Cross border remittances and financial access issues: topics to understand the market base of MSBs

Manuel Orozco

October 25th, 2007; Chicago

FDIC Committee on Economic Inclusion

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A. The context: migrants, development, and financial access

One key trend in the global context is increasing labor market integration and transnational economic activities resulting from such integration

For one, the increased competitive capacity of the U.S. economy depends of an adequate demand for foreign labor to increase the country’s productivity;

Our demographic composition will experience faster aging without immigration;

Moreover the current transnational context has strengthened ties while already changing U.S. demographic composition;

Market supply and access to wealth among migrants is a critical factor to enhance development and competitiveness in our economy;

Efforts to expand access remain shy and highlight the need for greater intervention among government, private sector and grass roots civil society.

Efforts that work include grassroots marketing, alternative banking products, IT innovation and partnerships.

Alternative products such as cards are still a work in progress. . .

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The relationship between a declining unemployment rate among Hispanics in the U.S. and the increase of remittances to Mexico is an indicator of the increasigng demand for foreign labor in the U.S.

Source: Orozco, Manuel data compiled by the author

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 Transnational ties: Remittances to Latin America and the Caribbean, 2001-2006
| Countries            | 2001     | 2002     | 2003    | 2004     | 2005     | 2006     | (% of GDP) |
|----------------------|----------|----------|---------|----------|----------|----------|------------|
| Argentina (S.Am)     | 100      | 184      | 225     | 270      | 780      | 800      | 0.4%       |
| Belize (C.Am)        | 73       | 76.65    | 81      | 93.15    | 7.7%     |
| Bolivia (And)        | 103      | 104.2    | 340     | 421.6    | 860      | 989      | 1.0%       |
| Brazil (S.Am)        | 2600     | 4600     | 5200    | 5624     | 5792.72  | 7372.65  | 0.8%       |
| Colombia (And)       | 1756     | 2431     | 3067    | 3857.307 | 4126     | 4200     | 3.2%       |
| Costa Rica (C.Am)    | 80.25    | 134.82   | 306     | 320      | 400      | 520      | 2.4%       |
| Cuba                 | 930      | 1138.5   | 1194    | 1194     | 1100     | 1000     |
| D. Republic (Carb)   | 1807     | 2111.5   | 2216.55 | 2438.205 | 2559.5   | 2747     | 9.6%       |
| Ecuador (And)        | 1430     | 1575.2   | 1656.9  | 1739.745 | 1827     | 2893     | 7.0%       |
| El Salvador (C.Am)   | 1910.5   | 2206.1   | 2316.3  | 2547.6   | 2830.2   | 3316     | 18.2%      |
| Guatemala (C.Am)     | 584.3    | 1689.53  | 2106    | 2680.7   | 2992.77  | 3609.81  | 12.2%      |
| Guyana (Carb)        | 90       | 119.25   | 136.5   | 143.325  | 260      | 270      | 32.5%      |
| Haiti (Carb)         | 810      | 931.5    | 977.55  | 1026.428 | 1077     | 1100     | 25.7%      |
| Honduras (C.Am)      | 460      | 770.4    | 862.05  | 1134.3   | 1762.98  | 2359     | 26.2%      |
| Jamaica (Carb)       | 967.5    | 1228.8   | 1425.9  | 1497.195 | 1651     | 1770     | 16.6%      |
| Mexico               | 8895     | 10502.05 | 13266   | 16612.84 | 20034    | 23053    | 2.8%       |
| Nicaragua (C.Am)     | 660      | 759      | 787.5   | 809.55   | 901      | 950      | 17.7%      |
| Panama (C.Am)        | 220      | 231      | 254     | 292.1    | 1.7%     |
| Paraguay (S.Am)      | 506      | 550      | 650     | 7.5%     |
| Peru (And)           | 930      | 1265     | 1295    | 1359.75  | 2495     | 2869.25  | 3.2%       |
| Suriname (Carb)      | 50       | 55       | 102.3   | 6.6%     |
| T.&Tobago (Carb) | 40.9     | 58.5     | 88.2    | 92.61    | 97       | 110      | 0.6%       |
| Uruguay (S.Am)       | 42       | 105      | 110     | 115      | 0.6%     |
| Venezuela (And)      | 136      | 235.4    | 246.75  | 259.0875 | 271.9    | 300      | 0.2%       |
| LAC                  | 24290.45 | 32044.75 | 38048.2 | 47000.89 | 52878.07 | 61481.26 | 2.2%       |

