Sat | Nov 28, 2020

Bank de-risking hits remittance costs

Published:Wednesday | July 5, 2017 | 12:00 AM

While remittance costs have declined over the last decade, a new working paper coming out of the International Monetary Fund (IMF) indicates that costs are climbing again because of correspondent banking challenges.

The paper, published in June, examines recent trends in outward migration from, and remittances to, Latin America and the Caribbean - LAC - as well as their costs and benefits.

The authors say that the withdrawal of global banks from correspondent banking relationships has "disproportionately" affected money-transfer operations, or MTOs, "given the enhanced challenges they face to meet the stringent know-your-customer anti-money laundering/ combating the financing of terrorism standards."

The retreat by the global banks has been linked to their cost-benefit analysis in response toAML/CFT and tax transparency standards, said the paper, titled Migration and Remittances in Latin America and the Caribbean: Engines of Growth and Macroeconomic Stability? Their withdrawal from banking partnerships is otherwise widely referred to as de-risking.

A survey carried out by the World Bank, referenced in the IMF working paper, said "global banks have closed the correspondent bank accounts of MTOs, particularly smaller MTOs, on a widespread basis, curtailing their ability to transmit remittances".

Severely curtailed

They note that, coming under similar pressure in some countries/regions, local banks have also faced challenges in maintaining their correspondent banking relationships, with 60 per cent of the Asociacion de Supervisores Bancarios de las Americas (Association of Banking Supervisors) reporting that remittances to LAC have been affected.

The study noted that the cost of sending remittances to LAC is lower than to other regions, except for South Asia, but, at 6.2 per cent for a US$200 transaction, remains substantial.

Nevertheless, the authors added, these costs have declined significantly over the past decades - for example, by about 40 per cent for flows to El Salvador, Colombia and Guatemala, and by 15 per cent to Jamaica over the period 2001 to 2015.

Remittances to Jamaica top US$2 billion annually. Year to date, inflows are up 1.7 per cent at US$753 million, according to the latest central bank data covering the period January to April.

Based on feedback from local companies, the fees for remittances to Jamaica appear to average US$10, usually paid by the sender.

Within LAC, those gaining the most from remittances benefit from lower transaction costs as do the dollarised economies, with dollarisation eliminating the cost of currency conversion.

"Costs remain relatively elevated for Caribbean countries compared with those in Latin America," the paper stated.

The cost of sending remittances includes a transaction fee and a currency conversion fee, both typically paid by the sender, although some remittance-service providers may also require the recipient to pay a fee, as outlined in the IMF paper.

In the United States, where sending charges are lower, the researchers said this likely reflected competition among remittance service providers in the region's most important remittances corridors.

However, the global average cost of sending US$200 in remittances remains substantial at 7.42 per cent as of 2016. Banks remained the most expensive channel for migrants to send remittances, at 11.18 per cent, while the cost of sending remittances through MTOs reached 8.05 per cent.

They paper states that mobile remittance service providers are a low-cost option for migrants, at 3.45 per cent, well below the global average. Meanwhile, the cost of sending remittances through post offices, the third main type of remittance service provider, was also below the global average at 6.36 per cent.

The researchers said that based on the US$68 billion in officially recorded remittances to LAC in 2015, lowering the cost of remittances could significantly increase the funds received by migrants' families back home.

The United Nations itself has made lowering these transaction costs a priority - reducing them to less than three per cent and eliminating remittance corridors with transaction costs higher than five per cent by 2030 as a UN Sustainable Development Goal.