Leveraging remittances for sustainable growth and improved development outcomes

March 23, 2022

There are more than 280 million immigrants around the world, growing dramatically since 2000 when there were less than 180 million. For immigrants working and living abroad, remittances can be a critical lifeline for and a bridge to their families. In 2020, an estimated $1.5 trillion was sent in formal and informal person-to-person channels worldwide, with roughly $40 billion generated in associated fees.

Despite efforts to create an inclusive system, traditional approaches to remittances have fallen short due to a lack of innovation and inclusivity. In many markets, large banks dominate with few other players present. Brick-and-mortar locations and informal channels operate on disparate legacy systems that end up costing the customer more than necessary. Furthermore, technology used is often not scalable or integrated enough to meet the needs of diverse communities served.

Sending money by remittances is often unpredictable and expensive with no assurance that it will arrive safely or on time. The experience can also be daunting – users risk having their identity stolen, losing their money or having no way to ask a service question at a moment in need. Additional financial services, even when available to them, such as savings, credit, investments, and insurance products, often come with high fees, and can be deceptive.

Today, there is a strong need for innovation in the cross-border remittance market, but to date, innovation has focused mainly on digitizing the existing channels for sending money without addressing the inherent inefficiency of the approach. Rather than streamlining existing payment channels, use of remittances needs to be made more productive. Today, only a small proportion of remittances are utilized to establish small businesses, improve agricultural practices, or on other forms of productive investment. Rather than being used for long-term investment, remittances tend to be used for short-term consumption. How can this be solved?

One possible solution is to create remittance pools – regional or country-level remittances that are collected, pooled and invested in projects that benefit both the destination countries and the senders. This approach would allow remittances to be used for more sustained economic growth. By pooling remittances, a larger amount of money can be generated from existing remittance flows, which can then be invested in projects that have long-term benefits. Pooled remittances can also enable access to traditional financial services that would otherwise remain inaccessible due to high transaction costs or lack of trust with financial institutions.

Another possible solution is the use of remittance bonds, which are debt instruments backed by remittances that can be sold to institutional investors. By making remittance flows more visible and accessible, remittance bonds would increase the liquidity of remittance money, allowing it to flow more freely and enabling financial institutions to better understand remittances and develop financial products tailored for immigrant populations.

Another solution would be to incentivize dual use of remittances by offering senders the possibility to participate in remittance investment funds at discounted rates. In this way, a portion of remittances can be used to fund short-term consumption needs, while allowing a portion to be invested in a long-term equity instrument that is used to support local businesses and provides an investment return to the sender.

Last, the use of remittance aggregators, which allow remittances to be bundled and sent in one large payment, can reduce overall costs and increase the efficiency of remittances. In this way, remittances can be funneled into specific projects that are tailored to help local communities achieve sustainable economic growth. This includes investments in infrastructure, education, health care, social protection schemes and other development projects that require long-term commitments such as access to financial services.

The challenge in remittance innovation lies in developing a system where pooled remittances are accessible, secure, efficient and cost effective enough for small remitters to be able to participate. This requires financial innovation, including leverage of technology and advances in remittance regulations that can open up remittance markets around the world. It also requires a shift in mindset from using remittances for consumption to investment, as well as an understanding that remittances are an essential part of economic development. That said, to truly make a difference in the developing world, remittances must be managed in a more sustainable way through innovative products such as those discussed above. Only then will we see real growth and improved development outcomes.

CPM