This Knowledge Paper makes an effort to elucidate the concept of remittances in the international context and is focused on the remittances sent by emigrants to their families back home, for domestic consumption and investment. The paper highlights the significance of International Remittances... to the global economy, details existing business models, and examines emerging trends as well as challenges faced by an industry which is to poised to play a bigger role in the globalization process.

1. International Remittances
Universal Banking Solution System Integration Consulting Business Process Outsourcing

2. “Remittance is the act of transmitting money to a Migrant-receiving country:
distant location to fulfill an obligation”
• Availability of employment
This Knowledge Paper makes an effort to
elucidate the concept of remittances in the • Friendly migration policies
international context and is focused on the • Shortage of skilled resources
remittances sent by emigrants to their families • Financial liberalization
back home, for domestic consumption and
investment. The paper highlights the significance • Abundance of natural resources
of International Remittances to the global
A few examples of such corridors (sender
economy, details existing business models, and
country-receiving country) are Mexico-US,
examines emerging trends as well as challenges
South Asia-UAE and India-US.
faced by an industry which is to poised to play a
bigger role in the globalization process.
Impact on Global Economy
Remittances Overview
This section highlights the magnitude and impact
In this globalizing world, migration of people of increased migration on the world economy.
from one country to another for employment
opportunities has become a common The World Bank estimates that remittances
phenomenon. Dominant migration corridors have in 2009 totaled $420 billion - out of which
been formed between various countries/regions. $317 billion went to developing countries - and
This is primarily due to the socio-economic involved some 192 million migrants or 3.0% of
conditions prevailing in the migrants’ countries the world population.
of origin and destination. A few examples:
Figures 1 and 2 respectively depict the remittances
Migrant-sending country: of top remittance sending and receiving countries
• Lack of job opportunity for 3 consecutive years.
• Lower wage rates
Figure 3 expresses the quantum of this incoming
• Social insecurity money as a percentage of GDP thereby indicating
• Political instability its significance to the destination country’s overall
• Extreme geographical conditions development. (Source: World Bank website)
Figure 1 Top Remittance-Sending Countries (figures in US $ million)
International Remittances

3. Figure 2 Top Remittance-Receiving Countries (figures in US $ million)
Figure 3 Remittances as a Percentage of GDP
Operating Models in the Remittance Business banks globally, through which remittance
transactions are routed
An International Remittance business may follow
the conventional banking model or any of the Figure 4 illustrates the Nostro-based setup,
non-banking models. wherein the Beneficiary Bank has an account
with the Correspondent Bank, while Figure 5
Conventional Banking Model shows the generic process involved in a remittance
In this model, an end-to-end remittance transaction transaction based on a Nostro account model.
involves the following parties:
• Remitter’s Bank - the bank where the
remitter has an account that is debited for
transferring money to the beneficiary
• Beneficiary’s Bank - the bank where
the beneficiary of the remittance has an
account that is credited for the remittance
money received
• Correspondent Bank (only in cases where
the above-mentioned entities do not have
a direct business tie-up) - an intermediary
bank which has associated with various Figure 4 Nostro-based setup
International Remittances

4. Non-Banking Channels
Non-banking players play a vital role in the
remittance space and have a larger share in the
Global Remittance business than conventional
banks. These entities operate in various forms:
Money Transfer Operators
MTOs (Money transfer Operators) like Western
Union and Money Gram have a network of
agents across the globe and serve as non-bank
remittance channels.
The remitter can visit an MTO outlet and pay cash
Figure 5 Remittance Transaction Process in a in foreign currency to send money to any part of
Nostro-based Setup
the globe where the MTO’s agent is present. The
Modes of Remittance receiver can visit the MTO agent at his location
and collect the money in local currency.
There are various Origination Modes, which are
Figure 6 depicts the process for an International
used by the remitter to transfer money.
Remittance transaction effected through an MTO.
The remitter can issue a remittance request to
his bank either
a. by visiting the branch and furnishing a
Remittance Instruction Form prescribed by
the Remitting Bank, bearing all details
necessary for effecting the remittance along
with an account debit mandate
or
b. by dropping a cheque from an account with
the Remitting Bank along with the Remittance
Instruction Form
Based on the details in the form, the Remitter’s
Bank debits his bank account and sends a
SWIFT message to transfer the money to the
Beneficiary’s Bank.
Figure 6
Listed below are the various Disbursement
Modes of remittance using which the money
can be tendered to the beneficiary. The settlement between the MTOs in the two
countries takes place through their partner
1. Direct Credit to the beneficiary’s account
banks. On receiving the remittance amount in
with the Beneficiary Bank
cash from the remitter, MTOs deposit those
2. Disbursement of Cash to the beneficiary on funds in their local bank accounts. MTOs
furnishing appropriate photo - identification/ request their bank to transfer the consolidated
address proof in the event of his not having amount to the bank account of the MTO agent
a bank account in the receiving country. In order to minimize
3. Transfer of Money by the Beneficiary costs, only the net amount (total amount to be
Bank to the beneficiary’s account with sent to the recipient country minus total amount
some other local bank using the local to be received from that country) is sent.
payment mechanism
Please note that the beneficiary receives the money much
4. DD issuance in the name of the beneficiary before the settlement between the MTOs
International Remittances

