Oversight Hearing on "Accounting and Investor Protection Issues
Raised by Enron and Other Public Companies."

Introduction

Like other people, Latin American immigrants have and fulfill family obligations. One important duty is provide a financial assistance to their relatives in their country of origin. Therefore, using a money transfer mechanism is vital to immigrants. However, for these immigrants and the Latin American remittance recipient relatives, money transfer charges as well as exchange rate differentials generally continue to be very high, seriously constraining how much support immigrants can offer their families.

Fees charged and exchange rates incurred to send and receive remittances can add up to 15 percent of the amount sent. It is in the interest of nations and families receiving remittances to increase the quantity and flow of remittance monies. Increases can be achieved in part by reducing the share lost to transaction costs, and in part by increasing the gross flow of migrant remittances and investments.

Competition among both existing financial service companies and potential new remittance transfer entrepreneurs needs stimulating. Greater competition lowers prices and increases services offered to actual and potential customers who send remittances abroad. The private sector transferring remittances can contribute to increased remittance flows by lowering transaction costs and offering development alternatives to individuals and groups through their services. More importantly, remittances can serve as an instrument to incorporate migrants into the financial and banking system.

The majority of Latin American immigrants residing in the United States, honor a commitment to their families and communities by sending them remittances. Latino immigrants who earn less than $25,000 a year tend to send somewhere around $200 a month, that is, nearly ten percent of their income. Thus, the cost of remitting money is of great significance to migrants. Moreover, money recipients, who are generally families earning below average incomes, also value the remittance they receive and are affected by any cost incurred through unfavorable exchange rates.

Today’s total remittances from the U.S. to Mexico, Central America, and the Caribbean are estimated to be at least $15 billion annually. In comparative terms, remittances tend to be more than 10 times greater than U.S. foreign aid to these countries; they are equivalent to five percent of Mexico’s exports, seventy percent of El Salvador’s exports and nearly one quarter of Nicaragua’s national income. El Salvador, the Dominican Republic, Jamaica, and Guatemala are among the major remittance recipients in the Caribbean Basin. In 2001 the combined amounts remitted to these four nations added up to over five billion dollars, which is equivalent to 50 percent of those countries’ trade through the Caribbean Basin Initiative.

Table 1. Remittances to Latin America, 2001,

Remittances continue to flow to Latin America without showing signs of decline. As Figure 1 shows, monthly flows of remittances in selected countries have continued an escalating trend in the past three years. Within this context, governments and businesses are important agents in stimulating the flow of remittances. Businesses sell services facilitating the transfer of remittance funds, but transfer charges to consumers continue to vary.

The players within the remittance industry constitute a crucial piece in the puzzle of economic development. This testimony is based on a report that analyzed more than 70 money transfer companies. Data gathering was conducted to estimate fees charged, exchange rates used, services offered, and types of distribution networks in place. Money-remitting companies in nine different countries were studied, but central focus was placed on four countries; Guatemala, El Salvador, the Dominican Republic, and Jamaica. The other countries that were analyzed were Mexico, Haiti, Colombia, Nicaragua, and Cuba.

This report’s findings show that:

• In the past three years, charges have declined significantly in some countries.
• Transfer costs incurred by customers range from $7 to $26 for sending $200.
• Fee charges decrease with competition. Remitters to Mexico, El Salvador, and Guatemala charge lower fees than companies sending money to Jamaica and the Dominican Republic. For countries, like Cuba or Haiti, where there are more market restrictions, charges are higher.
• Distribution networks demanding lower commissions tend to promote the decline in charges. The use of electronic interfaces also helps in reducing costs.
• A growing number of companies offer money transfers in dollars. This practice does not guarantee that received remittances will be not involve disadvantageous exchange rate charges as banks can sell dollars at adverse exchange rates. (This topic requires further study and is beyond the scope of this report.)
• Banks, credit unions and credit and savings cooperatives are increasingly opening money transfer franchises and are offering some of the lowest charges at about $9. However these institutions continue to have a small and limited reach. In some cases, the home country distribution networks are not well established within the credit union system.

