What are Remittances?

Migrant Workers Supporting Their Families From Afar

Remittances are simply transfers of money from one country to another.  Most migrants send remittances through cash to cash transfers at a money transfer organization (MTO) such as Western Union, Money Gram, or Delgado Travel.  Companies like these are favored because they are likely to be present in neighborhoods that are home to large concentrations of migrant workers and they usually offer more competitive rates and less paperwork than banks.

“Sending money hardly costs anything and they charge a lot… The industry is depending on low wage migrant workers all over the world, generating huge profit margins based on the sacrifices that people have to do to send money.”
–Francis Calpotura, Remit4Change

The average monthly transfer made by a migrant worker in the United States is less than $300, usually made once per month. Some workers send half of their wages or more.  It is typical for domestic workers to send more than half of their wages in the form of remittances. Whereas the wages of migrant workers are almost always considerably lower than those of natives of wealthier countries, sending away a large portion of those wages forces migrants to live on even less.

Before MTOs proliferated, migrant workers often had to resort sending money home via ‘mules’ that would make trips from one place to another, delivering cash to migrants’ families by hand.  This has declined in recent years.  In remote regions of Sub-Saharan Africa, and pariah-states such as Cuba, this risky, expensive transfer is still commonplace.

Comparison Shopping is Impossible

Migrant workers usually don’t complain about the cost of sending money, but this reflects more of a lack of transparency than genuinely good service. Experts agree that lack of transparency in the market for remittances is a key factor in keeping prices high.  Migrants have no way of knowing whether the price will change tomorrow, or if there is a cheaper place to send just a few blocks away.

“With remittances, you put your money in and take your chances. Money comes out at the other end, but how much money comes out at the other end depends on what kinds of fees and what kinds of exchanges have been added in – things that are not necessarily exposed to the consumer up front.”
–Elizabeth Warren, Senate Candidate and former Special Assistant to the President

Imagine having to shop for gasoline, but not being told the full price until the gas is in the car. Or not having any way of knowing whether another gas station has a better product for a lower price. In such an environment, the gas stations would not really be competing at all.

In such an environment, prices tend to be higher.  When the customers don’t have the information necessary to make rational choices, MTOs aren’t truly competing.

The remittance providers, for the most part, are not doing anything illegal to intentionally dupe their customers, but they have drawn the eye of the law in the past. In 1997, Western Union and Moneygram were sued in a class-action lawsuit alleging that the “free” money transfers to Mexico to help victims of Hurricane Pauline were actually not free because the firms made profits from the exchange rate spread.  Western Union and Moneygram settled out of court without admitting wrongdoing.

Most of these people, they don’t want to stay here. They don’t want to become Americans. They want to just work, to send money until they can return. -Carlos Navarro, Casa Mexico

Other than anti-terrorism rules, no other federal laws regulate the remittance industry until provisions in the Dodd-Frank financial regulations mandated that remitters get a receipt with the amount to be collected on the other end. Though the industry sees itself as a very low-margin business, activists argue that most remittances cost the company almost nothing, and that if the MTOs charged less, more money would go to the developing world.