5. Figure 7 Fund Movement for an MTO
Costs have started spending on advertising and
brand building.
The fixed costs incurred by an MTO are
listed below: 4. Compliance and Regulatory Costs
Various mandatory compliance/regulatory
1. Origination and Disbursement Agent
procedures in the remittance business are
Network Costs
listed below. Expenses involved in following
Setting up agency networks/outlets in the them form a sizeable part of the total cost.
country of origination and disbursement
• KYC of Remitter / Beneficiary
forms a significant portion of an MTO’s
To prevent practices like transfer of
costs. Though traditionally, MTOs have had
money between anti-social elements,
proprietary agents, of late, third party agents
the “Know Your Customer” checks are
have also been appointed by Western
done by the Remitter’s and the
Union and Money Gram. While these agents
Beneficiary’s Bank. KYC would typically
receive a fixed minimum compensation,
involve obtaining documents such as
major incentives are linked to the number
photo-ID, address proof, passport
and value of transactions. The MTOs thus
details, driving license details etc.
share the risk of expanding their network
with these partners. • Regular Reporting of Transaction
Details to the Central Bank
2. Processing and Money Transfer Costs Central Banks place limits on the value
of an individual’s remittances within a
These are the fees to be paid to the
certain time frame.
local bank which buys and sells various
Additionally, institutions are also
international currencies, on behalf of the
supposed to comply with Anti-Money
remittance service provider. These costs are
Laundering requirements and report
linked to the aggregate transaction value
any suspicious/fraudulent transactions
and MTOs with large volume transactions
to the Central Bank.
could negotiate lower fees.
5. Administrative and IT costs
3. Marketing Costs
The MTO will also have to bear office
This simple transaction processing business maintenance expenses as well as system
has now become commoditized and players development and maintenance costs.
International Remittances

6. Risks Exchange Houses
Exchange Houses are extensively used for
Currency Hedging
remittances from the Middle East. Unlike the
When there is an International Remittance banking channel, this channel is based on
transaction through an MTO, there is a time lag Vostro accounts i.e. the accounts maintained
between fund availability to the recipients by exchange houses with various banks in
(money is generally received the same day) the beneficiary countries. These accounts are
and actual international transfer by the MTO’s pre-funded by the exchange houses.
partner bank through its Correspondent Bank
The Remittance Transaction Process
(generally takes 3 business days). This implies
a currency rate risk which is borne by the MTO.
Step 1 The remitter deposits the remittance
money in the overseas currency in cash
Salient Features of the MTO model
at the Exchange House counter.
1. It is the fastest mode of transfer since the Step 2 The exchange rate and the transaction
beneficiary can receive the money within fee are communicated and confirmed
seconds after it is sent. over the counter.
2. People without bank accounts can also Step 3 The beneficiary account details are
transact in this model. provided by the remitter.
3. The cost per transaction is lower compared Step 4 The exchange house instructs the
to other models. Beneficiary Bank with whom it has a
4. MTOs have the biggest market share in the tie-up for transferring the requisite
remittance business. amount in the beneficiary country’s
5. Setup costs are high, acting as a barrier for local currency using one of the
new entrants. following modes:
Figure 8 depicts the Vostro-based setup wherein the Correspondent Bank has an account with the Beneficiary Bank
a. E-mail: The exchange house sends Costs: The costs involved are similar to that of
e-mail to the Beneficiary Bank the MTO channel.
instructing it to transfer the amount
to the furnished beneficiary account. Salient Features of the Exchange House
Channel
b. Integration of exchange house and
Beneficiary Bank systems 1. Since the Vostro accounts are pre-funded,
the beneficiary amount is paid based
c. Beneficiary Bank’s proprietary on the funding in this account. Hence,
remittance platform on receiving the Exchange House’s
International Remittances