Perhaps one of the most significant changes in the remittance market is the decline in transfer costs. Three years ago the cost of sending remittances to different Latin American countries averaged about 15.0% of the amount sent. Those transfer costs have now declined. In 1999, for example, Western Union charged $22.00 for transferring up to $200.00. By 2001 that charge was dropped to $15.

Although there is a relative decline in the price for customers, fees plus the exchange rate applied to the amount received in local currency still show a wide range in prices. For example, immigrants pay from $6 to $26 to send $200. Figure 2 demonstrates the wide fee range incurred by senders and recipients. One important aspect appearing in Figure 2 is price elasticity. Remittance charges decline with volume sent, and particularly observed in charges for amounts ranging from $150 to $300. This finding is important as it shows that prices tend to decline when customers send greater amounts; only 15 percent of companies charge over 9.5 percent for $300. However, the majority of customers send less than $200 a month in remittances and therefore do not enjoy the benefits of price elasticity in the $300 amount (See Table 2). This means that the majority of senders tend to pay over $15 in fees. Table 3 shows the fee per amount sent.

Table 2. Percent distribution of remittances sent by immigrants

Source: IADB Survey on remittances.

Table 3. Fees Charged on Amount Sent

Source: data compiled by the author

These charges represent a significant cost to clients in the money transfer industry, where senders tend to be relatively poor Latin American immigrants, for at least three reasons. First, Latino immigrants are generally low-income people. According to the U.S. Census nearly 33 percent of Latino (or Hispanic) households earn less than $20,000 a year. Second, about 46 percent Latin American immigrants are not incorporated into the financial systems through banks. About two thirds of immigrants cash their salary checks in check cashing stores that charge exorbitant fees. Many of these same immigrants then use what remains of their income to send remittances back home. In this common scenario, immigrants are penalized in both receiving and sending their earnings. Third, the real cost of sending money is not higher than $6. This means that costs of receiving and sending income remains a challenge to the majority of immigrant remittance senders.

Table 4. Household Income by Race

Source: U.S. Census Bureau, CPS March 2000.

The companies that charge above 9.5 percent tend to have a significant market share in the recipient countries. Specifically, while only 24 percent of companies charge fees above 9.5 percent of the principal, they have the largest market share. Therefore these fees affect a larger number of immigrants. According to the IADB survey on remittances, 41 percent of senders used Western Union and MoneyGram.

Table 5. Remittance Companies Charging over $15 on $200 Remittance

The price of sending remittances varies significantly from one recipient country to another, and the level of market competition for sending money to a specific country serves as a key determinant of that country’s average price range. When the results are disaggregated by country, the price of sending ranges from $7 to $26. Mexico is the country with the lowest fees among the nine countries studied. It is also the country with the greatest market choices for customers. The competition in Mexico ranges from small businesses to large corporations. Significantly, among the reasons for expanded competition is the entrance of the banking industry into the remittance market. Bancomer, Banamax, and Bancomex are major competitors in the industry, offering direct money transfer services (like remittance agencies) and/or working jointly with money transfer companies such as MoneyGram and Ria Envia. The major competitor, Western Union, has gradually lost its market share in Mexico due to the entrance of many new competitors. The competitive market may make it more difficult for remittance companies to survive. As prices have gone down in Mexico, many companies have been unable to stay in the competition.

Following Mexico is El Salvador, which also exhibits greater competition and is the second largest remittance recipient in the Hemisphere. While Western Union remains a dominant player for El Salvador with about 15-20 percent of market share, it also has to compete with other companies. Its first major competitor is Gigante Express, a courier company that mostly sells and sends money orders, and which has also nearly a quarter of of the market share. Second, competition exists with commercial banks. BanSol, BanComercio, Banco Agrícola, and Banco Cuscatlán operate in the United States as money transfer agencies and compete with Western Union and Gigante Express. Banco Agrícola, the largest bank in El Salvador, has about 10 percent market share. The bank offices in Los Angeles transfer nearly two hundred million dollars a year. BanComercio has almost the same market share as Banco Agrícola.

