There is no doubt, the year 2020 has been quite the roller coaster ride, to say the least. The global economy is in a deep recession following the coronavirus pandemic and its continuing impact.
Economies around the world imposed lockdowns to curb the spread of the Coronavirus, which had adverse effects on the lives and livelihoods of millions of people. A World Bank report estimated an additional 115 million people have been pushed into severe poverty again, taking the total to 150 million by 2021 as a result of the economic crisis.
On the other hand, we have seen significant growth in formal remittances channels, a spike in digital remittances, and fast adoption of blockchain technologies. As the year ends, here is a rundown on remittances for the year 2020.
Importance of Remittances and Migration
Remittances are simply an amount of money transferred from one party to another, typically across international borders. It includes both personal money transfers to friends and family and business transactions.
The remittance inflows have been increasing over the years. In 2019, total remittances received reached a record high of $715 billion. The two key factors that are driving the increased inflow of remittances are migration and globally connected business.
Migration allows people to move to other countries where they can find better employment. It is common for people to live and work abroad and financially help their loved ones back home with remittances. And thanks to the internet, it is easier for businesses worldwide to connect and collaborate resulting in a sharp increase in overseas business payments.
For developing nations, remittances are an important source of external financing larger than foreign direct investment (FDI) and overseas aid. According to World Bank data, remittances to developing countries reached $548 billion in 2019, whereas FDI amounted to $534 billion and foreign aid at $166 billion.
It has been long established that remittances play an important role in poverty alleviation in the recipient families and promoting economic development at the national level.
Impact of COVID-19 on Migration and Remittances
From the perspective of migration, the impact of the COVID-19 pandemic is pervasive and could be long and deep. For the first time in recent years, the stock of international migrants is likely to decline this year as return migration has increased and new migration has reduced.
With unemployment rates reaching a historical high in host countries coupled with restricted mobility, return migration is likely to further increase in number. Migrants face harder challenges as they have to deal with job loss and earnings along with the risk of getting infected with the virus. And the fear of recurrence of COVID-19 phases in migrant-hosting countries could deter new migration. Ultimately, remittances depend on migration.
In the United States, as per the central bank, the unemployment rate soared to 14.7 % in April and fell to still high 13.3 % in May. The employment level of foreign workers declined by 21 % in April as compared to the 14 % decline in the employment of native-born workers.
Migrant workers are more vulnerable to job loss than native-born workers. Even when the economy recovers, it might still be harder for migrants to get hold of jobs in their host countries.
As per the trajectory of the economic activities in host countries, mainly in the US, European countries, and the GCC countries, remittances to low and middle-income countries are expected to decline by 7.2 % in 2020 and further by 7.5 % in 2021. The World Bank's latest remittances outlook indicates a gradual but more prolonged decline continuing well into 2021.
Due to the pandemic-induced global economic crisis and decreasing oil prices, the World Bank projected the remittances to fall by a record of 20% in 2020. By 2021, it is expected to decline by 14 % as compared to the pre-COVID levels in 2019. Despite the projected decline, the importance of remittances is expected to go up multifold.
Remittances Trends and Projections
Data available on remittances for 2020 showed a common pattern for most countries. Coinciding with the initial abrupt lockdown, travel restrictions, and disruption to businesses including remittances services, there was a sharp decline in April and May followed by a slow but partial recovery.
Despite the dip in remittances in Q2, remittances picked up in Q3 with the gradual opening of businesses and economies in major remittances sending countries such as the US, the European Union (EU) countries, and the GCC (Gulf Cooperation Council) countries. However, it has not quite recovered to the pre-crisis state yet.
As an exception to the general pattern of remittances mentioned above, Mexico, Pakistan, and Bangladesh - high remittances receiving countries did not suffer a decline in Q2 and also registered increases in Q3.
For most countries, the partial recovery in June after a hiatus in April and May could be attributed to migrants sending money for families that rely solely on remittances despite suffering the loss of income either by drawing on their savings or from stimulus support from the host country governments.
Secondly, a shift from informal (unrecorded) remittances channels to formal (recorded) channels. Having access to digital remittance channels during a global pandemic proved convenient for migrant workers especially for the higher-skilled workers. While there was a drop in remittances, money transfer service providers such as MoneyGram and Remitly reported a significant growth in digital remittances.
However, the weak economic growth and the uncertainties around work in high-income countries due to the pandemic has weakened the factors that fundamentally drive remittances.
