicy issue: reducing remittance costs andstrengthening the financial infrastructure thatsupports remittances. Reducing the cost ofpersonal remittances is the most promisingarea of policy intervention for several reasons.First, it will stanch a drain on the resources ofpoor migrants and their families back home.Second, it will increase flows through formalchannels, especially banks. Third, it willimprove financial access for the poor in devel-oping countries.

Cost is usually not an issue in large remit-tances (made for the purpose of trade, invest-ment, or aid), because, as a percentage of theprincipal amount, it tends to be small. But forsmall, personal transfers, remittance costs arehigh—unnecessarily so. Providers of remit-tance services in the formal sector typicallycharge a fee of 10–15 percent of the principalamount to handle the small remittances typi-cally made by poor migrants.1 High fees placea financial burden on the migrant remittersand on the recipients of the remittances, whoreceive a smaller amount of the much-neededfunds sent by their family members.

Major international banks tend to focus onlarge-value remittance services rather than onservices for migrants. Poor migrants may feeluneasy about using a major bank for remit-tance services; they tend to prefer smaller fi-nancial institutions, money transfer operators

(MTOs), or informal channels, such as afriends, family members, export-import firms,and transport companies.

The main messages of this chapter are asfollows:

There is significant scope to reduce the fees onremittance services, especially for the smalltransfers typically made by poor migrants.Remittance transaction costs are often signifi-cantly lower than the fees that most customerspay. Reducing transaction fees will increasethe disposable income of poor migrants andincrease the incentives to remit (as the net re-ceipts of beneficiaries increase). It may alsosignificantly increase annual remittance flowsto developing countries. Cross-border pay-ments for retail trade, investment, and pensionbenefits (typically defined in foreign currency)would also increase in response to a reductionin remittance fees.

A weak competitive environment in the remit-tance market, lack of access to technology-supporting payment and settlement systems,and burdensome regulatory and compliancerequirements all tend to keep fees high. Com-petition in the remittance market could be in-creased by lowering capital requirements onremittance services and opening up postal,banking, and retail networks to nonexclusivepartnerships with remittance agencies. Dis-seminating data on remittance fees and estab-lishing a voluntary code of conduct for fairtransfers would improve transparency in

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Reducing Remittance Fees6

remittance transactions. In countries withexchange controls, efforts to align the officialand the market exchange rates would reducethe foreign-exchange spread in remittancetransactions.

Reducing remittance costs and improvingaccess to the financial system for migrants andtheir families will do more to encourage theuse of formal channels than will regulation ofso-called informal services. While regulation isnecessary for curbing money laundering andterrorist financing, overregulation of informalservices may conflict with the objective ofreducing remittance costs.

Expanding migrants’ access to bankingservices may enable remitters to bundle remit-tances and thereby take advantage of thelower fees available for larger remittances.This would require expanding the bankingnetwork, allowing domestic banks from origincountries to operate overseas, providing iden-tification cards to migrants, and facilitatingthe participation of savings banks, creditunions, and microfinance institutions inproviding low-cost remittance services. Remit-tances, in turn, can be used to support finan-cial products—such as deposits, loans, andinsurance—for poor people, and to contributeto the financial development of the recipienteconomy.

The plan of this chapter is as follows. Thefirst section describes remittance fees andcosts in various remittance channels. It shows(a) that remittance fees paid by customers arehigh for smaller transactions, especially inlow-volume corridors; (b) that the cost ofproviding remittance services need not be sohigh; and (c) that remittance flows to devel-oping countries would increase if remittancecosts were reduced. The next section exam-ines the factors underpinning remittancefees—market competition, regulations, pay-ment infrastructure, and technology—andsuggests policies for reducing costs and fees.This section also briefly discusses the recom-mendations of the international FinancialAction Task Force (FATF) to prevent misuse

of remittance systems for criminal purposes.The last section discusses complementaritiesbetween remittances and other financialproducts such as loans, deposits, and insur-ance. Finally, an annex to the chapter brieflydescribes the historical evolution of threemajor remittance service providers (WesternUnion, MoneyGram, and Bank of America)to provide a perspective on the remittancemarket.

Remittance fees and costs

The remittance industry consists of formaland informal fund transfer agents. Major

competitors include a few large global players,such as the major money transfer operators(MTOs) and banks, as well as hundreds ofsmaller participants that serve niche markets inspecific geographic remittance corridors. Theinformal fund transfer agents include friends,family, and unregistered MTOs such as hawaladealers and trading companies.

The price of a remittance transactionincludes a fee charged by the sending agent(typically paid by the sender when initiatingthe remittance transaction) and a currency-conversion fee for delivery of local currency tothe beneficiary in another country. (A stylizedremittance transaction is presented inannex 6A.1.) Some smaller MTOs require thebeneficiary to pay a fee to collect remittances,presumably to account for unexpectedexchange-rate movements. In addition, remit-tance agents (especially banks) may earn anindirect fee in the form of interest (or “float”)by investing funds before delivering them tothe beneficiary. The float can be significant incountries where overnight interest rates arehigh.2 Many recipients spend considerabletime and travel considerable distances tocollect remittances. These costs typically arenot included in the price.

Remittance fees are high, regressive, and nontransparentRemittance fee pricing is complex, and rarelyare senders informed about the full and

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 6

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precise price of a remittance transaction. Feesmay be as high as 20 percent of the principal,depending on the remittance amount, chan-nel, corridor, and transaction type. The aver-age price is reported to have been around12 percent of the principal in 2004 (Taylor2004; Kalan and Aykut 2005). Prices are be-lieved to have declined recently but are stillvery high in low-volume corridors. Currency-conversion charges are even less transparentthan remittance fees; they, too, vary depend-ing on the competitor, corridor, and channel,ranging from no charge in dollarizedeconomies to 6 percent or more in somecountries (Orozco 2004; Hernández-Coss2004; Kalan and Aykut 2005).

Major MTOs such as Western Union andMoneyGram apparently charge higher remit-tance fees than banks and other financialinstitutions that offer remittance servicesto attract migrant customers (table 6.1).Informal channels such as hawala are reportedto be cheaper than formal services. Someheavily traveled remittance corridors, such asUnited States–Mexico and South Africa–Mozambique, are much cheaper than others.Urgent transactions delivered in minutes costmuch more than next-day transfers, and elec-tronic transfers cost more than bank checks or

drafts, because they also clear much fasterthan the latter.

The fee amount also depends on the remit-tance amount. Average remittance fees, as apercentage of money sent, decline rapidly asthe transaction size increases, indicating scaleeconomies and the potential advantage ofbundling remittances—that is, the advantageof sending more funds, but less frequently.According to one firm’s fee schedule, the costof sending money from Belgium to Africadrops from 21 percent to below 4 percentas the transaction amount increases from40 euros to 900 euros (figure 6.1). Similarly,the cost of remittances from the United Statesto Mexico (through the major MTOs) is morethan 10 percent for $100, but less than 3 per-cent for $500 (figure 6.2).

