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Technological advancements are causing big changes in the payments sector. Commerce is growing more international and interconnected in the digital economy of today. And International Money Transfers are more frequently required by individuals and corporations.
Different types of money transfers exist. It can include person-to-person transfers or business-to-business transfers, and others. So what are remittance transfers, and how do they operate.
The payment industry is undergoing significant changes, driven by technological innovations. In today's hyper-connected digital economy, commerce is becoming more global and interconnected. People and businesses need to send money abroad frequently.
If you are a migrant worker or an international student who sends money abroad, it is important to understand money remittance, the definition of remittance, and how it works.
To help you make a remittance smoothly, we have put together this guide to understanding remittance.
The term remittance comes from the word “remit” which means “to send back”. Remittance refers to the payment of money to another party, usually overseas, although it can also be domestic.
In other words, remittance can simply be referred to as an international money transfer. When you send money from your resident country to your recipient country, the money is converted to the currency of your recipient's home country by using the exchange rate at the time.
Remittances can be used for a variety of purposes, such as transferring money to loved ones or paying corporate debts. Remittance payments can be sent via wire transfer, postal delivery, cash, draft, or check.
Remittances are most frequently used in the context of money sent home by migrants who work abroad. Many people relocate abroad in search of employment opportunities and then transfer some of their earnings back home through remittances.
In reality, migrant workers usually make recurring payments through these cross-border person-to-person transactions.
Here are some examples of remittances
Remittances are a common side effect of migration, which has always been a part of human history.
Remittance transfers have been increasing rapidly in recent years due to advances in financial technology and are now the main of foreign income for many developing economies.
According to Allied Market Research, the remittance market size is expected to increase by $930.44 billion globally by 2026, showing a CAGR of 3.8% from 2019 to 2026.
Remittances have surpassed development aid since the late 1990s, and in some nations, they account for as much as a third of the country's gross domestic product (GDP).
India, Mexico, China, the Philippines, and Egypt were the top five recipients of remittances in 2021. Lebanon (54%), Tonga (44%, Tajikistan (34%), the Kyrgyz Republic (33%), and Samoa (32%) are among the economies where remittance inflows account for exceptionally high shares of GDP.
Remittances to low- and middle-income countries (LMICs), excluding China, have been the main source of foreign financing since 2015. Furthermore, compared to other sources of external financing and foreign direct investment, the flow of remittances appears to be considerably more stable.
The most recent Migration and Development Brief from the World Bank project that remittances to low and middle-income countries will rise by 4.2% to $630 billion. This comes after a strong 8.6% gain in 2021, when remittance flows reached $605 billion, exceeding earlier expectations.
India consistently ranks as the top recipient of remittances because of its huge diaspora and ex-pat population, receiving $87 billion in 2021, $83 billion in 2020, $83.3 billion in 2019, and $79 billion in 2018, as per World Bank data.
Remittances sent by migrant workers to their families back home are a significant source of revenue for many developing economies.
The recipients generally use remittances to pay for daily living expenses, act as a safety net in case of emergencies, or as capital for small investments.
Additionally, receiving money can encourage citizens of less developed countries to create bank accounts, which boosts local economies and aids in their transition into the future.
Although the word remittance is synonymous with money transfers, it can mean something different when used in another context. Here we defined money transfer terms related to remittances.
Payment remittances are defined as money transfers from one entity to another across international boundaries. It's just another word for “remittances”.
When a business purchases goods and services, it may receive an invoice outlining the price and due date. The business may then reply with remittance advice after receiving that.
The remittance advice, which resembles a receipt, confirms that the invoice has been paid. Remittance advice is a useful record-keeping courtesy even though it is not mandatory documentation.
The remittance advice offers a point of contact for inquiries if a supplier has concerns about payment.
Remittance advice is intended for commercial transfers rather than personal transfers.
A remittance address or otherwise knowns as a remit address or remit to address, or simply billing address, is a company mailing address for receiving payments, checks, and invoices.
Their primary mailing address may be different from the remittance address. In other words, it is the address of the person or company that will receive the money you are sending.
It functions similarly to a regular address but is specific to money transfers. Due to payments going directly to the department they are intended for, the payments are processed faster.
A payment's processing period is referred to as the "float." For instance, it typically takes 3-5 business days or longer for a wire transfer to arrive and be deposited into the recipient's account.
The sender, the recipient, and the remittance service provider are the three main players in a remittance transfer. To complete the transaction, there must be two remittance service providers: one in the sending country and one in the receiving country.
It is not necessary for the provider in the receiving country to be the same as the one in the sending one. Typically, banks play a significant role in remittance transfers.
When converting currencies, the service provider will apply the exchange rates they are offering and charge a fee. The costs and exchange rates vary with every service provider. Most money transfer service providers offer a marked-up rate (a margin above the real exchange rates on Google and Reuters) to earn a profit.
Depending on the service provider, the recipient can choose from many payment options, such as direct transfer into their bank account or in-person collection at a local agent location.