Moreover, millions of migrants have returned to their home countries in the wake of the pandemic. This will dampen the remittance flows to major developing economies. India, the highest remittance receiving country is projected to see a decline in remittances to $64 billion by 23 % from the previous year of $83 billion.
Despite the decline, the projections in global remittances in 2020 show that the top remittance recipient countries are expected to be India, China, Mexico, the Philippines, and Egypt which remain unchanged from 2019.
Growth of Digital Remittances and Blockchain Technology
The few positive outcomes from the pandemic could be the growth in digital remittances and the fast adoption of blockchain technologies. The pandemic has exponentially increased the adoption of digital channels across the money transfer sector and also the single biggest catalyst for the growth of digital remittances.
The global digital remittance market is projected to grow at a Compound Annual Growth Rate (CAGR) of 25.35% by the end of 2025. Leading big cash-based incumbents in the money transfer market such as Western Union and MoneyGram and new players such as Wise, formerly known as TransferWise and WorldRemit all reported a tremendous increase in their digital revenue due to the lockdown and stay-at-home orders during the pandemic.
The rapid rise in contactless payments during the pandemic is in part due to safety concerns. Banknotes carry an extremely high risk of transmission of the virus. As such, people have been advised to use non-cash digital payments.
It is safer, cheaper, convenient to send money online to anywhere in the world. And it is available 24/7. In an effort to incentivize the use of digital payment solutions and to support workers who are serving communities amid the pandemic, online payment firms like Skrill offered free money transfer for months. The firm also removed all fees and foreign exchange charges for customers using Skrill money transfer to send money to Italy.
Innovation in the digital space includes drone delivery by Remitbee, as a new way of contactless payments. It is worth pointing out that for money transfer companies, a successful business strategy would be to integrate both the digital and physical channels to provide different payment options for a diverse customer base. Because in certain corridors and for certain target customers, cash still plays a key role when it comes to sending money to loved ones back home.
Another development in the payment sector is the implementation of a near-real-time settlement network powered by Visa and Mastercard. With this capability, the transactions are instant, unlike bank transfers that can take days. Several developed countries have already started using the network and more are expected to roll out the near-time rails by 2021.
It seems that COVID-19 has also been good for bitcoin and generally for cryptocurrency. High-net worth individuals and companies are investing and taking notice of the emerging blockchain technology. It is interesting to note that bitcoins have also surged during the pandemic; a steep rise from $10665 in September to $19028 in November before dropping to around $17000 level.
Increased financial surveillance and financial fraud following the pandemic are good reasons for the use of blockchain technology with its features such as decentralization, transparency, and secure transactions. However, despite the potential benefits of bitcoin-based remittances, the mass adoption of the technology is yet to be seen.
Cost of Sending Money and Innovation
The average remittance cost of sending $200 as per the World Bank in 2020 is still double the Sustainable Development Goal target of 3 % by 2030.
The lowest cost is in South Asia at 5% and the most expensive is in Sub-Saharan Africa at 8.5 %. Remittances by mode of transfer, banks are the most expensive at 10.9 %, followed by post offices (8.6 %), money transfer companies (5.8 %), and mobile operators (2.8 %).
As we have better technologies to ensure compliance and increased competition, and an informed consumer, the cost of sending money will continue to decrease.
Many governments have also put in measures to subsidize the cost of sending money to ease the burden of remittance fees. In support of the migrants, money transfer companies came together during the crisis by waiving fees and jointly pushing to designate money transfer service as an essential service in many countries.
In times of crisis like the pandemic, it's the migrants who turned out to be most vulnerable to joblessness or unfair treatment by employers and at a high risk of getting infected by the coronavirus. Many of them are on the frontline as healthcare workers or essential service providers.
With the COVID-19 pandemic as a catalyst for the rapid adoption of contactless payments, banks such as Standard Chartered started online money transfer as a step towards improving remittance infrastructure. We will see this trend of digitalization continue.
As more customers look for digital remittance solutions, there has been a continued interest by investors in the remittance industry. Remitly, an online international remittance service provider, joined the billion-dollar club in the middle of a pandemic with their latest round of funding. We will see more funding, innovation, and investment in the cross-border industry in the coming years.
For many countries, remittances are a major lifeline, and supporting migrants is a way to ensure that the inflow of remittances that are cheaper, faster, and safer remains continuous.
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