The Dominican Republic has more than fifteen well-established companies remitting from the United States. These companies are grouped into a conglomerate through an association named the Associación Dominicana de Empresas Remesadoras de Divisas, Inc. The members of this association generally have similar prices. As Table 8 shows, remittances to the Domincan Republic tend to have relatively higher prices than other countries with similar characteristics (high volume, significant competition, and immigrant demographic concentration). These companies generally offer two kinds of charges: $8+5 percent (when sending in dollars) and $5+5 percent (when sending in local currency) of the amount sent. Remittance companies in the Dominican Republic usually offer a home delivery service as part of their fees. In other countries, home delivery generally incurs an extra dollar fee. The Asociación claims that their charges offset price fluctuation. This claim is bolstered by the fact that the standard deviation of the fees is the lowest among the different countries studied, that is, $3.7. In other countries the standard deviation is over $5, except for Mexico.

In Jamaica, money transfers also tend to be more expensive. Western Union, through its arrangement with the local firm Grace Kennedy, controls the majority of Jamaica’s remittance market. With about 200,000 transfers a month coming from the United States, Grace Kennedy, manages somewhere between 65 percent and 70 percent of the market share. Another competitor with operations in the United Kingdom and the United States is Jamaica National Overseas, which is part of Jamaica National Building Society. In 2001, Jamaica National Overseas transferred $95 million from the United States, which amounts to 10 percent of the market share. These results show that there are differences among countries for the charges to transfer money. Competition among remittance sending companies is a key variable explaining the country differences. However, there may also be other factors involved, such as the type of institution participating in the money transfer process or the technologies employed.

Charges vary depending on whether money is sent in local or foreign currency. Money transfer institutions tend to charge more when the amount is sent in U.S. dollars (as the company looses the ability to profit with the foreign exchange). Conversely, if the money is sent in local currency at lower fees, the recipient loses a percentage of the remittance in the foreign exchange rates.

Table 6. Fee charged and Type of Currency

According to company officials in different countries and businesses, most remitters request the money be sent in the country’s local currency. Because of the exchange rate losses, remittance recipients’ relatives receive less than the (monthly average) $200 that is sent to them. On average, recipients lose nearly $60 a year from the unfavorable exchange rates. Since the average household income for Central American and Caribbean families is below $200 a month, the price of sending and receiving remittances amounts to more than an additional month’s income.

Table 7. Average Fees charged to send $200

Despite average prices of over eight percent the amount sent plus over two percent in the exchange rate applied, there are some businesses that offer lower priced transfers (i.e, four percent of a $200 remittance). Banks, for example, tend to charge less than $10 for transfers, whereas money transfer companies charge more. Nearly sixty percent of banks but only 30 percent of money transfer companies charged $9 or $10 for any transaction under $200 (See Figure 4). These companies tend to be located in El Salvador, Mexico and Guatemala, the most competitive markets.

There are numerous reasons why banks offer lower charges. The home country offices of banks involved directly in money transmission a) are generally the largest banks in the country, b) have the capacity to acquire capital upfront to back the outflow of transactions, c) have an already-existing distribution network, d) are better known by the sending clientele, and e) concentrate on attracting volume from demographically concentrated areas where migrants of the bank’s country reside. Smaller players such as money transfer companies often have to find an investment partner as well as banking or other financial institutions to arrange distribution schemes and are therefore likely to incur extra costs.

Nevertheless, the availability of banking institutions involved in money transfers is limited and in most cases banks do not provide an inexpensive service, merely a cheaper one. In addition, banks often respond to the presence or absence of competition, and do not necessarily offer a lower fee service. For example, Jamaica and the Dominican Republic have banking institutions with branches operating as money transfer companies in the United States. However, their charges are not necessarily lower than the other non-banking institutions remitting to these countries (see Table 8).