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Outbound remittances from the United States
| Region                         | Total                 |
|--------------------------------|-----------------------|
| East Asia & Pacific        | $  23,178,936,263.59  |
| Europe & Central Asia      | $  6,702,514,444.62   |
| Latin America & Caribbean  | $  53,131,672,060.37  |
| Middle East & North Africa | $    3,611,726,578.29 |
| South Asia                     | $  10,109,629,219.20  |
| Sub-Saharan Africa             | $    3,257,968,230.42 |

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Main countries of destination of remittances from the U.S.
| Host Countries     |                |
|--------------------|----------------|
| Mexico             | 24,242,813,200 |
| India              | 8,400,000,000  |
| Philippines        | 8,201,485,776  |
| China              | 3,807,711,180  |
| Viet Nam           | 3,788,610,840  |
| Guatemala          | 3,210,327,839  |
| Germany            | 3,129,595,560  |
| El Salvador        | 2,969,952,963  |
| Colombia           | 2,856,000,000  |
| Dominican Republic | 2,081,384,881  |
| Honduras           | 2,075,889,556  |
| Nigeria            | 1,790,358,198  |
| Ecuador            | 1,312,379,841  |
| Poland             | 1,203,720,840  |
| Jamaica            | 957,665,520    |

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The profile—migrant remitters

Source: Orozco, Manuel and Jacob, Katy. “Remittances, prepaid cards,
| Mexico                         | Dominican Rep. | Jamaica | El Salvador | Guatemala | Bolivia | Nicaragua |
|--------------------------------|----------------|---------|-------------|-----------|---------|-----------|
| Over 40 years of age           | 18%            | 15%     | 17%         | 15%       | 26%     | 24%       | 51% |
| Female                         | 40%            | 55%     | 43%         | 64%       | 33%     | 52%       | 41% |
| Some college or college degree | 14%            | 60%     | 75%         | 19%       | 12%     | 42%       | 35% |
| Income  $35,000               | 3%             | 3%      | 4%          | 3%        | 3%      | 18%       | 8% |
| U.S. Citizenship               | 13%            | 43%     | 56%         | 17%       | 12%     | 16%       | 14% |
| Use Internet                   | 24%            | 63%     | 76%         | 31%       | 23%     | 36%       | 24% |
| Daily                          | 45%            | 40%     | 44%         | 30%       | 57%     | 36%       | 41% |
| Monday - Friday                | 17%            | 18%     | 27%         | 20%       | 9%      | 14%       | 15% |
| Weekends                       | 12%            | 19%     | 19%         | 25%       | 9%      | 10%       | 15% |
| Rarely                         | 26%            | 23%     | 9%          | 25%       | 26%     | 40%       | 29% |

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Length of time in the US and average remitted

Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

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Gender and average remitted

Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

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US citizen and average remittance sent

Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

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B. Issues on the marketplace of money transfers

Players in the market: type, size, 

Pricing: operating costs and consumer costs;

Market structure and concentration;

Regulatory environment;

Financial intermediation: demand and supply side dynamics;

Technology innovation

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Changes in the demand side . . .

Account to account transfers to Mexico: 1.00% (2004); 2.55% (2006); 7.28% (2007)

Informal networks declined from 20%+ in 2000 to about 10%.

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Consumer preferences to change ...

