What Explains Remittance Fees? Panel Evidence

IMF Working Papers, April 1, 2022

Source details

Paper uses data across 365 corridors to document time and country variation in remittance fees and to explore factors predicting variation in remittance fees.
Documents a general reduction in remittance fees over the past decade, although the goal of fees below 3 percent has not been met yet in many corridors.
Identifies cost- and risk-based constraints and market structure as barriers to lower remittance fees.

General reduction in remittance fees over the past decade, yet the goal of fees below 3 percent remains unmet in many corridors.
Higher transaction costs, due to a more rural population in the sending country and lower scale, are associated with higher remittance fees.
Lower risks—linked to the stability of fixed exchange rates and Internet rather than cash payment—are associated with lower remittance fees.
Remittance corridors dominated by banks and by few players are characterized by higher fees.

Cost-based constraints:
- More rural population in the sending country → higher transaction costs → higher remittance fees.
- Lower scale of operations → higher remittance fees.
Risk-based constraints:
- Stability of fixed exchange rates → lower risk → lower remittance fees.
- Internet payment (vs. cash payment) → lower risk → lower remittance fees.
Market structure:
- Corridors dominated by banks → higher fees.
- Corridors with few players → higher fees.

Address cost drivers in sending countries (e.g., rural access and scale) to reduce transaction costs and remittance fees.
Promote digital (Internet) payment channels to lower risk-related components of fees.
Enhance competition in remittance corridors to mitigate fee premia associated with bank dominance and concentrated market structures.
Recognize exchange rate arrangement stability (fixed exchange rates) as a factor correlated with lower remittance fees.