Personal remittances from migrant workers are disproportionately important to the economies of Latin America and the Caribbean. Home to only 8% of the global population, the region receives 18% of global remittances, and since 2020 remittances there have grown more than twice as fast as remittances globally. In some of the region’s poorest countries, remittance receipts amount to more than a sixth of total output providing a lifeline for vulnerable households.
Given the importance of remittances for developing countries, the international community has long sought to minimize the cost of cross-border transfers, which not only weighs on senders’ and recipients’ disposable incomes but may also reduce remittance flows. A 2009 resolution by G8 countries sought to halve remittance costs globally to 5% over five years (the 5×5 objective), a target to which the G20 signed on in 2011. In 2015, the Sustainable Development Goals went further, with Goal 10.c aiming to further cut the cost of a $200 remittance to no more than 5% in any corridor by 2030 and no more than 3% on average globally. While four out of five remittance corridors in Latin America and the Caribbean have already achieved the first target, the region is only halfway to attaining the second, and will have to pick up the pace of price reductions to meet the 2030 deadline. Market structure, financial regulations, and consumer behavior all play a role in keeping fees high.
Upward Pressure on Remittance Costs
Remittances are big business. The average remittance service provider (RSP) charged $11.62 to remit $200—5.8% of principal—to Latin America and the Caribbean in 2023Q1, down from 6.2% nine years before. Over the same period, the service options for initiating remittances online or via fintech algorithms proliferated from less than a quarter of offerings to almost two-thirds. The increasing availability of faster and more efficient digital remittance services independent from costly brick-and-mortar agent networks raises the question of why their prices are not falling faster. Regionwide, sending remittances digitally is cheaper on average than sending from a brick-and-mortar agent, and receiving remittances as mobile money or a bank deposit is cheaper than receipt in cash. Nonetheless, within individual corridors, digital sending and cashless receipt aren’t always the cheapest options.
Supply-side factors could partly explain this phenomenon. Remittance corridors sometimes contain few RSPs, with large market shares in the hands of the leading providers. These incumbents’ advantage comes from dense networks of physical access points—a key asset when senders or recipients prefer to deal in cash, as many do. Incumbents’ unrivaled network density bars new entrants from attracting the critical mass of users that would make them grow to a competitive scale.
Regulatory regimes can also reduce competition and drive up costs, with safeguards to prevent money laundering and the financing of terrorism weighing most heavily. For example, only ten years after US banks massively entered and lowered prices in the US-Mexico remittance corridor during the 2000s, almost all shuttered their remittance services and throttled their relationships with RSPs during a crackdown related to anti-money laundering and countering the financing of terrorism. The results were fewer market actors, higher costs from the remaining RSPs, and evidence of higher prices for remitters. Digital remittance services are also subject to regulatory costs, potentially undermining their competitive edge.
Users also may be unequipped to take advantage of digital and cashless remittance services even when they are the more affordable option. A 2019 IDB Lab study on remittances from the United States to Latin America and the Caribbean found that only one respondent in five had originated a remittance online, and only 6% of remittances to Mexico and the Dominican Republic were deposited in bank accounts. Though remitters may have the technology they need, their lack of access to banking gets in the way. In 2019, only about half of surveyed Mexican and Salvadoran immigrants had US bank accounts, without which digital remitting is impractical. Recipients often have a similar problem. Sizable numbers of recipient Mexicans, Central Americans, and Dominicans were still unbanked in 2021-2022, and fewer than half had received digital payments. And for senders as well as recipients, distrust of banks and digital remittance platforms has deep roots.
Policy Solutions for Lower Remittance Costs
Many of these obstacles can be addressed with policy action. To tap the full suite of available remittance services, both senders and recipients need bank accounts, as cash dependence can limit the use of price-competitive RSPs. Efforts must also be made to overcome historical distrust of banks in the region and tackle fee structures that often make bank account ownership unaffordable for low-income people.
Once banked, senders and recipients need the confidence and connectivity to exploit the cost savings of digital remittance services. This means building trust in digital service platforms among senders and alerting them to their potential options. For recipients, it means mainstreaming cashless payment systems so that the need to collect cash from a bank branch or agent becomes a thing of the past.
Regulatory streamlining can make a difference. Know-your-client requirements and other regulations designed to prevent money laundering and the financing of terrorism are necessary but have high compliance costs. These can be reduced without affecting security by harmonizing reliable digital identification systems across countries, banks, and RSPs.
Financial Wellbeing Across Borders
For better or for worse, remittances remain an essential resource in the livelihoods of many families in Latin America and the Caribbean. Few cross-border financial flows to the region can match the magnitude of worker remittances, which even exceed foreign direct investment in the region’s eight poorest countries. Attaining the cost-cutting targets outlined in the Sustainable Development Goals could afford additional purchasing power to remittance-reliant families. Financial inclusion of both senders and recipients, digital connectivity and literacy, as well as regulatory efficiency could go a long way in cutting remittance costs. The development impact of these gains would make the sacrifices of migrant workers all the more worthwhile.