In recent years, remittance fees have de-clined in high-volume corridors in response toseveral factors. First, global and regionalMTOs have intensified their competitionin mature corridors (United States–LatinAmerica, for example), as new competitorshave been attracted by high and growingremittance volumes. In the United States–Mexico corridor, for example, remittance feeshave dropped nearly 60 percent since 1999(box 6.1).3 Second, Bank of America and

R E D U C I N G R E M I T T A N C E F E E S

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Table 6.1 Approximate cost of remitting $200 Percent of principal amount

Major MTOs Banks Other MTOs Hawala

Belgium to Nigeria* 12 6 9.8 —Belgium to Senegal* 10 — 6.4 —Hong Kong, China, to the Philippines 4.5 — — —New Zealand to Tonga ($300) 12 3 8.8 —Russia to Ukraine 4 3 2.5 1–2South Africa to Mozambique — 1 — —Saudi Arabia to Pakistan 3.6 0.4 — —United Arab Emirates to India 5.5 5.2 2.3 1–2United Kingdom to India 11 6 — —United Kingdom to the Philippines — 0.4–5.0 — —United States to Colombia — 17 10 —United States to Mexico 5 3 4.7 —United States to Philippines 1.2–2.0 0.4–1.8 — —

Source: Brocklehurst 2004; Orozco 2004; Gibson, McKenzie, Rohorua 2005; Hernandez-Coss 2004; Ratha and Riedberg 2005;Kalan and Aykut 2005; Andreassen and others 2005.*World Bank survey of African diasporas in Belgium. Note: Figures do not include currency-conversion charge. — Data not available.

other banks in source countries are using min-imal transfer fees to attract migrant accounts,while a growing number of banks in recipientcountries (including ICICI and Bancomer) arecompeting for remittance customers. Third,the use of Internet-based technology for mes-saging and advanced clearing and settlementhas reduced the cost of remittance transac-tions. In some countries, new remittance toolshave emerged, based on cell phones (seebox 6.6) and smart cards. Finally, government

policies to improve transparency in remittancetransactions (as in the United Kingdom), pro-vide financial training to migrants (as in thePhilippines), and establish bilateral initiatives(such as the Partnership for Progress betweenthe United States and Mexico) have helpedreduce remittance costs.

These positive developments remain theexception. In most corridors, particularlythe low-volume corridors, remittance feescontinue to be very high. In the NewZealand–Tonga corridor, for example, feesare about three times as high as those in theUnited States–Mexico corridor. The wide gapbetween remittance fees and costs shows thatboth should be reduced.

The cost of a remittance transaction appears to be far lower than the priceService providers’ remittance costs appear tobe much less than the fees charged to cus-tomers. Domestic transfer fees are only a frac-tion of the cross-border remittance fees (net ofthe currency-conversion charge). The cost of adomestic automated clearinghouse (ACH)payment in the United States is one-third ofa cent. Domestic transfers using Visanet cost2 cents per transaction, as opposed to 51 cents


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Figure 6.1 Remittance costs are high andregressive

Percent of principal amount

40

21

13

109

87

Principal amount, €

65

4 4 4 43

75 150

225

300

375

560

745

930

1120

1305

1490

1860

Source: Western Union branches in Brussels and Paris.

Figure 6.2 Remittance fees in the United States–Mexico corridor

100

Fees as % of remittance

200 300 400 500 600 700 800 1,0009000

2

4

6

8

12

16

10

14

Size of remittance, $

Western Union

Moneygram

Dolex

Vigo

Source: Kalan and Aykut 2005.

per transaction for international transfers(Brocklehurst 2004). In some corridors, feesfor international remittances are as low as$1.80 per transaction (London-Manila),which hints at a falling lower bound for thecost of remittances. The fact that some bankshave been offering free remittance services asloss-leaders to attract new business suggeststhat the actual cost of remittances is modest.Courier services that offer remittances alsocharge small fees for this additional service.Finally, industry cost estimates as well asother calculations presented below suggestthat remittance costs are not very high.

The cost of providing remittance servicesvaries with the business model used by the ser-vice provider. Western Union, MoneyGram,and Vigo use agents who pay all operatingcosts in exchange for their franchise and acommission on sales. In the “branch” modelused by Dolex and many of the smaller

regional MTOs, the fixed and operating costsassociated with each branch are paid by theMTO. By leveraging existing businesses on acommission basis, the agency model is muchless capital-intensive than the branch modeland can be expanded rapidly through partner-ships, but it has higher variable costs.4 In bothmodels, relatively high fixed costs are associ-ated with transaction-processing operations,compliance with regulatory requirements,marketing, and administration.5

Data on MTOs’ costs of providing remit-tance services are hard to obtain. However, ananalysis of profitability of the market leaders6

using publicly available financial statementssuggests that remittance costs are significantlylower than the fees charged to customers.Western Union has sustained operatingmargins that are at least 50 percent higherthan other MTOs and industry peers in thepayments and electronic processing market


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The cost of sending $300 from the United Statesto Mexico declined nearly 60 percent between

1999 and 2005—from $26 to $11 (according toPROFEC data, see figure). The decline can be tracedto greater competition. Prices generally remainedstagnant when one MTO dominated the transmis-sion service through exclusive contracts with distrib-utors. Practitioners inside the industry cite thebreakup of these exclusivity contracts and the entryof new competitors—especially banks—into thecorridor as key events leading to a steady decline inprices.

Starting with Citibank’s acquisition of Banamexin 2001—a $12.5 billion deal reportedly motivatedby the attractiveness of Banamex’s remittance busi-ness, U.S. banks have increased their stake in theUnited States–Mexico remittance market in the pasttwo years. Being able to use the matricula consularidentification card to establish identity when openingan account has helped this process. The card is

Box 6.1 Decline in remittance costs in the UnitedStates–Mexico corridor

United States–Mexico, remittance fee per $300

Dollars Billions of dollars

10

16

19

13

1999

22

25

20

15

10

5

28

2000 2001

Cost(left scale)

Remittancesto Mexico

(right scale)

2002 2003 20052004

accepted as a valid identity document in 32 U.S.states, more than 1,000 police stations, 409 cities,125 counties, and 280 banking institutions.

(table 6.2).7 Its operating profit per remittancetransaction may have averaged $8 to $9 in2004. This is consistent with an earlier annualreport (Western Union 2000) that put thecompany’s operating profit at $684 million(or 30 percent of its $2.3 billion revenue). Theoperating profitability of the other major mar-ket players (MoneyGram and Dolex) has beenin the range of 15–20 percent (table 6.2). Avery simple model for Western Union (whichassumes that agency commission costs are 35percent of revenues after deduction of fixedcosts and that all other costs are fixed costs)suggests that average transaction fees could bereduced by as much as one-third while main-taining operating margins within the samerange as those of other major MTOs and peers.Reducing these operating profits to zerowould provide a rough estimate of the break-even cost for these firms. Such an exercise re-veals that the break-even fee for WesternUnion is probably around $9 per transactionand would fall below $5 if the volume oftransactions were to double (box 6.2). Al-though it would be unreasonable to suggestthat any company reduce its prices to cost, thissimple model does appear to indicate that thereis considerable latitude for reductions in trans-action fees within the higher-priced corridors.

A more direct way of estimating the cost ofa remittance transaction in a hypotheticalMTO is to add up plausible cost components,

such as staff to process the transaction andprovide security, rental of the premises, fixedcosts (including franchise licensing), the costof network and technology, and administra-tive costs for regulatory compliance.8 Thismethodology yields a cost estimate of $5.50for the first remittance transaction (table 6.3).Because most remittance transactions tendto be repetitive—the same amount is re-mitted from the same location to the samebeneficiary—the cost for subsequent transac-tions drops to $3.60 (less staff time is re-quired). It drops to under $3 per transaction ifelectronic processing is used.

Admittedly, the calculations in table 6.3are based on a theoretical model of a basic


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Table 6.2 Operating profits of major MTOsPercentage of revenue

2004

First Data Corporation, Western Union money transfer operationsa 32

MoneyGram money transfer operations 15Global Payments money transfer operations, 20

including Dolexb

Peer group averageb 18

Source: Yahoo Finance Database financial summaries; Kalanand Aykut 2005; Piper Jaffray Equity Research; MoneyGramInternational.a. 90 percent Western Union; 50–55 percent non-UnitedStates/Canada consumer-to-consumer money transfers. b. Includes American Express, Total System Services, DSTSystems, Sunguard Data Systems, and Fiserv. These compa-nies are not directly comparable to the MTOs as they are notnecessarily in the money transfer business.