Cash, debit cards, credit cards, and bank transfers are all options for the sender to pay for the transfer. Payment with a credit card will carry additional charges.
The whole process and take up to 5 business days or more, depending on various factors.
Remittance can be made in a variety of ways, including cash payments, card payments, bank-to-bank transfers, and through specialized international money transfer companies, among others.
Bank drafts, cashier's checks, and ACH transfers, to mention a few, are less expensive options if speed is not an issue. Although it could take longer for these ways to reach your receiver, they are dependable and secure.
International ACH transfers or wire transfers may be offered by your banks. Do note that not all banks have this service for international money transfers.
You can send money abroad online using companies that specialize in money transfers, including Western Union, MoneyGram, Wise, Remitly, Xe, and others. You only need to sign up online or download their money transfer app to start the process and send it easily from the comfort of your home. That's how easy it is.
If you decide to transfer cash, Western Union and other similar money transfer companies have agent locations all over the world.
There are many options to choose from depending on several factors such as destination country, payment method, delivery option, or whether you want the money to reach quickly or reduce the transfer fees. So it pays to do your research before you make a transaction.
Once you have decided which transfer provider to go ahead with, you need to provide the details of your recipient, such as their name, remittance address, and name and address of their bank, bank account number, and their bank's SWIFT code.
The cost of remittance includes a fee charged by the money transfer provider, normally paid by the remitter, and a currency conversion fee for sending local currency to the recipient in a different country.
Some banks may charge a recipient's fee when collecting the remittance payment to cover unforeseen changes in the exchange rate. Or a correspondent bank fee if an intermediary bank participates in the transfer process.
Remittance agents (especially banks) may make an indirect profit in the form of interest or ("float" by making investments with the money before sending it to the recipient. The float can be large in countries with high overnight interest rates.
Large remittances are rarely impacted by transaction fees (for trade, investment, or aid). The fees as a percentage of the principal amount are low, and major international banks compete for large-value remittances.
However, fees for smaller remittances, which are often under $200 and are typical of poor migrants, are on an average of 7% and can be as high as 15-20% in certain remittance corridors. The recipients' families would benefit from reduced transaction costs.
The good news is that several low-cost online services have emerged to make money transfer to developing and emerging economies more affordable.
When it comes to remittance, there are also lots of comparison websites that break down the costs of sending money abroad and provide the best deals on exchange rates, fees, discounts, and promotional offers.
Bill Gates stated during the G20 conference in 2011 that reducing costs on remittances from where they are now, at about 10%, to an average of 5%, would free up $15 billion annually for use in developing nations.
Check for Authorization When Choosing Transfer Provider
You and the service provider's main priority is the security of your money. Money transfer companies that have been approved are safer because they must comply with rules and laws established by local, national, and international organizations like the Financial Conduct Authority (FCA).
To safeguard your money and identity and stop money transfer fraud, they have put in place several security measures.
Be Aware of Marked-Up Exchange Rates
The exchange rate is important as it determines how much money your recipient will get.
When offering money transfer services, money transfer platforms and banks frequently add a margin to the mid-market rate or the real rates seen on Google. Because of this, the exchange rates provided by various money transfer providers differ and are competitive to draw customers.
Search for the actual exchange rate online or on a currency conversion tool to determine whether the exchange rate offered to you is fair.
Transfer Costs Varies Widely
The cost of an international money transfer varies depending on the payment type, transfer amount, transfer speed, provider, delivery method, and destination nation.
Watch out for hidden fees. To get an estimate of the cost, you can use the price estimator on the websites of money transfer businesses. Choose transfer companies with upfront costs and reasonable exchange rates.
Faster Transfer Speeds Are Costlier
If you want a quicker delivery, be prepared to pay more. Compared to payments made using a bank account or debit card, payments made with a credit card have higher fees but are processed more quickly.
Though they frequently have higher costs, cash transfers are the fastest alternative.
Online customer reviews of the money transfer companies can be telling. Check for the quality of service people are getting from the particular money transfer provider from their customer feedback.
Lastly, Shop Around and Compare Your Options
There are many ways to send money abroad with different fee structures, speeds, and processes, as we have discussed.
Comparing the exchange rates on online comparison tools like CompareRemit is highly recommended to get the best deal on your transfers. This approach will help you find the one that suits your transfer need or find you the best deal.
Simply enter the amount and the sending and receiving country or the currency pairs of your choice, and then compare your options side by side in terms of exchange rates, fees, the transfer speed, the delivery option, and the amount receivable.
The growth of international remittances in the coming years will be driven by the development of digital money transfers, declining costs, and the availability of affordable and safe international money transfer options.
If you are one of the people who must send out remittances regularly, it is important to understand how remittances operate and how to cut costs.
You can get the best deals and cheaper ways to send money to your loved ones safely, quickly, and securely with a little bit of research. In this way, you lose less money out of your hard-earned money in high service fees, and more ends up where you want them to.
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