The process of globalization is growing ever faster, connecting every part of the world and creating numerous opportunities for people from all over. The record volume of remittances in 2018 and the prognosis of it growing to $550 billion in 2019 proves this. However, the costs of transferring money abroad remain a huge barrier that prevents not only individuals from benefitting from global opportunities but also entire economies. Technology helps change this situation revolutionizing the money transfer industry.
Global Impact of Remittances: Why These Costs Matter
Remittances are expensive. That fact remains true despite the changes that are slowly happening in this industry. And this is a major problem for economies because according to studies, remittances have a major impact on developing countries.
On average, about 7% of the total transfer amount will be lost to fees and other money transfer charges. This might not seem like that big a number to people who don’t rely on these transfers to survive. However, total losses, which are pocketed by banks, money transfer services, and other intermediaries, amount to billions. Using the 2019 remittance forecast stated above, 7% losses will amount to $38.5 billion.
One should never forget that in some developing countries, remittances make up over 40% of GDP. Now, imagine how much of a difference those $38.5 billion could make for these economies.
And through influencing local economies, remittances also affect the global economy. Therefore, reducing their cost is a priority not only for individuals who rely on these transfers but also for important financial organizations and regulatory authorities, including WorldBank. Even the UN announced that one of its Sustainable Development Goals is to reduce remittance costs to 5% at the least.
Considering the growing number of migrant workers, a fact proven by increased remittances, reducing the costs of these transfers is now one of the more effective tools that can help fight extreme poverty and the many problems that come with it.
How Technology Is Revolutionizing the Money Transfer Industry
A little over a decade ago, the majority if international money transfers went through banks with a smaller number of people using Western Union or MoneyGram companies. A few other options existed, but those were the most popular, and sometimes, the only available methods.
Unfortunately, today this is still the case, but the number of people using these services is going down fast and hard. This is because a much cheaper and efficient alternative has become available. Online money transfer platforms have revolutionized the industry through making these financial operations affordable. TransferWise, WorldRemit, Remitly, OFX, and MoneyCorp are among the best websites for this purpose. Each of these is unique in some way, but all of them offer affordable, fast, and secure international money transfers. These companies are already having an impact, and it is sure to increase as they increase their reach.
The efficiency of such businesses is aptly proven by their fantastic rate of growth. For example, Remitly raised $115 million in the latest funding round and announced its expansion to 11 European countries to go with Australia, Canada, the US and 28 Asian countries the company has covered before. TransferWise, one of the most successful fintech startups in history, now values at $3.5 billion and is actively taking on the industry giants, MoneyGram and Western Union.
However, the most important thing you need to understand about these companies is that they now seem to be racing for the lowest charged fee. Today, offering the cheapest money transfer possible seems to be the goal everyone aims for. And they can do this because of the way these services operate.
You see, these international money transfer platforms don’t include any physical transportation of the funds. Instead, you transfer the money from your bank account to your app account. From there, you send it to the recipient and they receive a converted amount in the local currency that comes from the company’s own account. As no money actually crosses borders, transfer providers aren’t charged with a variety of big fees and other expenses.
The result is a cheap transaction that can make remittances as affordable as the UN and the rest of the world wants them to see.
However, there is one big problem in this amazing system, and that problem is that these online money transfer services are only available in a limited number of countries. Quite often, you also won’t be able to use your account to both send and receive payments at the same time. It’s the lack of reach that currently forces millions of people to stick with the expensive and inefficient remittances.
The good news is that the increased demand for these services sees them grow rapidly. They aren’t on the level of Western Union or Money Gram yet, but today there are many online money transfer companies that enable making transfers to over 50 countries. As such businesses only started to appear recently and new seem to emerge every day, we might soon see the much-needed global remittance cost revolution and reap the benefits of a stringer world economy.