Table 6.3 Estimating the cost of a remittance transactionCost in dollars

First Subsequent Electronic transaction transaction processing Explanation

Sending staff 2.50 0.83 0.50 10 minutes of staff time at $15 per hourReceiving staff 0.17 0.17 0.17 10 minutes of staff time at $1 per hourFixed costs 0.27 0.27 0.27 $40 million system cost recovered over

10 years; 2,000 branches with 20 transactions per day

IT, telecommunications 0.60 0.60 0.60 1 minute international phone call Rent 1.50 1.50 1.50 $30 rent per day; 20 transactions per dayAdministrative costs 0.50 0.50 0.50 Compliance, general overhead

Total costs 5.54 3.60 2.94

Source: Ratha and Riedberg 2005.


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Remittance industry costs are difficult to obtain.Isolating the cost of remittance services is diffi-

cult in the case of financial institutions that provideother services as well. Estimating costs is not easyeven in the case of dedicated remittance serviceproviders because of the differences in the qualityand reliability of remittance services (only someproviders give customers legal redress). In Remit-tance industry costs, therefore, we have used publiclyavailable information on Western Union, the largestMTO that is also a publicly listed company.

We used a simple model to estimate a break-evenfee for Western Union’s international money transferoperations. The model suggests that for WesternUnion’s operating margins on its international moneytransfers to drop to the peer group average of 17.8percent (table 6.2), the average transaction fee wouldhave to be lowered from $22.90 to $15.30 (column 2of the table below)—very close to the company’s cur-rent fee in several U.S. corridors. The model also in-dicates that the break-even fee at which the operatingprofit becomes zero is $9.30 (column 3). This price isin the same range as MoneyGram’s standard flatprice in the U.S. corridors. A sensitivity analysis usingthis model suggests that the break-even fee would be$6.50–$7.00 if agency commissions were 25 percent,and around $11 if commissions were 45 percent.

Box 6.2 Estimating remittance industry costs

Calculation assuming Calculation peer group margin assuming

2004 data of 18% break-even margin

Operating margin (operating profit 30 18 0over revenue) (%)

Operating profit per transaction 8.8 3.9 0.0(revenue minus costs) ($)

Costs ($) 20.4 17.7 15.7Agency commission, 35% of fee 8.0 5.3 3.3Fixed costs 12.4 12.4 12.4

Revenue ($) 29.3 21.6 15.7Foreign-exchange commission 6.4 6.4 6.4Fee 22.9 15.3 9.3

Source: Western Union financial statement for 2004.Note: Reflects 76 million transactions in 2004. Fixed costs include marketing, administration, depreciation, and amortization,agency start-up, and other unidentified costs. Figures may not add up due to rounding errors.

Western Union: Operating profitbreak-even price vs. volume

Dollars

0

2

75

4

6

8

10

100 125 150 175 200

Transaction volume (millions)

225 250 275 300


The figure illustrates how the break-even feeshown in the table decreases as the number of trans-actions increases. If transaction volume doubledfrom the current 76 million to 150 million, thelowest fee at which the international operationwould remain profitable would be $4.74.

remittance transaction that does not capturethe global network and diversified servicesprovided by major MTOs. Moreover, themodel’s assumptions are subject to consider-able uncertainties, the greatest of which is thataverage costs would be higher if the number oftransactions were smaller. It is worth noting,however, that many independent agents pro-vide remittances as a side business: for them,fixed and variable costs could be significantlylower than for dedicated remittance serviceproviders. Indeed, there may be a case for pro-viding free remittance services in order todraw customers for other products and ser-vices, as practiced by certain banks.

Remittance costs should continue to fallunder the influence of increased competitionand better technology. Large MTOs mayhave considerable latitude to reduce feeswhile maintaining reasonable profit margins.In corridors where costs have already fallensignificantly, further decline may be modest;but elsewhere there is scope for significant de-cline, especially with the volume of transac-tions rising rapidly.

Reducing remittance fees will increaseremittance flows to developing countriesReducing remittance fees would increase thedisposable income of remitters, encouragingthem to remit more. It also might encourage

smaller and more frequent remittances.And lower prices in a particular channelmight encourage remitters to shift from otherchannels—notably informal ones.

The degree to which a fee reduction wouldresult in an increase in flows depends on thepurpose of the remittance. At one extreme,where the purpose is to meet a specific need—payment for tuition, a medical emergency, asocial ceremony, or the purchase of a giftitem—the amount of remittance may not besensitive to the remittance fee. At the otherextreme, remittances by a poor, cash-strappedremitter may be highly cost elastic. Similarly,remittances meant for investment are likely tobe cost elastic. In reality, most remittancetransactions fall between these two extremes.Even when remittances are driven by altruism,they will tend to be cost elastic, as evidencedby the literature on charity, which shows thatpeople tend to donate more as the cost ofdonating declines (box 6.3).

In a recent survey of Senegalese migrants inBelgium, two-thirds of the migrants said theywould send more if the cost of sending wentdown. In a survey of Tongan migrants in NewZealand, 30 percent of remitters said theywould increase the amount of remittances by0.74 percent (on average) if costs fell by 1 per-cent (Gibson, McKenzie, and Rohorua 2005).That survey found the overall cost-elasticity of


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Charitable donations and bequests, like altruisticremittances, increase when the costs of such ac-

tions decline. In one of the best-known early studiesof the responsiveness of gift-giving to tax deductions,Feldstein and Taylor (1976) estimated a price elastic-ity of the amount given of �1.3.a Although this find-ing has been challenged on the ground that gift-giving responds more to temporary changes in thecost of giving (Glenday, Gupta, and Pawlak 1986),the general agreement is that people give more when

Box 6.3 Even charitable donations are sensitiveto cost

it costs less to do so (Cordes 2001). The literature oncharitable bequests reaches a similar conclusion.Bakija, Gale, and Slemrod (2003) estimate a priceelasticity of �2.14 for charitable bequests.

aIn the United States, taxpayers can deduct the amount ofcharitable contributions from their income for tax purposes.Thus, Feldstein and Taylor (1976) view an increase in the in-come tax rate as a decline in the price of charitable donations.

remittances with respect to the fee (averagingthe elasticity over those who would increaseremittances and those who would not) to be–0.22. Based on this estimate, Gibson and oth-ers (2005) calculate that lowering the fixedcost of sending money through banks andMTOs from New Zealand and Tonga to com-petitive levels in the world market would re-sult in a 28 percent increase in remittancesfrom existing remitters. It might also inducesome nonremitters to start remitting.9

If the cost elasticity (–0.22) of the NewZealand–Tonga study were applicable to alldeveloping countries, a reduction inremittance cost from 12 percent to (say) 6percent could result in an 11 percent increasein annual remittance flows to developingcountries. One caveat to this calculation isthat the cost elasticity applies only to high-cost corridors, which also tend to have lowvolumes. In corridors where the remittancecost is already low, further decreases may notincrease flows. For example, a fee reductionby a major MTO may not produce much ef-fect if a major part of the flows is alreadymoving through low-cost informal channels.This is confirmed by the World Bank surveyof Senegalese migrants in Belgium; half of therespondents who paid remittance fees of 20percent or more said they would send more ifcosts were halved; not even one-fourth ofthose who paid less than 10 percent said theywould send more (table 6.4). Almost 75 per-cent of the Senegalese migrants who sendmoney through the large MTOs said that

they would send more if the costs werelowered, a result confirmed by findings froma World Bank survey of the Nigerian diasporain Belgium.

An indirect implication for cost elasticitymay be drawn from Yang’s (2004) finding ofan elasticity of 0.6 for remittance receiptsdenominated in Filipino pesos with respectto the peso–dollar exchange rate. Applyingthis elasticity to a remittance transaction of$150, if the remittance fee were halved from(say) 12 percent to 6 percent, remittance re-ceipts would rise by 3.6 percent, or $5.4,while the remittance fee would decline from$18 to $9.31.10 If the same elasticity wereto apply to the entire flow of remittances todeveloping countries, remittance receipts, inresponse to a halving of costs would in-crease significantly, by more than $5 billionusing only recorded flows, and more than$8 billion using both recorded and un-recorded flows.