7. instruction, the beneficiary receives the costs
amount almost instantaneously.
1. Creating a network of banks in the countries
of origination and disbursement would be
2. The Exchange House has to fund its
a major cost.
account with the Beneficiary Bank; hence
the latter enjoys the float. 2. The cost involved in creating and maintaining
a robust and scalable IT platform would also
3. The Exchange House can draw a DD on its be significant.
Vostro account in favor of the beneficiary
and hand it over to the remitter over the Salient Features of the Online Model
counter, which can then be dispatched by
1. Transaction is effected from the convenience
courier or even sent along with a friend
of one’s home.
travelling back home. Alternatively, the
DD can also be drawn in favor of the 2. The transaction can be effectively tracked.
remitter, who can then carry it back to his 3. TATs are on the higher side (3 to 5
home country on his return and get it working days).
cleared there. This is a secure option for
4. The remitter has to undergo a one-time
blue collar workers who would otherwise
registration process which has a TAT of 4 to
have to travel with hard cash.
5 working days.
Emerging Non-Banking Channels
White Label Platform Providers
Online Channels A White Label Platform provider is a variant of
the online platform channel, wherein a third
Online Players, which provide platforms party enables banks and FIs operating in the
encompassing the entire remittance process, remittance corridors to launch remittance
are a recent development. They have created services by providing the following:
global networks with banks/FIs in origination
• A gamut of innovative products based
and destination countries. From the comfort of
on the latest demand, which could be
his home, the remitter can initiate a remittance
further customized to meet specific
request by registering himself on the online
requirements of banks and end customers
entity’s website and furnishing his and the
in various geographies
beneficiary’s bank account details.
• Best-in-class technology for new age business
The Remittance Transaction Process
• Marketing and sales support for promoting
the product range
Step 1: Select the recipient country and enter
the amount to be remitted • 24*7 operations support in case the client
proposes to outsource transaction processing
Step 2: Choose the mode in which the recipient
• Round the clock customer service through
would receive funds
toll-free numbers, email support and online
• Cash pickup live chats
• Direct deposit into bank account • Built-in international compliance and
regulatory practices
• Cash delivery to the recipient's home
• Adherence to the best practices in IT security
Step 3: Choose a payment method to confirm
Costs:
the money transfer
1. The major cost involved is in hosting and
Through a card or by debiting his account
maintaining the platform.
with the local bank in the remitting country
2. Marketing expenses form a significant part of
Step 4: Notify the recipient about the transaction the total cost.
International Remittances

8. Salient Features of a White Label Platform b. Offer high-level reach and scalability
Provider c. Bring about efficiency in operations
1. The provider need not be part of the d. Ensure more consistent and faster
banking/financial domain. delivery of remittance services
2. Without investing in technology and
This system is currently being evaluated by
operations, banks and FIs can use this
leading banks and institutions, which provide
plug-and-play offering to provide world-class
remittance services.
remittance services.
3. It provides all the advantages of an online 6. Online offerings on the originating side are
platform channel to the end customer. expected to increase in importance, in line
with the growing education levels and
4. The platform provider’s economies of scale computer proficiency of immigrants.
reduce the per-transaction cost.
7. Increasing Role of Software and Analytical
Emerging Trends in the Remittance Business Tools
1. MTOs are leaders in the remittance space, In addition to SWIFT and the local payments
but are being challenged by other channels. system in destination countries, which
form the IT backbone for the remittance
2. The following are turning out to be decisive
business, in-house systems are also being
factors while choosing a remittance provider:
used to streamline various processing stages
a. Transaction cost involved in a remittance transaction. Also,
b. Exchange Rates several CRM and web analytics software
c. User-friendly procedures are being used by the service providers
d. TAT of the transaction to analyze the transaction data for the
e. Transaction tracking mechanism following purposes:
f. Reach in the destination country a. Understanding customer behavior
b. Understanding business cycles
3. Agent exclusivity, one of the strong
competitive advantages of MTOs on both c. Segmenting customers
the remitting and receiving side of money d. Launching products targeted at specific
transfers, is eroding and agents are customer segments
increasingly shifting away from the exclusivity e. Designing marketing campaigns and
arrangement. incentive schemes for specific customer
segments
4. To increase their market share, conventional
banks are leveraging their existing client f. Aligning sales force and customer support
relationships and are coming up with channels for better customer service
innovative offerings such as prepaid g. Effective customer due diligence through
cards for the beneficiary. This enables them
i. Transaction monitoring
to provide account-to-cash and cash-to-
cash offerings to the customer, allowing the ii. Customer screening against published
beneficiary to withdraw cash in tranches. black lists
iii. Identification of risks and suspicious
5. SWIFT has come up with a Workers’ transactions
Remittances solution for banks and FIs
for settlement of cross-border person-to- 8. Role of Central Banks in Recipient
person payments. It aims at providing a Countries
standardized, off-the-shelf operational and
technical framework to Central Banks in recipient countries are
a. Connect new entities playing the role of facilitator and promoter
International Remittances

