Building a more inclusive age of digital remittances

Leaving your home, family, and country behind in the pursuit of new opportunities takes real courage and determination. International Day of Family Remittances, celebrated last month, is a chance to recognize the significant contribution migrants make towards supporting loved ones and furthering financial inclusion. 

Today, around one billion people are involved with remittances, either by sending or receiving them. This boom in remittance payments has helped make the world a smaller place. Total remittance flows increased to $860 billion in 2023 and they’re projected to grow at a similar rate this year, with 41% of senders and 48% of receivers expecting the frequency of their cross-border transactions to increase over the next 12 months, according to our research.

But it should also serve as a reminder of what governments and our industry can do to better support these types of payments and make the process simpler for those who need it most.

Leveraging remittances for financial inclusion 

Remittances provide a financial lifeline to hundreds of millions of people around the world. In the case of Nguyễn Đức Thành, a car manufacturing worker from Vietnam who moved to Japan to pursue better career prospects, the money he regularly sends back to his elderly parents helps keep them afloat.

“Families like mine, where parents lack a pension and have exhausted their income on their children's education, could face major challenges in later years,” he explained. “Having an individual with a stable income to offer support to the rest of the family is crucial.”

Remittances also have a huge impact on at least 12 of the United Nations’ (UN’s) 17 Sustainable Development Goals, from promoting gender equality and better health and education to contributing to economic development and reducing inequality. A recent UNESCO study showed remittances help increase the amount households in Latin America and the Caribbean can spend on schooling by between 23% and 83%.

Unfortunately, access remains a significant pain point in remittances. More than a third of those we surveyed said their family has limited options to access the money they send. And one in four told us their family must travel a long way to access funds.

Then there is the cost. From the $669 billion of remittances sent to low- and middle-income countries (LMICs) last year, more than half went to areas populated by unbanked or underbanked individuals who need a cash payout option. This is expensive, as well as often inconvenient, adding a 4% premium to the cheapest digital alternatives. World Bank data from Q3 2023 highlighted the global average cost for sending a non-digital remittance had reached 6.77%.

Lowering transaction costs to the 3% targeted by the UN would lead to migrant families in Africa - the most expensive remittance market - receiving an additional $4 billion per year, according to UN data. As it stands, the poorest countries on earth continue to pay the highest price for receiving much-needed remittances.

Laying the foundations for greater digital adoption  

The payments industry has been at the forefront of driving digital transformation, which is helping reduce these costs significantly.

Unlike traditional methods, digital remittances eliminate the need for manual processing and related administrative expenses. They also benefit from having fewer intermediaries involved and lower expenses on building and maintaining physical infrastructure, like money transfer offices. Based on the same World Bank data, the cost of sending a $200 digital remittance was 4.72%. The average rate of sending via mobile operators was even lower at 3%.

Beyond lowering costs, digital remittances also improve access and boost security. Digital wallets have been key in helping people receive remittances faster, cheaper, and with greater transparency. Mobile money, meanwhile, has skyrocketed thanks to increasing smartphone penetration, particularly in sub-Saharan Africa, with around $2.3 billion transacted per day.

But digitization cannot just be a private sector initiative. Governments have a huge role to play, especially in making baking facilities ubiquitous. In India, a country dominated by cash, there have been huge strides towards digitization through the Government’s JAM Trinity program. In less than a decade, the country has seen the banked ratio increase from below 40% to over 80%. The World Bank estimated that without government intervention, this growth would have taken nearly 50 years.

Governments also have a clear role to play in making digital payments easier for goods and services, especially in parts of the world still in need of internet and mobile network rollout, while harmonizing rules that drive down regulatory and compliance costs.

Laying the groundwork in this way will enable private companies to provide new payment solutions that help accelerate digitization. Virtual and prepaid cards for example, used both at points of service and to withdraw cash from ATMs, are playing a major role in digitization. Here, we have been working with fintech Paysend to enable unbanked users in Central America to receive remittances from the U.S. via instantly issued Mastercard virtual cards.

Another example is digital wallets which allow unbanked individuals to receive funds. This represents a support system that accelerates access to the digital economy while governments are making efforts to drive bank account adoption.

New digital solutions are also enabling smaller banks to better meet the needs of remittance senders, especially blue-collar workers, that they serve. These banks have traditionally been excluded from the cross-border payments ecosystem due to high costs of setup, regulatory overheads and compliance burdens.

Remittances will only grow in importance. It’s essential that banks, payments services providers, and governments around the world work together to promote digital solutions that empower both senders and receivers, and foster greater inclusion for all.