Reductions in remittance fees would also belikely to increase other cross-border retailflows such as transfers from public and privateinstitutions to individual beneficiaries (pen-sions, child-care payments), small-value pay-ments in exchange for goods and services, ac-quisitions of assets, and debt servicing.11 Inmore developed countries, migrant remittancesare only a small share of retail payments,which, in turn, are a fraction of wholesale pay-ments. But in developing countries, especiallyin smaller and poorer countries, remittancesare a significant source of funding in relationto the size of the economy and, therefore, ofthe retail payment system. A reform of the re-tail payment system to facilitate remittanceswould probably benefit other (not easily quan-tifiable) components of retail payments.

Based on the evidence presented above,notably the finding that the cost elasticity ofremittances is negative, policies that aim tolower remittance costs by increasing accessto banking services, promoting competition,and disseminating information have thepotential to provoke sizeable increases inremittance flows to developing countries.


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Table 6.4 Remittances are more cost-elastic when costs are higher

% of respondents who would remit more

Cost(% of principal) Senegal Nigeria

1–9 23 6410–19 50 67

20 and above 50 83

Source: World Bank Survey of Senegalese and Nigeriandiasporas in Belgium.

Factors underpinning highremittance fees

What accounts for high transaction costsin the remittance business? Are they re-

lated to large sunk costs, regulatory measuresthat restrict competition, or the lack of accessto low-cost public infrastructure (such as pay-ments systems)? Do exchange controls, coun-try risks, or other specific factors keep the costof cross-border transfers higher than those ofdomestic transfers?

Before answering these questions, it isworth noting some general findings from across-country regression analysis of remittancefees (Freund and Spatafora 2005). Remittancefees tend to be higher in corridors in whichbank concentration is high and competitionlow (as reported in chapter 4, table 4A.2.2).They tend to be lower in more developed fi-nancial sectors (proxied by the ratio of depositsto GDP) in the recipient country and in dollar-ized economies and other economies that pre-sent low exchange-rate risk. Greater creditrisk12 reduces the willingness of agents to pro-vide remittance services. Finally, high wages atthe recipient end (as proxied by domestic out-put) are associated with more costly remittanceservices. These results, which should be treatedas indicative rather than conclusive, suggestthat measures to increase competition amongremittance-service providers and to reduce fi-nancial risk and exchange-rate volatility arelikely to reduce the transaction costs associatedwith remittances.13

Several factors related to conditions in thecorridor and in the sending and receivingcountries have significant impacts on remit-tance pricing. Two corridor-related factorsthat have a significant impact on price are the(potential) level of competition in the corridorand special arrangements with postal systemsto handle distribution.

A high level of competition may consider-ably reduce remittance prices in a corridor.The level of competition in a corridorcan be proxied by remittance volume, sincehigh-volume corridors attract more competi-

tors, particularly small niche players thatcompete primarily on price. The relativelylower prices in high-volume corridors, suchas United States–Mexico and Saudi Arabia–India, can be ascribed in part to the presenceof regional and smaller players, in addition tothe major MTOs (and in part to scale econo-mies). The remittance prices of the global mar-ket leader, Western Union, are significantlylower in the high-volume U.S. corridors thanelsewhere (figure 6.3).14

High volume in a corridor does not alwaysguarantee high competition, however. Exclu-sive access to an extensive distributionalnetwork (such as a post office network) maydistort competition in the corridor. Using postoffices as money transfer agencies can give anMTO a significant advantage, because thepostal system almost always offers the most ex-tensive distribution networks in both sendingand receiving countries, particularly in ruralareas. Exclusive arrangements with postal sys-tems have been employed by the two largestMTOs, Western Union and MoneyGram.

Exclusive arrangements can block orbar entry by small competitors and maythus allow the company that enjoys the arrange-ment to maintain a high price premium. More-over, exclusive arrangements with the post of-fice, typically a trusted and ubiquitouspresence, may facilitate price leadership and


144

Figure 6.3 Fees and foreign exchangespreads for $200 in Western Uniontransfers from New York City (percent)

Transfer fee Foreign exchangespread

Total cost

Low-volumecorridors

High-volumecorridors

7.0

10.6

1.82.9

8.8

13.5


price signaling—thereby raising the fee struc-ture across the board. For example, arrange-ments with the postal systems in France andMorocco may help explain Western Union’sability to charge significantly higher fees inthat corridor than its major competitor,MoneyGram (figure 6.4a). However, inthe United States–Vietnam corridor, whereMoneyGram has such an arrangement, WesternUnion lowers its price to the same level asMoneyGram’s, whereas MoneyGram chargeshigher foreign-exchange commissions (fig-ure 6.4b).

At the global level, Western Union’s pricepremium over MoneyGram’s fees, even inhigh-volume corridors, appears to be signifi-cantly higher when the company has a linkwith the postal system in either the sending orreceiving country (figure 6.4c).15 On the otherhand, when MoneyGram, which almostalways offers lower prices than WesternUnion, has the agency relationship with thepost office, its strong distribution advantageforces Western Union to lower its prices tocompete in the corridor.

Other factors that appear to have animpact on corridor pricing include activeparticipation of banks, credit unions, or othernonbank financial institutions in the remit-tance market; cultural and geographic com-monality with a group of countries thatincludes one highly competitive, high-volumecorridor with lower prices; the size of informaltransfer network in the corridor; and govern-ment policy initiatives within the corridor.

Regulatory and policy decisions have asignificant effect on remittance costs. In a re-cent survey of providers of remittance servicesin the United States, 40 percent of those sur-veyed cited the process of getting a license asthe chief barrier to their operation, followed bybuilding a compliance system (figure 6.5). Inthe United States, remittance service providersare supervised by state departments of con-sumer affairs and banking. Not all states havespecific regulations on remittances. And regis-tration requirements vary widely from state tostate (annex 6A.2). To set up a money transfer


145

Figure 6.4 Exclusive arrangements withpost offices skew competition

Western Union MoneyGram

11.7

4.9

a. Fees for $200 remittance, France–Morocco corridor

Percent

Price premium, $

12

10

8

6

4

2

0

c. Western Union price premium over MoneyGram for$200 remittance when Western Union has post office link

Allcorridors


Source country Recipient country


Allcorridors

0

4

12

8

16


With post office link Without post office link

5.0

Western Union

5.0

1.0

3.0

Percent

b. Fees and foreign exchange spread for $200remittance, United States–Vietnam corridor

0FX spreadTransfer fee

2

1

3

5

4

6

MoneyGram

business with offices in all 50 states would re-quire net worth and bonds of more than $5million (Ratha and Riedberg 2005). Althoughbond and capital requirements protect con-sumers and deter fraudulent practices, the widevariation in requirements from state to state,mirrored in wide variances among countries,can be confusing and costly, thereby discourag-ing competition from new, smaller players.Many countries, including France, Italy, andthe Russian Federation, require a provider ofremittance services to be a fully licensed bankor financial institution. Only recently did Ger-many allow remittances to be conducted undera financial institution license instead of underbanking regulations. Costly and stringent li-censing requirements, like bond and capital re-quirements, discourage the entry of smallerplayers that could provide effective competi-tion in many remittance corridors.

Regulating informal remittances may raise costsSince the terrorist attacks of September 11,2001, authorities in many countries have

adopted more stringent regulations and steppedup enforcement of existing rules governing thetransfer of foreign exchange.16 An increasingnumber of countries are requiring MTOs to reg-ister with the authorities and to report transac-tions on a regular basis. These regulatory re-quirements have raised the cost of fundtransfers to the remittance service providers,which tend to pass them on to customers.

