However, the convenience of MTOs comes at a high cost. Remittance costs include fees and exchange rate spreads, which are not always transparent. This lack of transparency negatively affects both senders and recipients of remittances. The global average cost of sending a US$200 remittance has only decreased from 9.3 per cent in 2011 to 6.39 per cent at the end of 2023. This level is significantly higher than the Sustainable Development Goal target of 3 per cent (SDG 10.c) and the 2014 G20 commitment of 5 per cent (the G20 has since endorsed the SDG target). However, there is evidence that their fees are sensitive to competitive pressures. More recently, the G20 cross-border payments roadmap has prioritized actions to foster competition by increasing consumer knowledge about remittance fees and exchange rate spreads.
Fintech, mobile money, and cryptocurrencies each offer distinct advantages over traditional money transfer operators (MTOs), but they also face unique challenges. Fintech solutions enhance convenience by bundling financial services like loans and insurance while slightly reducing fees. However, they present technological barriers to entry, as not all migrants are familiar with the apps or have access to the necessary devices and internet. Additionally, regulatory requirements often necessitate partnerships with MTOs or banks for backend operations, limiting potential savings for consumers. Mobile money services, such as M-PESA, WeChat Pay, and Orange Money, provide convenience, low-tech barriers to entry, and instant transfers. Despite these benefits, their operations are often confined to specific countries or territories and face transfer amount restrictions due to regulatory frameworks. Cryptocurrencies, on the other hand, offer very low transaction fees and rapid peer-to-peer (P2P) transfers. For example, sending Bitcoin to another wallet costs an average of US$1.50 per transaction, while Ether costs an average of US$0.75 per transaction. However, they encounter technological barriers and the challenge of converting back into fiat currency, known as the off-ramp problem.
The prospects seem particularly promising for cryptocurrencies and other blockchain-enabled solutions, as viable solutions to the off-ramp problem have gained momentum. Governments in recipient countries can regulate around this issue without overhauling existing banking regulations or coordinating with sending countries. For example, thanks in part to Mexico’s cutting-edge fintech law, in 2023 fintech company Bitso processed US$4 billion in crypto remittances by offering both crypto transfers and conversion services back into pesos. The Philippines is trialing a local stablecoin for crypto remittances in a regulatory sandbox. Even without regulation, countries like Argentina and Venezuela, facing rampant inflation, are increasingly adopting US-denominated stablecoins for remittances and direct transactions in-country.
The Bank for International Settlements and China-led mBridge project (and other cross-border digital currency projects) may revolutionize remittances. Using Central Bank Digital Currencies (CBDCs) for cross-border payments, this initiative enables instant settlement of transactions by central banks with their official digital currencies. This system cuts down on intermediary banks, exchange rate costs, and fees, making remittances faster, more efficient, and more affordable through digital wallets. While currently limited to commercial banks, CBDCs have the potential to transform remittances if central banks push for wider adoption or introduce retail CBDCs for individuals and businesses.
“Maximizing the impact of remittances, especially for the benefit of children, requires a concerted effort to enhance their accessibility, efficiency, and effective use.”
Enhancing the impact of remittances on child well-being
Maximizing the impact of remittances, especially for the benefit of children, requires a concerted effort to enhance their accessibility, efficiency, and effective use. This involves reforms at both international and national levels, focusing on policy, regulation, technological development, and empowering children to be active participants in financial decisions. A successful strategy also needs to harness the power of advocacy and engage diaspora communities as key partners. There are four major areas of engagement:
Reduce remittance costs
- Governments: Foster competition in the remittance market by easing regulatory requirements, especially for small transfers, and removing barriers in specific remittance corridors. Advocate for public-owned banks to offer easy conversion of cryptocurrencies and stablecoins, promoting the adoption of peer-to-peer payments and pressuring traditional operators to lower costs.
- CBDCs: Ensure that the efficiencies generated by Central Bank Digital Currencies (CBDCs) for cross-border payments benefit migrants and remittance recipients.
Enhance digital and financial literacy
- Connectivity and digital literacy: Improve internet connectivity and smartphone accessibility in underserved areas to facilitate the adoption of digital remittance platforms. Implement large-scale digital literacy programs targeting potential remittance senders and recipients across all ages, including adults, youth, and children.
- Financial literacy for children: Introduce age-appropriate financial literacy programs in schools and communities, teaching children about budgeting, saving, investing, and responsible financial decision-making.
Expand financial inclusion and empowerment
- Banking and microfinance: Expand access to banking and microfinance services to offer greater choice, reduce reliance on informal channels, increase transparency, and ensure broader benefits from remittances. Develop tailored solutions to address the unique challenges faced by refugees in accessing remittances.
- Empower children and women: Promote the development of child-friendly financial products, such as savings accounts, to enable children to manage their funds and build financial independence. Focus on empowering women to significantly improve the impact of remittances on children, fostering a more equitable distribution of benefits.
Leveraging remittances for development
- Diaspora bonds: Unlock the development impact of remittances by offering an accessible and meaningful investment vehicle for diasporas. Their success hinges on balanced returns and transparent community engagement. By providing attractive returns for migrants and manageable rates for governments, these bonds can create a win-win scenario. Transparent connections to tangible development initiatives ensure migrants see the direct impact of their investments, fostering a more engaged and supportive diaspora community, ultimately driving significant social impact.
Advocacy and collaboration are crucial to implementing these recommendations effectively. This involves highlighting the positive impact of remittances in international fora and mobilizing diaspora communities for policy reforms. Creating platforms for knowledge transfer and skills exchange, connecting diaspora entrepreneurs with opportunities in their home countries, and supporting diaspora bond issuance to mobilize financial resources will enhance the overall impact on children’s well-being.
