Credit: (photo: Henry Romero/Reuters/Newscom)

Chart of the Week

Fintech Can Cut Costs of Remittances to Latin America

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For Latin Americans living abroad, sometimes sending money back home can be a complicated and costly ordeal. Most people rely on traditional banking methods and money transfer operators to send their remittances. But using these financial services for cross-border payments is costly—about a 6 percent charge on the total amount—and these fees are typically paid by the sender. This means less money left over for the family or friends receiving the money.

A more cost-effective approach for Latin American countries relies on using fintech, like mobile banking, to send money across borders, according to a recent IMF staff Working Paper.

Our chart of the week shows Latin America’s share of remittances transmitted with mobile money along with its overall share of remittances on a global scale. As the chart shows, Latin America’s use of mobile money both to send and receive remittances is relatively low—despite the region’s high share in total world remittances, which was about $80.5 billion in 2017. 

Fintech is evolving rapidly in Latin America.

This stands in contrast to Sub-Saharan Africa, which is more advanced in using mobile money for remittances. Globally, Latin America’s share of remittances is larger than Sub-Saharan Africa’s share. But, as the chart shows, Sub-Saharan Africa accounts for the bulk of global mobile money remittance transactions, followed by East Asia and the Pacific.

Phone home

With Latin America’s large population abroad sending home sizeable remittances—about 1.5 percent of the region’s output in 2017—greater reliance on newer fintech options may help reduce the costs of cross-border transfers.

According to the paper, mobile operators and mobile money can transmit remittances at a relatively low-cost, about 3 percent, compared to the cost of transfers using more traditional financial service providers, which is about 6 percent.

This is critical when remittances are a source of income for many countries in the region. For instance, in El Salvador, Haiti, Honduras, and Jamaica incoming remittances exceeded 15 percent of each country’s GDP.

Greater fintech availability

The good news for remittance senders and recipients is that fintech is evolving rapidly in Latin America. For instance, according to a report by the InterAmerican Developmental Bank and Finnovista, fintech startups in the region focusing on payment-related services are growing—about 61 percent growth in 2018. Further, global fintech companies are starting to partner with local mobile network operators, money transfer operators, and banks in the region to provide financial services.

Policies have a role to play as well. Across the region policymakers are already taking measures to improve the efficiency of payment systems. In addition, a supportive regulatory environment will be crucial to spur the development of fintech solutions for remittance transfers in Latin America.

For example, rules to streamline licensing for mobile money and international remittances, as well as for remittance service providers to both send and receive cross-border payments may help support fintech development and more tech startups.

Further, countries may support partnerships between traditional money transfer operators (like local banks) with established networks and mobile money providers.

Countries in Latin America may also support more global remittance hubs to connect with other remittance service providers, which would help to lower costs.

At the same time, policies should also guard against risks related to cyber security, money laundering, and terrorism financing.

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