National requirements center on the regis-tration of transfer businesses, application ofknow-your-customer procedures, detailedrecord-keeping, and frequent reporting.“Money service businesses” in the UnitedStates must maintain a list of their agents andmake the list available to the Financial CrimesEnforcement Network (FinCEN) upon re-quest. Operating such a business without reg-istering it is a crime. The introduction of theUSA Patriot Act in late 2001 tightened theknow-your-client requirements for fund trans-fers. In addition, U.S. financial institutions arerequired to comply with the recommendationsof the international Financial Action TaskForce to Prevent Money Laundering (FATF


146

Figure 6.5 Barriers perceived by remittance service providers

Gettin

g U.S

.

licen

se

% of firms

Barriers to entry cited by firms

Creat

ing a

gent

netw

ork

Buildin

g co

mpli

ance

syste

ms

Gettin

g ba

nk a

ccou

nt

Gettin

g U.S

. bon

d

Fundin

g wor

king

capt

ial

Gettin

g lic

ense

abro

ad

Buildin

g co

nsum

er

trust

Acquir

ing kn

ow-h

ow

Tech

nolog

y

Establi

shing

com

mer

cial

cont

acts

Acces

sing

U.S.

finan

cial in

frastr

uctu

re

0

20

10

30

40

50

40

32

27 27

23 23

18.216

11

7 7

14

Source: Andreassen 2005.

2005), which are incorporated into U.S. regu-lations, and to comply with the sanctions listmaintained by the Treasury Department’sOffice of Foreign Assets Control.

Since early 2005, correspondent bank ac-counts of hundreds of money service businessesin the United States have been closed by banksfor fear that they may be targeted by authori-ties for servicing customers regarded as “high-risk.” The wave of closures can be traced to aJune 2004 notice from the Office of the Comp-troller of Currency that “[s]ome nationalbanks also provide banking services to foreign[money service businesses], a line of businessthat can carry significant money launderingrisks.”17 Clear guidance on how to assess risksand spot suspicious activity is lacking.

Some argue that the users of informalremittance channels face a great risk of fraudand default. Requirements for bonds, capital-ization, auditing, reporting, and disclosurecan shield consumers from excessive fees,fraud, or other losses. At the same time, trustand self-regulation, characteristics of infor-mal remittance networks such as hawala,hundi, padala, fei chien, and others, haveproven effective in protecting customersagainst losses, although they are by no meansimmune to fraud. Moreover, their low cost,speed, reach, and convenience of informaldoor-to-door remittance services remainextremely competitive compared with the in-efficiencies of formal operators (Ballard2005; El Qorchi, Maimbo, and Wilson 2003;Maimbo and Passas 2005). Law enforcementcases from all continents show that formaland informal remittance channels are bothsusceptible to criminal abuse.18

The regulatory regime governing remit-tances must strike a balance between curbingmoney laundering, terrorist financing, andgeneral financial abuse, and facilitating theflow of funds through efficient formal chan-nels. Policies that encourage formal operatorsto imitate the best practices of informaltransfer systems will benefit poor migrants.Strengthening the formal remittance infra-structure by offering the advantages of low

cost, flexible hours, expanded reach and lan-guage, and increasing efforts to identify andregulate the unregulated sector, would effec-tively facilitate remittance flows while pre-serving their integrity.

Policies to reduce remittance costs

Measures to reduce remittance costsshould aim to improve the efficiency of

remittance transactions by (a) enhancing mar-ket competition to reduce high profit margins;(b) helping remittance service providers’ accessto new payments technology; and (c) devisingways to encourage remitters to send largeramounts (table 6.5). As a way to enhancecompetition, governments can encouragepostal systems and other state-owned distribu-tion alternatives to open their networks tomultiple MTO partnerships on a nonexclusivebasis. In addition, they should avoid overregu-lation, excessive monitoring, or reporting re-quirements that could drive out smaller com-petitors that lack the economies of scale toabsorb the cost of compliance.

Developing a shared network would be apowerful way to increase competition. Co-operation on infrastructure and competitionin service provision would allow networkbenefits to accrue to the consumer.19 Thetechnology required to set up a payment-processing infrastructure with large capacityis no longer an expensive proposition. Afunctioning payment infrastructure could beextended to a new country at a minimal costand in a matter of weeks.20 There have beensome attempts to set up shared networks inthe remittance-source countries (for exam-ple, the United States–Mexico FedACHsystem, box 6.4). Also some governmentsin remittance-receiving countries havefacilitated the establishment of payment net-works that are shared by savings banks,credit unions, and microfinance institutionsoperating in poor and remote areas (forexample, BANSEFI in Mexico21 and ApexLink in Ghana).22


147

Another way to address the issue of high feesin the remittance industry would be to developbest-practice guidelines for remittance serviceproviders. Several such guidelines have been is-sued by Credit Union National Association,Inter-American Development Bank, and World

Savings Bank Institute, which urge serviceproviders todisclose fees,exchangerates,andthetime of delivery. At the end of 2004, the WorldBank and the Bank for Committee on Paymentand Settlement Systems (CPSS) set up a taskforce, with participation from the IMF, to de-velop voluntary principles for remittance serviceproviders, regulators, and supervisors for im-proving transparency in the market (box 6.5).23

Such guidelines would have to be voluntary.Central banks generally are not willing to im-pose such guidelines or to cap remittance feesand foreign-exchange commissions. A recentsurvey (de Luna Martinez 2005) revealed thatin only 9 of 40 countries—Brazil, Bulgaria, In-donesia, Pakistan, Philippines, Russian Federa-tion, Thailand, Tunisia, and República Boli-variana de Venezuela24—did central bankseven have the legal power to do so. All 40 cen-tral banks indicated that even if they had thepower to limit fees, they would not do so, pre-ferring to leave fee-setting to financial institu-tions in response to market competition.25

Raising consumer awareness throughfinancial literacy efforts and publicizing infor-mation on costs (as Mexican authorities havedone through the PROFECO initiative) willstrengthen competition among remittanceservice providers. In April 2005, Britain’sDepartment for International Development


148

Table 6.5 Policies to reduce costs, regulateinformal providers, and provide remittance-linked financial services

Source Recipient country country

Reducing costsIncrease competition X XAvoid exclusive arrangements X XHarmonize regulation and capital X

requirements (same policy for all players)

Introduce and harmonize electronic Xpayment systems (card-based products)

Improve data on corridors X XVoluntary code of conduct X XBundling of transactions X X

Regulating informal providersMake formal sector operations X X

more convenient and user friendly

Improve banking access X X

Leveraging remittancesImprove banking access X XEncourage microfinance institutions X X

and credit unions to provide remittance services

United States–Mexico automated clearinghousewas created as part of the U.S.-Mexico Partner-

ship for Prosperity to reduce the cost of sending re-mittances between the two countries. In 2002, thecentral banks of the United States and Mexico un-dertook a cooperative effort to link their automatedclearinghouse (FedACH) systems. The cross-borderservice began operating in February 2004. Today, ap-proximately 23,000 payments are sent from theUnited States to recipients in Mexico through thischannel each month. The cost of a remittance trans-action is just $0.67; the exchange-rate spread is only0.21 percent. Since July 2005, the cross-border

Box 6.4 United States–Mexico FedACHservice has made funds available to a recipient on thefirst business day after a payment is originated.

But FedACH has not been as popular with thebanking community as was expected. It sufferedfrom some technical weaknesses—for example, insuf-ficient coding flexibility for certain remittances. Also,major international banks that earn significant remit-tance fees from their own proprietary payment sys-tems and from foreign-exchange commissions havebeen slow to join FedACH. And other cross-borderACHs between the United States and Canada andbetween the United States and Europe have had simi-lar difficulty attracting participation from banks.

(DFID) launched a website that provides in-formation on remittance costs and options inseveral countries.26

Assisting remittance service providers toadopt new payment systems technology andinstruments would help lower their service costs.Some technologically advanced methods ofsending transfers already exist. Card-based in-struments, such as stored value cards (similar tophone cards), credit cards, and debit cards, arenow frequently used to send remittances tourban locations that have access to card-pro-cessing machines. Systems such as iKobo.comuse the Internet to make remittances. PayPal andother services move money between virtual ac-counts, although they do not (yet) focus on im-migrants’ transfers. Similar technology has beenadapted by an operator in the Philippines tosend fast—and reportedly cheap—remittancesusing a cell phone (box 6.6).

