Digital Remittances Could Pave The Way To Economic Recovery In Developing Countries

Digital Remittances Could Pave The Way To Economic Recovery In Developing Countries
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The COVID-19 pandemic instigated a steep fall in global remittances, but it might also instigate something else – a seismic shift in the way we transfer money, writes Zak Killermann.

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Q4 2020 hedge fund letters, conferences and more

The Fall In Global Remittances

When COVID-19-induced lockdowns first hit in early 2020, remittances were projected to fall steeply. In April 2020, the World Bank estimated that global remittances would drop by 20%. With a dollars and cents price tag of a whopping $100 billion, the fall would be one of the sharpest in recent history.

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But they were just estimations. At the first year anniversary of COVID-19, we’re starting to see a fuller picture of the impact of the pandemic – or in other words, just how bad things got.

According to the latest data from the World Bank, global remittances are projected to fall by 14% by December 2021. While not as steep as those earlier projections, experts say the fall is still like nothing we’ve seen before. In an interview with NPR, World Bank economist Dilip Ratha described the drop as unprecedented. For context, even when the global financial crisis hit in 2007, remittances only fell by a mere 5%.

Remittances have long been the crutch of developing economies, with studies showing the money sent home from immigrant workers helps to alleviate poverty, improve nutritional outcomes and reduce child labour.

With businesses closing their doors and countries shutting their borders in early 2020, families who relied on remittances from immigrants abroad were among the hardest hit populations.

The Severe Impact Of COVID-19

Vice president for Human Development and chair of the Migration Steering Group of the World Bank Mamta Murthi noted in a recent report the severe impact of COVID-19 on families who rely on remittances.

The impact of COVID-19 is pervasive when viewed through a migration lens, as it affects migrants and their families who rely on remittances,” she said.

While the COVID-19 pandemic wreaked havoc on the inflows and outflows of global remittances, it may also be an instigator for something else. With COVID-19 driving the need for contactless transfer solutions, it has the potential to bring about a seismic shift in the way we send money around the world.

Despite seemingly endless options now available for digital transfers, the market has been slow to adopt. Cash remains one of the most common ways people send and receive money, even for international transactions. In the same NPR interview, Dilip Ratha estimated that around 80-85% of remittances are cash based. Some estimations are even higher. Data from the International Fund for Agricultural Development (IFAD) suggests that transfers that begin and end with cash make up 90% of all remittances. In these cases, a migrant worker will go to an exchange store and send the cash, and the money arrives in the other country for their family to receive. While the idea of sending cash may strike some as an outmoded way of passing currency to one another, around 1.7 billion people in the world are unbanked, many of whom are likely in countries that rely on remittances to survive.

While practical and (prior to the pandemic) relatively convenient, there are better ways to go about sending money overseas. And the pandemic might have caused people to revisit those options. Forbes reported in late May that major players in the consumer-facing transfer businesses saw an uptick in the use of their digital platforms at the beginning of last year. In fact, Western Union reported a 13% increase in its digital revenue in the first quarter of 2020. It only went up from there – by April, digital transactions accounted for 32% of consumer business.

But while these figures are promising, they don’t reveal the whole picture.

The Cost Of Remittances

Digital transfers aren’t so easy to coordinate in countries where the technology is harder to come by. According to IFAD, the cost of remittances is often highest in developing countries where they lack adequate infrastructure to send and receive money. That’s because it’s generally more expensive to send money in person than it is digitally. And despite many digital transfer providers now providing services for people without a bank account, it can still be a challenge for the unbanked to access these services. The workaround for transfers to an unbanked person is usually by way of a digital wallet, and the way to get a digital wallet is via a smartphone or computer. While two-thirds of the world’s unbanked people have access to a mobile phone, this isn’t enough to achieve universal access to digital banking.

These virtual banks and remittance providers have the opportunity to bridge the gap between the old and new world. Some of these providers have full ecosystems where users can not only send and receive money digitally but also provide similar functions as traditional banks in the way of savings accounts and physical cards. However, as it stands, some of these services are not available in the countries where they’re needed most. Making it easier for people to access digital remittance providers will be key to driving the cost of remittances down, and in turn, putting more money into the hands of those who need it.

While some countries were saved from the worst of it, broadly speaking, the COVID-19 pandemic triggered a fall in global remittances. But it also provided a powerful case for doing things digitally, proving that the old-school way of sending money won’t be feasible forever. The real question now isn’t whether or not we need to move remittances to the digital world, it’s how we can go about making those services more accessible in developing countries, and how quickly we can make it happen.


About the Author:

Zak is a staff writer at Finder specializing in money transfers. After getting burned once by an over-the-counter money exchange, he vowed to never settle for anything short of the mid-market rate.

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