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Remittance Corridors and Economic Development: A Progress Report on a Bush Administration Initiative money visa

I am delighted to be here in Atlanta to join this distinguished group of experts on the payments system, which is so important to the efficient functioning of the economy. Your work today is having a profound impact on a top priority of the Bush Administration: the efficient and secure flow of remittances from developed countries to developing countries and the role of these remittances in economic development. The efficiency of cross-border payment systems is a major factor in determining the cost and quality of remittance services. The remittances, in turn, have a substantial impact on economic development, poverty reduction, and financial stability around the world.

Because of the growing role that remittances play in the world economy, the Bush Administration, and the U.S. Treasury in particular, embarked several years ago on a multifaceted effort to enhance the environment for the provision of remittance services. We have worked this priority at every appropriate opportunity and venue. We began in 2001 with the Partnership for Prosperity with Mexico, and we have already seen a significant reduction in the cost of remittances from the United States to Mexico. A more recent example is the goal established at this year’s Summit of the Americas in Monterrey to halve the cost of sending remittances by 2008, from 12 percent to 6 percent, with the Multilateral Investment Fund of the Inter-American Development Bank taking an important role based on their long experience in this area. The APEC (Asian Pacific Economic Cooperation) remittance initiative is another example.

And this past June there was an agreement made here in Georgia at Sea Island by the leaders of the G8 countries to take actions to improve remittance transfers; this was, in my view, one of the most significant and lasting initiatives announced at that summit.

My hope is that you leave this conference with a heightened sense of the importance and urgency of your work. Without efficient electronic retail payment systems, the prospects for lowering the cost, and increasing the efficiency and accessibility of remittance services would be dim.

In my remarks, I would like to discuss (1) why the Bush Administration cares so much about remittances; (2) the impediments to the efficient handling of remittance flows with existing cross-border payment systems; (3) progress already achieved; and (4) what more we are doing to facilitate and stimulate the development of innovative, cost effective remittance services.

Why Do We Care about Remittances?

Remittance flows, once largely ignored by economists and policy makers, have grown over the past decade to the point where they play a huge role.

• Over the past two years alone, remittance flows to developing economies jumped by 20 percent to nearly $100 billion dollars and likely will keep growing. They are three and half times net official flows. [KK1]

• These estimates do not include unrecorded flows, much of which travel through informal, or even underground, financial channels; these are thought to be at least half the magnitude of recorded flows.

• Remittance flows to Latin America comprise almost a third of the world’s recorded flows and for the first time edged out net foreign direct investment flows to the region.

• In some countries, remittances as a share of GDP are substantial; for example, this share is 15 percent in El Salvador and 35 percent in Haiti. About 28 percent of households in El Salvador receive remittances.

Remittances serve as an important means of reducing poverty. Remittances are private sector transfers that go directly to the poorer, economically isolated segments of the population. With no government involvement, these flows go directly to those who most need them. Often these flows are critical for the survival of the receivers, and under the right circumstances can be used by the sender and/or recipient to break the grip of poverty. Studies have shown that remittance recipients are more likely to send their children to school, have more access to health care, and are more likely to start small businesses. Product options introduced recently in some remittance services allow remittance senders to directly pay for a house or to save money in a bank account from overseas.

Remittances can also serve as a catalyst to financial market deepening. According to a recent survey, 33 percent of Mexican remittance recipients report having a bank account, which is significantly higher than the 22 percent reported for the general population. Credit unions in Central America have reported that remittance receivers are more likely to open accounts, aided by financial products tailored to their needs.

Often households receiving remittances never had sufficiently liquidity to merit consideration of a bank account; with remittance flows they are allowed the possibility of accumulating savings, accessing other financial service products such as loans and insurance, and establishing a credit history.

Impediments to Remittance Flows with Existing Cross-Border Payment Systems

While domestic retail payment systems can be extremely efficient, cross-border payment mechanisms are generally far less efficient, especially for small retail payments such as remittances. It is a Treasury priority to look for ways to address the impediments to efficiently sending small payments across borders.

Competition, technology and the high daily volume of business have combined to spur the development of efficient, electronic, domestic payment systems in some of our economies. For example, in the United States, banks can rely on their own internal systems, the existing national large-value systems such as Fedwire and CHIPS, the newly created Continuous Linked Settlement Bank (CLS), or the retail Automated Clearing House (ACH) system and checks to execute payments.