Migrant workers need easier access to the formal financial systemImproving migrant workers’ access to bankingservices could reduce transaction costs, and atthe same time, help to develop the financialsystem in the countries where remittances arereceived. Sending and receiving countries alikecould support migrants’ access to banking byproviding them with the means to establishtheir identity.

In receiving countries, the factor that exertsthe greatest effect on remittance costs (and on

the choice of remittance channel) is the reach ofthe remittance agent’s distribution network. Re-cipients in rural areas underserved by banks mayhave to pay high costs for receiving remittances,especially through formal channels. Partnershipsbetween remittance operators and institutionsthat have wide networks in rural areas (such aspost offices) would help reduce such costs.27 Incountries where residents are allowed to holdforeign currency deposits, permission to deliverremittances in U.S. dollars (or the same foreigncurrency sent by the remitter) would signifi-cantly reduce (if not eliminate) the exchange ratespread on remittances (as seen in the case of dol-larized economies such as El Salvador).

Remittances and financialinstitutions

Banks and smaller financial institutions,such as credit unions and microfinance in-

stitutions, can deliver convenient and possiblylow-cost, remittance services in developingcountries, especially in rural areas. In contrastto cash transactions, remittances channeledthrough bank accounts may encourage savingsand enable a better match for savings and in-vestment in the economy. Remittances, in turn,can be used to support business and consumerloans, insurance, and other financial productsfor remittance recipients.28 Some institutionsare exploring ways to target remittances tospecific uses such as school fees or medical


149

At the end of 2004, the World Bank and the Bankfor International Settlements’ Committee for

Payment and Settlement Systems (CPSS) convened atask force, with members from central banks ofsending and receiving countries, international finan-cial institutions, and development banks, to addressthe need for international policy coordination in re-mittance systems. The task force is expected to issue

Box 6.5 The World Bank/CPSS task force on generalprinciples for international remittance systems

general principles for international remittance sys-tems in the first half of 2006. The purpose of theprinciples is to promote a sound, efficient, andcompetitive market in remittance services. Therecommendations of the task force are expected tocover market environment, consumer protectionand transparency, market infrastructure, and publicpolicy.

bills. Others are exploring insurance products,for example, to ensure a stable flow of incometo the remittance beneficiary in the event thatthe sender suffers an income shock.

Credit unions in El Salvador, Guatemala,Honduras, Nicaragua, Mexico, and Jamaicathat are members of the World Council ofCredit Unions (WOCCU) encouragedWOCCU to establish the International Remit-tance Network (IRnet) in July 1999 to facili-tate remittance flows from the United States toLatin America. That initiative has lowered re-mittance costs by raising customer awarenessof remittance fees and by generating somecompetition in the remittance market. Tosend up to $1,000, IRnet charges a flat $10—much less than the fees charged by majorMTOs. Besides fee income, IRnet institutionshope to use remittances to build relationshipswith customers. It is reported that 14–28 per-cent of nonmembers who visited WOCCU-affiliated credit unions to transfer funds even-tually opened an account; 37 percent of creditunion members saved a part of theirremittance receipts (Grace 2005).

Smaller nonbank financial institutions facechallenges in entering the remittance marketbecause of regulatory constraints—such aslicenses for transactions involving foreignexchange and access to national paymentsystems. For prudential reasons, access to pay-ment and settlement systems is typically re-stricted to well-capitalized and well-establishedbanking institutions. Microfinance institu-tions and smaller institutions generally mustenter into corresponding banking relation-ships with commercial banks29 and with inter-national remittance providers (such as theIRnet or the major MTOs).

A survey of central banks found that 35 of 40developing-country authorities were not enthu-siastic about allowing small financial institu-tions to have access to clearing and settlementsystems (de Luna Martinez 2005). Centralbanks appear to believe that most nonbank fi-nancial institutions in developing countries lackthe technological infrastructure required to par-ticipate directly in clearing and settlement sys-tems. Also, central banks believe that givingnonbank financial institutions direct access to


150

The largest mobile phone company in the Philip-pines, Smart Communications, has developed an

innovative remittance system based on cell-phonetext messaging. Cell phones are widespread in thePhilippines, in use by at least 30 percent of the 84million Filipinos. A standard Smart remittance workslike this: A Filipino in Hong Kong, China, depositsmoney to be remitted with one of Smart’s remittancepartners, which then sends a text message to the ben-eficiary in the Philippines, informing him or her ofthe transfer. The remittance is credited into a SmartMoney “electronic wallet” account by any Smartmobile customer. The money can be withdrawn froman ATM using the Smart Money cash card, whichcan also be used as a debit card for purchases.Smart’s partners in the Philippines—among themMcDonald’s, SM malls, SeaOil gas stations, 7-Eleven

Box 6.6 Smart’s phone-based remittance system in the Philippines

stores, and Tambunting pawn shops—will also payout cash to Smart customers.

Smart has already formed remittance partnershipswith Travelex Money Transfer; Forex InternationalHong Kong; Dollar America Exchange in California;CBN Grupo in Greece, Ireland, Japan, Spain, and theUnited Kingdom; New York Bay Remittance; andBanco de Oro Bank in Hong Kong, China.

The system’s simplicity keeps fees down. Fees atorigination vary from country to country. In HongKong, China, it is about $2. In the Philippines, it is1 percent plus the cost of the text message.

The Smart system also appears to be secure. Theuse of different PINs for the cell phone and theSmart account make it difficult for a thief to accessthe funds. An ID is required when collecting cash.

central banks’ clearing and settlement systemsmay not help reduce the remittance fees chargedby those institutions. According to the survey,only five countries—Azerbaijan, Belarus, Bo-livia, Philippines, and Thailand—are contem-plating granting access for clearing and settle-ment systems to a few large nonbank financialinstitutions (mostly post offices).

Even if microfinance institutions were tooffer remittance services, they might face re-strictions on taking deposits and offering loanand insurance services, again for prudentialreasons. Given these constraints, sources offunds for such institutions tend to be expen-sive and their capacity to offer financial prod-ucts limited.

Annex 6A.1 A stylized remittancetransaction—structure, players,instruments

Atypical remittance transaction takes placein three steps: (1) initiation of remittances


151

by a migrant sender using a sending agent,(2) exchange of information and settlement offunds, and (3) delivery of remittances to thebeneficiary. In step 1, the migrant sender paysthe principal amount of the remittance to thesending agent using cash, check, money order,credit card, debit card, or a debit instructionsent by e-mail, phone, or Internet. In step 2,the sending agency—which may be an MTO,bank, or other financial institution, moneychanger, or merchant (gas station, grocerystore)—then instructs its agent in the recipi-ent’s country to deliver the remittance. Instep 3, the paying agent makes the payment tothe beneficiary. In most cases, there is no real-time fund transfer; instead, the balance owedby the sending agent to the paying agent issettled periodically according to a mutuallyagreed schedule. Settlement usually occursthrough commercial banks acting through thenational clearing and settlement system. A por-tion of informal remittances is settled throughgoods trade.

Step 1 Step 2 Step 3

SenderInformation

Beneficiaryby phone or mail

CashCheck, money orderBank transferCredit, debit, prepaid card Transfer order in person,by phone, or by internet

Sending agentMTOs, banks, creditunions, microfinance

institutions, merchants,money exchanges,friends, relatives,

missionaries, cell-phonecompanies

Information forwarded bye-mail, SWIFT, proprietarynetworks, fax, phone, ACH

Settlement in cash, via banktransfer, netting against othertrade

Paying agentMTOs, banks, creditunions, microfinance

institutions, merchants,money exchanges,friends, relatives,

missionaries, cell-phonecompanies

CashCheck, money orderBank transferCredit / debit cardInternetGoods


152

Auditedfinancials

Country Net worth($) required? Bond Comment

Min. $500,000 in equity

100,000 plus $50,000 perlocation up to $500,000

Depending on locations:1 � $35,00025� � $500,000

None

(1) Min. $100,000 plus$25,000 per location (oragent) in NJ up to$1,000,000

(2) $50,000 for foreignmoney transmitter plus$10,000 per location (oragent) up to $400,000

Liquidity equivalent to outstanding payments

$500,000

$25,000 per location up to $1,000,000

$100,000–$1,000,000 asdetermined by thecommission

“Suitable to conductbusiness”

Should not be lower than$10,000

None

Min. €2,400,000plus capital to cover first year’s expenses

€125,000 capital Net worth must besufficient to coverexposures

If available

Yes

Yes

No

Yes, 2 years

Yes

No

No

Yes, 3 years

Yes

United States27

California

Florida

Illinois

Massachusetts

New Jersey

New York

Pennsylvania

Texas

Virginia

Wisconsin

Canada

France

Germany(federallegislation)

Fee $5,000 plus $50 per agent

Application fee $500 plus $50 per agent; renewal $1,000 plus $50 per agent up to $20,000.

