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Remittances from the United States: big, getter fairer

Remittances from the U.S. to other countries continue to grow. And new Feb 2013 regulations on remittances, created out of the Dodd-Frank Act, seek to impose better controls to protect the sender.

The Congressional Budget Office estimated in 2011 that in 2009 remittances from the United States to other countries totaled more than $48 billion, nearly 30 percent more in inflation-adjusted terms than they were in 2000. This outflow is over 10% of total worldwide remittances. According to the Economist, remittances from the U.S. make up about 15% of the total GDP of Haiti, El Salvador and Honduras. It appears that about 2% of Mexico’s GDP is remittances from the U.S.

In 2009, such remittances from the United States to other countries totaled more than $48 billion, nearly 30 percent more in inflation-adjusted terms than they were in 2000. People in Mexico receive more of the remittances sent from the United States than do residents of any other country.

CBO 2011 report excerpts:

Of the $48 billion in remittances in 20098, nearly $38 billion of that amount was personal transfers by foreign-born residents in the United States to households abroad. The rest, about $11 billion, reflected the compensation of employees who were in the United States for less than a year.

Here are excerpts from a late 2012 report by the World Bank on remittances, which includes a summary of new U.S. remittance rules effective 2/7/13.


Overview of World Bank report

Officially recorded remittance flows to developing countries are estimated to reach $406 billion in 2012, a growth of 6.5 percent over the previous year. These flows are expected to rise 8% in 2013 and 10% in 2014 to reach $534 billion in 2015.

 Remittance costs are still too high, averaging 7.5% in top 20 remittance corridors; the worldwide average cost is about 9%.

 US Remittance Transfer Rule, to be implemented in February 2013, will increase transparency for consumers and thereby market competition.


Facts about remittance flows

Officially recorded remittances to developing countries are expected to reach $406 billion in 2012, up by 6.5% from $381 billion in 2011(figure 1 and table 1). The true size of remittance flows, including unrecorded flows through formal and informal channels, is believed to be significantly larger. Compared to private capital flows, remittance flows have shown remarkable resilience since the global financial crisis, registering only a modest fall in 2009, followed by a rapid recovery. The size of remittance flows to developing countries is now more than three times that of official development assistance.

The top recipients of remittances in 2012 are India ($70 billion), China ($66 billion), the Philippines ($24 billion), Mexico ($24 billion), and Nigeria ($21 billion).

Cost of remittances

The global average remittance price (i.e., average based on all countries for which price data is available) has declined over the same period from 9.81% in 2008 to 8.96% in the third quarter of 2012. Russia is, by far, the cheapest source country with a weighted average remittance cost of 2%. In many large remittance source countries such as the GCC, the US and the UK, the average cost is around 5%.

New February 7 2013 remittance regulations

Remittance transfer providers are generally subject to State laws and are required to register with the US Department of Treasury’s Financial Crimes Enforcement Network, but are not uniformly covered by Federal consumer protection laws. The new remittance rule aims to implement the consumer protections created by the Dodd-Frank Wall Street Reform and Consumer Protection Act for certain electronic transfers to foreign countries. The new remittance rule, to go into effect on February 7, 2013.

The European Union (EU) has a broadly comparable rule to the US remittance rule, the Payment Service Directive (PSD) implemented in 2009. However, the PSD is primarily limited to transfers in EU member currencies and to intra-EU remittance transfers, although some countries (e.g. Italy) have extended the law to transactions to non-EU countries. The European Commission is studying the impact of the law on competition and entry barriers, and the need and feasibility of extending the law to payments in all currencies and international payments.

The new U.S. regulation is expected to increase transparency in pricing, competition and innovation in the remittance market not only in the US, but also in the rest of the world.

The new remittance rule has three key elements: 14 (a) A remittance transfer provider needs to provide a the sender with a disclosure of key transaction information, such as exchange rate, taxes and fees imposed and the total amount to be collected by the recipient, before and at the time of payment. The final receipt should also contain information on the name and contact details of the recipient, the date the fund is available for collection and the rights of the sender regarding cancellation and refund and error resolutions. (b) The second key component of the law relates to sender’s cancellation and refund right. It allows senders to cancel the transfer within 30 minutes of making the payment and for recurring payments, such as pre-authorized payments, at least three business days before the scheduled date of transfer. (c) The third component of the law relates to error investigation and remedy. A remittance transfer provider is required to investigate and remedy errors arising from an incorrect amount paid by the sender, computational error, and incorrect amount received by the designated recipient; and also errors arising from late delivery, deposit to a wrong account and certain fraudulent pick-up of the fund. A remittance transfer provider is responsible for errors committed by its agents.
The law provides for some exceptions. For example, under certain circumstances, remittance transfer providers are allowed to disclose an estimate, instead of the exact value, of the amount to be received by the recipient.

This sweeping rule will have immense implications for consumers and remittance service providers. It benefits senders by increasing transparency and certainty in the market. It reduces deceptive pricing and enables senders to shop for cheaper deals. Therefore, it may increase competition, potentially reducing remittance costs in the long-run.

In the short-run, however, it is likely to increase costs to remittance transfer providers for maintaining up-to-date information on exchange and tax rates of receiving countries and fees charged by third parties. The error resolution requirement may also expose remittance transfer providers to risks arising from certain fraudulent pick-ups. The cost can be significant for large sized transfers and since it may expose RSPs to litigations. Remittance dispensing agents may, as a result, resort to strict identification requirement, not always good for the poor who may lack access to these documents. Cancellation and refund rights may force remittance transfer providers to delay transfer until the cancellation period expires.

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