Remittances are money transfers that people send to their families and friends in their home countries. They are an important source of income for many developing countries, especially those with large diaspora populations. Remittances can help reduce poverty, improve living standards, support education and health care, foster entrepreneurship and financial inclusion, and contribute to economic development and stability. According to the World Bank, remittance flows to low- and middle-income countries (LMICs) reached USD 626 billion in 2022, an increase of 4.9 percent from 2021. 
Figure 1 – Cost of sending $200, average by G20 sending countries, Q4 2019, Remittance Prices Worldwide, World Bank
However, sending remittances is not costless. Remitters have to pay fees to remittance service providers (RSPs), such as banks, money transfer operators (MTOs), mobile money platforms or fintech companies. They include exchange rate margins, commissions, taxes, and other charges. Transaction costs can vary depending on the amount sent, the destination country, the payment method, the delivery channel, the competition level among RSPs, the regulatory environment, and other factors.
How Transaction Cost Effects Remittance Service Worldwide
Transaction costs can have a significant impact on remittance flows and behavior. The higher the costs, the less money migrants are willing or able to send to their loved ones. This reduces the potential benefits of remittances for poverty reduction, financial inclusion, human development, and social protection in LMICs.
A recent study by Kpodar and Imam (2022) investigates how transaction costs influence remittances using a new quarterly panel database on remittances for 71 countries over the period Q1 2011 – Q4 2020. The study finds that cost reductions have a short-term positive impact on remittances that dissipates beyond one quarter. According to their estimates, reducing transaction costs to the Sustainable Development Goal target of 3 percent could generate an additional USD 32 billion in remittances, higher than the direct cost savings from lower transaction costs.
Figure 2 – Average fee as a share of a $200 USD remittance (2011Q1-2020Q4) (percent)
Figure 3 – Change in Average fee for a $200 USD remittance (2016Q1-2020Q1) (percent)
The study also explores how different country characteristics affect the elasticity of remittances to transaction costs. It identifies two types of factors: cost-mitigation factors and cost-adaptation factors.
Cost-mitigation factors are those that reduce transaction costs directly or indirectly by improving market efficiency and access. These include higher competition in the remittance market, a deeper financial sector, and adequate correspondent banking relationships. The study finds that these factors are associated with a lower elasticity of remittance to transaction costs.
How Users Adapt to High Service Costs
Cost-adaptation factors are those that help migrants cope with high transaction costs by increasing their awareness or ability to choose cheaper options. These include enhanced transparency in remittance costs, improved financial literacy, and higher ICT development. The study finds that these factors also coincide with remittances being less sensitive to transaction costs.
The study complements its panel analysis with microdata from the USA-Mexico corridor, one of the largest bilateral corridors in terms of volume and frequency of transactions. It confirms that migrants facing higher transaction costs tend to remit less, but this effect is less pronounced for skilled migrants and those who have access to a bank account.
The main policy implication of this study is that lowering transaction costs can boost remittance flows significantly but only temporarily unless other structural factors are addressed as well. Therefore, policymakers should adopt a comprehensive approach that combines cost-mitigation policies (such as promoting competition among RSPs) with cost-adaptation policies (such as enhancing transparency through comparison websites). This would help maximize the development impact of remittances for both senders and receivers.
In the context of transaction costs and their impact on remittance flows, it is worth mentioning the services provided by EzyRemit, a remittance service provider known for its low fees and competitive exchange rates. We offer an attractive option for migrants looking to send money to their families and friends in their home countries.
With our focus on providing cost-effective and efficient remittance solutions, EzyRemit aims to reduce the financial burden on senders and maximize the value of remittances received by recipients. By offering low fees and favorable exchange rates, EzyRemit contributes to facilitating the flow of remittances and ultimately supporting the economic development and well-being of communities in LMICs.
Read more: http://blog.ezyremit.com/news/106-surviving-cost-of-living-crisis