Fee $100 Licensing � $100

$10 per location; $100 renewal

Fee $250

Application fee $1,000 Licensing fee up to

$4,000Biennial fee $25 per

location up to max. of$5,000

Fee $500 Licensing � $1,000

investigation.Application fee $1,000 Renewal fee $300Fee $500 licensing �

$2,500 investigationfee

Licensing fee $500Renewal fee $750

Fee $500 license (annual)� $300 investigation� $5 per location(annual)

Reporting threshold:Can$3,000

STR and CTR aboveCan$10,000

Full bank license; the ownershipstructure must beadequate

AML proceduresscrutinized

Reporting threshold:€2,500

STR; AML laws must befollowed; 2 managingdirectors must havesuitable backgrounds

Annex 6A.2 Licensing and registration requirements for remittanceservice providers

Discretionary depending on size of business. Min. $200,000.

1% of annual turnover, max$250,000; can be set at$500,000 in exceptionalcircumstances; may be waivedupon request

Greater of $100,000 or theaverage daily outstanding for12 months, maximum$2,000,000

$50,000 (or 2x amount of outstanding transactions)

(1) Not less than $100,000 and not more than $1,000,000

(2) Foreign remitters: dependingon business volume, $25,000to $100,000; commissionermay require up to $900,000

In general: investments not lessthan outstanding paymentinstruments; this can bewaived by the commissioner

$500,000 unless thesuperintendent lowers theamount

$1,000,000

$100,000 for first location, $50,000 for each additional, max. $400,000

$25,000–$1,000,000 as determined by the commission

$10,000 for 1st location �$5,000 for each additional

Max. $300,000

None

None

None

Annex 6A.2 (continued)


153

Auditedfinancials

Country Net worth($) required? Bond Comment

Source: For United States, www.rubinsanchez.com; Canadian Bankers Association; French Central Bank, Banque de France, Comitédes Etablissements de Crédit et des Entreprises, d’Investissement (CECEI), Committee for Credit Institutions and Investment Compa-nies; German Financial Supervisory Board, Bundesanstalt für Finanzdienstleistungsaufsicht; Italian Law 106; Bank of England.Note: Licensing and registering approaches may differ. See FATF Typologies Report (FATF 2005). STR � suspicious transactionreport; CTR � currency transaction report; SAR � suspicious activity report; AML � anti-money laundering.

Italy

United Kingdom

€750,000

None

Yes

No

None

None

Reporting threshold:€12,500

STR; the license is onlyrequired by the serviceprovider, not by hisagents

Register normal business; Moneys may not be held

for more than 3 days, asa bank license (deposits)would be required inthis event

Annex 6A.3 A brief history ofsome remittance service providers

This annex describes the historical roleof three key providers of remittance

services—Western Union, MoneyGram, andBank of America. The intention is to shed lighton their business strategies.

Western Union Western Union descended from the New Yorkand Mississippi Valley Printing TelegraphCompany, originally formed by a group ofbusinessmen in Rochester, New York, in1851. The Western Union Telegraph Com-pany was subsequently formed in 1956 fol-lowing the acquisition of several competingtelegraph systems. Having completed the firsttranscontinental telegraph line by 1861, thetelegram network started providing the West-ern Union Money Transfer service nationallyby 1871.

Historically, Western Union has beeninvolved in a wide range of telecom and otherproducts. These included introducing theNew York Stock Exchange stock ticker in1866, offering a nationwide standard time, in-troducing teletypewriters in 1923, offering the

first intercity fax service, and launching thetelex. It also launched the first domestic com-munications satellite, Westar I in 1974.30

Today, Western Union is primarily a remit-tance company.

Western Union has always followed thestrategy of developing its own proprietaryproducts. For money transfers, WesternUnion has developed its own software andnetwork of exclusive agents. It has been ableto develop this network by being the firsttruly global remittance company. Currentlyits network comprises slightly more than220,000 locations in about 19531 countries(including the network of its subsidiary Or-landi Valuti). The growth rates in WesternUnion’s international remittance transactions(excluding Mexico) were 32 percent, 25 per-cent and 24 percent for the years 2002, 2003,and 2004, respectively.

MoneyGramThe MoneyGram money transfer service wasstarted in 1988 by Integrated PaymentService, a U.S.–based division of First DataCorporation (FDC), a data processing com-pany owned by American Express at the time

of inception.32 FDC divested its MoneyGramoperation in December 1996 through an ini-tial public offering of its common stock tocomply with the company’s agreement withthe Federal Trade Commission as part of amerger with FFMC.

In 1998, Travelers Express, a division ofViad Corp. acquired MoneyGram. On June30, 2004, the Travelers Express business wasspun off from Viad Corp.,33 and became anindependently traded company called Money-Gram International, Inc. Travelers Expressand MoneyGram Payment Systems, Inc.continue as operating companies under thisnew corporate umbrella.

Whereas Western Union insists on a strat-egy of exclusive partnership with its agents,MoneyGram allows its agents to representother remittance companies as well, as shownby its partnership with the World Councilof Credit Unions and Bancomer TransferServices.

Bank of AmericaBank of America (BoA) was established in1929 as an outgrowth of the merger betweenthe Bank of Italy and the Bank of America,Los Angeles. California became the fastest-growing state after World War II, with thehighest use of checking accounts. To cope withthe transaction volume, the bank investedheavily in information technology and isgenerally credited, together with GE and SRI,with inventing modern centralized bank oper-ations; BoA has a number of financial trans-action processing technologies, such as auto-matic check processing, account numbers, andMagnetic Ink Character Recognition (MICR),and, based on these technologies, credit cardslinked directly to individual bank accounts.Because of the efficiency of these technologies,BoA had significantly lower administrativecosts than other banks and was able to expandfurther, until it was the world’s largest bank bythe early 1970s.

In 1959, BoA invented the bank creditcard, the BankAmericard, which changed itsname to VISA in 1975. A consortium of

other California banks founded MasterCharge (now MasterCard) in order to com-pete with the BankAmericard.

BoA offers remittance services along withregular savings and loan products to its cus-tomers. It has a banking relationship with44 percent of all Hispanic households; itopened more than 1 million checking accountsfor Hispanic customers in 2004. The bank of-fers remittances under the SafeSend brand to itscustomers wishing to send money to Mexico. Inearly 2005, it announced that it would elimi-nate the $10 transfer fee for all checking ac-count holders for remittances from the UnitedStates to Mexico to attract new business frommigrant customers.

Notes1. Western Union reports an average fee of

6–8 percent and an additional foreign exchange spreadof 2 percent on its global remittance services. The av-erage size of a Western Union remittance (covering per-sonal remittances as well as small business-to-businessremittances), however, is around $700, much higherthan the average transaction size (under $200 reportedin household surveys of migrants by, for example, aPew Hispanic Center study on Mexican migrants in theUnited States and a Genesis Analytics study on SouthAfrica). A World Bank survey of African diaspora inBelgium found that the average monthly remittanceswere 154 euros in the case of Senegalese migrants, 126euros for Nigerian migrants, and only 78 euros forCongolese migrants.

