Sending Money Back Home. (Current Research)

Money remittances are bic business. Official statistics are unreliable, but we estimate that every year immigrants in North America and Europe send more than $60 billion to their home countries (Exhibit 1), transmitting the funds largely through small and informal neighborhood players. Just over half of all global remittances originate in the United States, and 65 percent of that money goes to Latin America. (1) Our research, which covers the region, suggests that banks and other major financial institutions should consider getting into this high-margin business (Exhibit 2), where they have a better position for serving the needs of customers than do the mostly small businesses that now compete in this market. Many immigrants are dissatisfied not only with the reliability and speed of the present informal remittance networks but also with the exorbitant fees they charge: 6 to 15 percent of the remitted amount for the transaction, as well as a hefty exchange rate margin of 3 to 5 percent. When sending money back home, most immigrants--often on the recommendation of an elder in their tightly knit communities--take the cash to a neighborhood agent located, for instance, in a convenience store. These agents, mostly representing small remittance companies in the immigrants' home countries or, in a few cases, multinational operators, pocket half of the transaction fee and then deliver the cash to the office of the remitting company, which wires the money, at a previously negotiated exchange rate, through its own bank account to a bank in the country of destination. The beneficiaries there can collect their cash from local agents or local branch offices representing the remitting company or its partners, or they can pay t o have the cash delivered to their front doors. We estimate that remitters collected about $12 billion in fees last year and that the remitters' revenues are growing at a compound annual rate of around 8.5 percent. One of the few larger players in this market (mostly in Latin America) is Western Union, a subsidiary of the message and money transfer group First Data, a company listed on the NYSE. With more than 100,000 agents around the world and 40,000 in North America (excluding Mexico), Western Union transfers money by wire, mainly to Mexico, El Salvador, Guatemala, and the Dominican Republic. Another leading remittance player--Gigante Express, one of the largest courier agencies in Central America--wires more than half of all remittances to El Salvador. For those few immigrants and recipients who have accounts at banks, transferring money through them can be at least as expensive because of the high minimum fees and the volumes of paperwork required even for small transfers. Banks have shown little interest in targeting immigrants and their needs in the past, but that is beginning to change in View of the increasing numbers of more sophisticated immigrants with credit cards and checking accounts. As a result, the market has new entrants, including International Remittance Network (IRnet), which offers an electronic-fund-transfer service linking credit union cooperatives with Citibank in the United States. Credit union members (such as unionized agricultural workers) who have emigrated there can transfer money to local Citibank branches in El Salvador, Guatemala, and Mexico for $6.50 per transaction, one of the lowest fees in the market. But banks and other major financial institutions still have plenty of room to deliver what customers want: speed, reliability, better products and reasonable prices. Much of the money that immigrants transfer home is used not for groceries or other consumable goods but for land purchases, mortgages, utility bills, personal investments, and even new homes. In fact, many immigrants work abroad to build a future back in their countries of origin. Banks have a good position to develop innovative products together with their own branch networks (or those of partners) for mortgage payments, with utilities for electric, gas, and water bills, and with real-estate companies for land and house payments. …