9. to extract maximum benefit from the • The number of migrants is inversely
opportunities provided by International proportional to the remittance costs across
Remittances. They are: different regions and service providers. This
seems to suggest an important volume
a. Allowing migrant workers to open foreign effect that works either through scale
currency accounts so that economies and/or higher competition in a
large market.
- their earnings could be retained in foreign
currency and can be exempted from • Corridors with higher income per capita in
foreign exchange regulations both the sending and receiving countries,
exhibit on an average, higher costs, which
- better interest rates could be offered and could reflect higher prices of non-tradable
the interest income could be made tax free. goods, such as services, in general.
b. Facilitating securitization of the future • Competition and market structure matter.
flow of remittances, which will result Corridors with a larger number of providers
in a better sovereign rating enabling and countries with more competitive
local banks to raise cheaper and banking sectors exhibit lower costs. On the
long term finance needed for the other hand, costs are greater in corridors
country’s development. where banks have a higher share in the
remittance business.
Challenges Faced by the Industry
b. Grey Channel
a. Transaction Cost
The Grey Channel eats into a significant
The cost that the remitter has to bear varies share of the remittance business. Apart
from 2% of the remittance amount and from the threat it presents to the established
may go as high as 10%, depending on the players, it also poses a security threat
following factors: since the money remitted could be used for
anti-social purposes. Since this channel
1. Exchange rate margin of the service does not have to comply with any regulatory
provider procedures, it offers lower transaction costs
2. Fixed fee being charged by the service and faster TATs to the remitter.
provider
3. Tax incurred c. Reconciliation of Remittance Transactions
4. Origination mode (Online, branch etc.) Since a remittance transaction flow involves
chosen by the remitter processing by multiple parties, a significant
5. Disbursement mode (Cash, DD, other percentage of transactions are non-STP
banks’ account etc.) chosen by the remitter due to various reasons such as incorrect
6. Revenue sharing arrangement between submission of details, account closure by
the Correspondent Bank and the beneficiary, system errors, manual errors by
Beneficiary Bank operations staff and communication gaps
between the parties involved- such as failure
Central Banks have constantly endeavored to to convey information regarding changed
bring down the costs. procedures -resulting in breach of TATs and
customer dissatisfaction.
In October 2009, The World Bank Development
Research Group published a paper on factors d. Revenue Sharing Arrangement
influencing remittance costs based on data
gathered across 119 country corridors. This report In the absence of a globally adopted
reveals the following trends which could help standard model, the revenue-sharing
address the issue. arrangement between the Remitter’s Bank,
International Remittances

10. Correspondent Bank and Beneficiary Bank Vostro - Local currency account maintained by
is ad hoc, resulting in disputes and at times, a local bank for a foreign (correspondent) bank.
disengagements between the parties. For the foreign bank, it is a Nostro account.
Moving Ahead…. SWIFT - Society for Worldwide Interbank Financial
Telecommunication supplies secure messaging
Though the International Remittance industry services and interface software to wholesale
is out of its infancy, it is still evolving and financial entities
catching up with the globalization process. TAT - Turn Around Time
Roadblocks and unaddressed issues continue
to exist. The pace of reform is slow and the GDP - Gross Domestic Product
business is still commoditized. Several political, FI - Financial Institution
social and economic factors defining the
business will have to be gradually tackled through DD - Demand Draft
various initiatives like CRM - Customer Relationship Management
ü
Promoting liberal movement of labor
KYC - Know Your Customer
ü progressive regulatory changes
Bringing
Central Bank - The body which regulates the
ü
Delivering services efficiently banking industry within a country
ü
Increasing market penetration
STP - Straight through Processing
ü products appropriately
Pricing
ü
Managing customer relationship References
ü
Developing innovations in technology Web-based research on many sites including the
ü up a cost-effective operational
Setting following:
infrastructure
1. www.worldbank.org
Planned and focused efforts in the above areas 2. www.swift.com
combined with political will and business 3. www.westernunion.com
acumen would help this industry leap forward and
4. www.moneygram.com
contribute significantly to the globalization process.
5. www.m2inet.icicibank.co.in
Glossary and Abbreviations 6. www.remit2home.com
Remitter - Person working abroad who intends 7. www.xoom.com
to send money across the border to his family
members back home
Beneficiary - Person who receives money from Author
the remitter
Akhil Nikam
Nostro - A banking term to describe an account Senior Consultant - Finacle
one bank holds with a bank in a foreign country, Infosys Limited
usually in the currency of that foreign country
International Remittances