As a result, the fees charged by domestic payment systems to the financial institution and the speed, precision and reliability of the service provided are highly competitive. The retail customers of financial institutions in the U.S. can send funds to an individual in virtually anywhere else in the U.S. for a nominal fee.

In contrast, existing cross-border payment systems generally lack efficient, automated links for retail transfers. Completing a single transaction can involve a multi-layer series of correspondent bank transactions that raise the cost of the transaction and add to the time it takes to get the funds to the ultimate recipient. In order for an individual to process a single payment through these correspondent cross-border arrangements, hand entry of information is required at various points of the transaction.

Establishing and maintaining a correspondent bank network is expensive. For institutions that hold accounts with one another or with multiple banks, correspondent services can be automated – using SWIFT messaging or internet access – and inexpensive. However, for institutions that lack such relationships or for individual account holders, correspondent banking services can be quite expensive. The cost of using these correspondent services, in combination with the costs to the originating and recipient institutions of hand processing information result in the high fee, typically in the range of $30, for individual customers to send money (wires) via banks from one country to another. Such a fee, though hardly trivial, is still relatively insignificant for a large value transfer.

The average remittance to Latin America is under $300, making the fee for using correspondent banking services a sizable chunk of the total amount sent. As a result of the lack of an automated link for cross border retail payments and, in many instances, limited competition, the cost to the customer of sending funds across borders can be dramatically higher than sending it across the United States. For example, I can send $150 from my home in DC to a friend in California for less than 30¢, using online banking.

But if my friend moves to Peru, I would have to spend close to $30 to send him $150, unless he happens to reside near and bank at one of six branches of a particular U.S. bank and I also happen to have an account at that same U.S. bank. In the latter case the fee would be $10. Obviously, 30¢ is a much cheaper proposition than $30. And just as obviously, a $30 fee on a $10,000 transaction is a far smaller percentage than a $30 fee on a $150 transaction.

How Remittance Corridors are Already Changing

Fortunately, the situation is changing. Partly as a result of efforts by the U.S. Treasury, other domestic and foreign policy makers and development institutions (in particular the Inter-American Development Bank’s Multilateral Investment Fund), a number of new private sector initiatives and product offerings have emerged to service remittance markets. In a handful of remittance markets, also known as remittance corridors, new low cost, accessible and efficient remittance services have been introduced. As a result, the fees for sending remittances through those corridors have dropped sharply.

The introduction of these new services — or remittance products – has been spurred on by the confluence of changes in regulatory environments, technological innovation and changes in perception of the size of the market. Changes in the regulatory environment are often needed for private-sector participants to gain access to or be able to serve the relevant segments of domestic markets. Innovation and automation in payment systems are necessary to reduce the cost of handling small cross- border transfers. And finally, financial institutions have to believe that remittance flows will be large enough to justify the expense of developing payment systems that can communicate across borders, or even to develop products that can use existing payment systems such as credit card and/or ATM products.

But in the final analysis, technological innovation in payments systems to facilitate cross-border transmission is key.

In order to appreciate the role of technology in remittance services, it is useful to think of a single remittance transaction as having three components: [1] the initiation of the transfer or the collection of the funds, i.e., the point at which the customer sends the money; [2] the actual transfer of the funds and the instructions from one country to another via a payment system; and [3] the delivery of the funds to the recipient. The technology, or instruments, employed to do the first and third component of the transaction are visible to the sender and/or recipient, and include, for example, cash, ATM cards, store of value cards, and direct bank account deposit. As you know, the technology, or payment system, used to actually transfer the funds is usually invisible to the client.

In the creation of innovative remittance services, existing instruments to collect and deliver the funds, such as ATM cards, have been used by the remittance service providers with a variety of cross-border payment systems. For example,

Some financial institutions have extended the reach of their internal electronic proprietary payment systems to their overseas branches, and coupled that payment system with an account-to-account collection and delivery system. Citibank has deployed such a service for the U.S./Mexico corridor. Citibank customers can now send money from their Citibank account in the U.S. to a Citibank account in Mexico for $5.
Existing proprietary cross-border payment system operators, such as VISA, have developed remittance specific products and services which member financial institutions can use to offer remittance services. Some banks are now offering VISA debit card based remittance services. With this service, the recipient receives a VISA debit card which she/he can use at any retail outlet than accepts VISA. The sender can add money, that is, recharge the card, from the States. This service does not necessarily require access to a bank account on either end.