2. For example, if a Brazilian bank received remit-tances on October 11, 2004, delayed payment to thebeneficiary for two weeks, and invested the funds inthe overnight money market, it would earn a float of2.85 percent (IOM 2005). Humphrey, Keppler andMontes-Negret (1997) note widespread use of floats bybanks, especially in the Russian Federation.

3. Some banks have announced even more aggres-sive price cuts recently. Bank of America, for example,eliminated fees for United States–Mexico remittances,to attract customers from the Mexican migrant com-munity. Banks have also been providing free remittanceservices in some other corridors as well. It is worthnoting, however, that there are hidden fees—accountmaintenance fees, minimum balance requirements,taxes on interest income—involved in such transactionsbesides the cross-selling of loan and deposit products.

4. According to the Piper Jaffray Global MoneyTransfer Report (2005), Western Union has said that it


154

can add a new agency for $1,000–$1,500 (the cost ofsetup, terminal, software, and training), while Dolexrequires $12,000–$15,000 to establish a new branch.

5. In the case of banking institutions (also gasstations and grocery stores), remittance services may becross-subsidized by other product lines, which rendersremittance costs hard to determine.

6. The leading MTOs are Western Union, with areported 13 percent market share, and MoneyGram,with a 3 percent market share. Vigo and Dolex are thethird and fourth largest MTOs, respectively, withabout a 2 percent combined market share. See Aite(2005) for their U.S. market shares.

7. Western Union has sustained high margins bytaking the initiative to enter underserved markets,building a strong distribution network, and leveragingits brand name. Overall, the company has provided re-mittance services to millions of individuals in previ-ously underserved markets.

8. This methodology is similar to that suggestedby Humphrey, Keppler, and Montes-Negret (1997) forpricing payment services. These calculations do not in-clude the costs of advertising and security.

9. This analysis is less conclusive with respect tothe sensitivity of remitters to exchange-rate commis-sions. Migrants do have fairly accurate knowledge ofthe exchange rate used by their remittance operator,but they may be less informed about the premiuminvolved in this rate. The estimate of cost-elasticityfrom the New Zealand study is based on responsesfrom a small random sample of new Tongan migrantsto questions about how they would react to a potentialchange in costs. It was not based on actual reactions.

10. This example assumes no change in theexchange rate.

11. There is no standard definition of a retailpayment. Here it is defined as a transaction originatedby, or payable to, an individual, the counterparty beingan individual, a firm, or a government agency. It alsoincludes frequent, small-value business-to-businesspayments. See also BIS (1999).

12. As measured by the International CountryRisk Guide, credit risk is based on foreign debt as apercentage of GDP, foreign debt service as a percent-age of exports of goods and services, current accountas a percentage of goods and services, the import coverof international reserves, and exchange-rate stability.

13. The regression that generated these results isbased on remittance fees from a single large MTO, so theresults are not representative of costs in the remittanceindustry as a whole. Also the low R2 suggests that theregression does not fully explain the cost structure.

14. The remittance price estimates provided byWestern Union and MoneyGram on their Web sitesoften differ from the actual transfer fees. For this study,

we gathered remittance price data by visiting WesternUnion and MoneyGram agents in Washington, NewYork, Brussels, Paris, London, and Singapore and bycalling agents in other cities in various parts of theworld. At various points, seven individuals were col-lecting remittance fee data in various corridors (for ex-ample, North America to Latin America and Asia, theEU to Africa and South Asia, the Gulf to South Asia,Eastern Europe to Central Asia, and East Asia to South-east Asia). We collected daily foreign exchange data (forWestern Union transfers to a broad range of countriesfrom the United States and the United Kingdom and forMoneygram transfers from the United States to thesame countries) on four consecutive business days inearly June and calculated the FX spread by comparingthese data to the exchange rates quoted on Bloomberg.

15. Lack of competition has been a persistent prob-lem in this industry. In December 1996, MoneyGramwas spun off from First Data Corporation, the holdingcompany of Western Union, as part of an agreementwith the U.S. Fair Trade Commission. See the annex fora history of remittance service providers.

16. In July 2005, the European Commissionproposed that banks in the European Union be re-quired to register the name, address, and bank accountof anyone making an international money transfer. Therequirements, which the commission hopes will comeinto force in January 2007, are the latest EU responseto terrorism following the bombings in London on July7, 2005.

17. OCC Advisory Letter 2004-7, www.occ.treas.gov/ftp/advisory/2004-7.doc.

18. Abuses include money laundering, the transferof corrupt payments, payment of human smugglingfees, tax evasion, customs offenses, violations ofcurrency controls, subsidy frauds, smuggling, illegalarms sales, and funding of terrorism. Internationaltrade is subject to many of the same abuses, but it iswidely recognized that efforts to curb them must notinterfere unduly with vital trade.

19. This is easier said than done, however, becausemajor remittance service providers that have investedin their own proprietary networks and used them toexpand their market share may not willingly sharethem. Furthermore, even if a shared network weredeveloped with public funding, it may not easily gainparticipation by key banks and financial institutions(box 6.4). Federal Reserve Bank (2004, pp. 33–37) listsmajor proprietary payment networks.

20. Visa reported that in 2004 it set up a Visanetsystem in Iraq within eight weeks and for less than$200,000 (Brocklehurst 2004).

21. BANSEFI has a commercial alliance (L@Redde la Gente) with 62 regulated saving banks and MFIsoperating mostly in areas where commercial banks


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have no presence. This network provides a commonplatform for collecting and distributing financial prod-ucts; for example, it facilitates migrant remittances aswell as government transfers for pension and socialand education programs, and it offers savings accountsand mortgage and consumer loans, small businesslending, and health insurance products to the poor. ItsIT network is aimed at offering the advantage of scaleeconomies to its members.

22. Apex Bank in Ghana was set up (with supportfrom the government and the World Bank) to providebanking services in rural areas. The Apex Bank has de-veloped Apex Link, a domestic funds-transfer schemeamong 75 rural and community banks. The Apex Bankis also collaborating with some financial institutionsfor the payment of foreign inwards remittancesthrough the rural and community banks to beneficia-ries in the rural areas.

23. The International Remittance Protection Actproposed by U.S. senator Paul Sarbanes in September2004 marks an effort to improve disclosure of fees andexchange-rate commissions in remittance transactions.

24. In the European Union, the fees that financialinstitutions charge their customers for money transfersbetween EU countries cannot be higher than the feescharged for domestic money transfers.

25. In some cases, consumer rights legislation hasenabled customers to challenge price gouging. In 2002,Western Union paid $30 million to settle two class-action suits stemming from its use of different exchangerates for converting remittances than the rates itreceived in the international money market (Aite 2005).

26. The related websites are www.profeco.gob.mxand www.sendmoneyhome.org.

27. For example, BANSEFI and Apex Link (asmentioned earlier).

28. This correspondent banking relationship be-tween MTOs and some commercial banks, which hadbeen working smoothly for a long time, came underpressure recently because of a misunderstanding ofthe know-your-customer rules. More than 300 smallMTOs that collected remittances and then wired themthrough a correspondent bank were told in February2005 that such transfers were no longer permitted. OnMarch 30, 2005, FinCEN, FDIC, the Federal Reserve,and the Office of the Comptroller of Currency issued ajoint statement that such transactions were indeedlegitimate.

29. Source: www.rubinsanchez.com, representingthe legislations for the different states of the UnitedStates.

30. Historical data on Western Union fromwww.westernunionalumni.com/history.htm.

31. PR Newswire, February 1, 2005.

32. See www.sec.gov/divisions/investment/noaction/firstdata011304.htm. In 1992, AmEx andFirst Data completed an initial public offering that re-sulted in approximately 40 percent of the commonshares of First Data being held by the public. Over thenext five years, AmEx sold its remaining shares to thirdparties, and by 1997 AmEx had no reportable owner-ship interest in First Data.

33. Source: www.MoneyGram.com.

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