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Costs influence decision to switch 

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Nigerian migrants preference to change to a more efficient way and current cost of sending as % of principal sent

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- Remittances and cost in Latin America and the Caribbean

Source: Orozco, Manuel, International Flows... (2006)

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C. Issues on financial access . . .
        - Usability: capable of opening accounts affordably and with small balances
        - Openness: capable of reaching everyone without underserving any social sector;
        - Formality: capable of enforcing regulations without compromising use and openness;
        - Functional capacity: capable to serve the four core product needs: (payments, savings, credit and risk mitigation);
        - Migrants are in a space where they often lack financial access, and where it exists, the access  is not linked to formal depository institutions 

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Most migrants use businesses that offer none or few financial services . . .

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. . . Partly because they have few financial obligations and no banking access. . .

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Immigrants without bank accounts

Copyrighted to author, Manuel Orozco, PhD

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. . . Migrants are not a monolithic group that either has no financial access and no obligations or has both....

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Moreover, at least one third or more saves . . .

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And the average amount is significant . . .

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And some unbanked migrants are saving . . .

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They also believe that the most important reason to have a bank account is to save money . . .

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...and would be prepared to use banking services if . . .

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Their access to bank accounts is determined partly by . . .
        - Demand for financial services
        -  Number of financial obligations 
        - Age 
        - Gender 
        - Citizenship, and not income (as is almost a constant)
        - Moreover, their interest to switch to account to account transfers is associated to changes among banks

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Moreover, those owning accounts are more likely to send more money . . .

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Recommendations

Accelerating financial access

Targeted goals and standards to increase access to financial services and access (who would be benefited)

Develop methodologies to accelerate banking rates

Increase a critical mass of the policy network

Underserved vs. marginality

Partnerships between MTOs and depository institutions in the U.S. and LAC: Dinero a Mexico, Red de la Gente, and others... 

Make clear the compatibility between financial access and mitigating methods that reduce security risks  of transactions

Segment and target appropriate markets

Lower the barriers to entry

Develop effective distribution channels

Educate the target market

Consider mobile banking channels

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 Consolidation and maturation

Source: Orozco, Manuel. “Markets and Financial Democracy” (2005)
| Criteria defining consolidation of firms in the industry & stages at which countries are found . . .                                                                                                                                                                                                                                                   | Mature                                                                                    | Consolidating                          | Undeveloped                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|----------------------------------------|--------------------------------------------------------------------------------------|
| Composition of market share, Efficiency of transactions (use of modern technology, extended networks nation wide, safe transfers), Compliance to regulatory environment, Tradition of transferring money, Multiple new and old players (MTOs, banks, MFIs), Costs to customers are lower than average, Information and transparency, Investment accessible | MexicoPhilippines El Salvador, Dominican Rep., Ecuador, Jamaica ColombiaGhanaIndiaArmenia | NigeriaTajikistanEastern EuropeVietnam |  Honduras PeruGuyanaHaitiCubaNicaraguaArgentina VenezuelaTajikistanNigeriaSomalia   |

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Factor estimates of migrant remitting by region
| Region of destinationMigrant’s origin   | Russia                                | Japan/Sing/HK/Australia | USA/Canada | Western Europe | Gulf States | Intra-Regional I | Intra-regional II |
|-----------------------------------------|---------------------------------------|-------------------------|------------|----------------|-------------|------------------|-------------------|
| Frequency and % remitting               | 6 * 85%                               | 12 * 80%                | 12 * 65%   | 12 * 65%       | 12 * 80%    | 8 * 80%          | 5 * 80%           |
| Region                                  | Amount remitted per sending frequency |
| East Asia & Pacific                 | 250                                   | 400                     | 450        | 450            | 100         | 150              |
| Latin America & Caribbean           | 600                                   | 350                     | 450        | 100            | 65          |
| Middle East & North Africa          | 450                                   | 100                     |
| North America                           | 200                                   |
| Russia and Central Asia                 | 300                                   | 350                     | 100        | 150            |
| South Asia                              | 400                                   | 450                     | 450        | 100            | 150         |
| Sub-Saharan Africa                      | 300                                   | 400                     | 350        | 100            | 150         | 50               |
| Western, East and C. Europe             | 400                                   | 400                     | 300        | 200            | 150         |

Some determinants of migration

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Income dependence on remittances

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