Table 8. Financial Institution Charging Less than $10.00 for a $200 remittance

(as % of total charges)

As noted, prices set by companies vary significantly. Operating costs to transfer money include service to the customer through a point of sale with an agency; use of the electronic interface to transfer the amount; availability of capital to back the money upfront, establishment of a distribution network on the receiving side; and customer service. Generally for money transfer companies, the cost of executing an individual transaction runs somewhere between three to six dollars per transfer (some analysts argue the costs are even lower). Banks already have an infrastructure in place in the home countries, therefore their costs may be lower. One company which charges $10 to remit to Mexico and Central America explained that their company spends 40 percent on transfer costs and the agent, another financial institution, retains 50 percent of the fees. In addition to the remaining 10 percent, this company uses the foreign exchange rate as a source of profit. Their primary means for this business to increase profits was to increase volume and keep costs down. In contrast, other companies share less than 50 percent of the fees with the agents. Furthermore, some remittance businesses cut out the need to pay agents by opening their own agencies and only need to cover overhead expenses. These entities are likely to have lower expenses.

At least one third of companies transfer remittances at $9 and $10, and some offer $7 transactions, which still make a profit (even without including the exchange rate applied).

Companies charging more than $10 and often over $14 per remittance transfer can not explain why their costs are considerably higher. Western Union generally argues that their charges are higher by virtue of offering a ‘premium service’, that is a service that is 100 percent guaranteed in terms of location, speed, reliability, and safety. Western Union does have a sophisticated and widespread company infrastructure. They have agencies throughout the United States and partner companies in Latin America. This capacity has rendered this company the remittance institution with the highest revenues in the Western hemisphere. Latin America is Western Union’s most important market after the United States, Canada, and Western Europe, and represents over twenty percent of the company’s revenues. The company does appear to have two advantages over many of its competitors. First are Western Union’s extensive geographical locations. Second, but more ambiguously, Western Union may offer better customer services than some of the competition. For example, Western Union operating as Vimenca or Grace, Kennedy notifies recipients that their money has arrived and provide toll free numbers to their clients so that they can inquire about the status of a transaction. However, other companies have proven capable of offering very similar services to Western Union while charging lower fees.

Although remittances are regarded as an important source of income by recipient countries, charges continue to be high. With prevailing advanced technology in which money transfers can (and do) cost very little or nothing to the most savvy senders and recipient, it is worth asking how these advantages can be extended to common remitting immigrants. For example, a person with a U.S. bank account could allow his or her relatives in the home country to withdraw cash with an ATM debit card sent by the account holder while only paying for the use of the ATM.

Expanding sending methods as well as competition (or leveling the playing field) are factors that help reduce money transfers. Moreover educating customers about costs and charges is another important method. In Latin America there is a need to greater facilitate money transfers of nay kind, be they remittance, savings, investment, or consumption. A comprehensive effort to support senders and recipients should foster an environment in which remittances are less costly and can also have a developmental leverage.

Only six out of ten Latin American immigrants use, or consider themselves to have meaningful access to, bank accounts. The effects of being unbanked are significant. People are not only susceptible to higher costs and difficulties on a daily basis, but also they lack the ability to establish credit records and obtain other benefits from financial institutions. Helping migrants to enroll in the banking industry would help ensure lower fee transfers. Some government and private institutions are already engaged in that effort and could target a strategy linking remittance transfers with banking options as a way to attract migrants into the financial system.

As with a large range of organizations, oversight boards are important institutions that help guarantee corporate transparency and accountability as well as compliance with standards for products and services. The U.S. needs such an institution on a nation-wide basis for money transfers. A remittance oversight organization could include representatives of money transfer companies as well as customers and other independent and knowledgeable parties. It could serve as or establish an independent board that reviews practices and other issues relating to remittances to Latin America (and elsewhere).

Remittance recipients are seldom aware of many of the practices and methods of the remittance companies. For example, many senders do not know about the different exchange rates that prevail among many companies. Furthermore, there is no independent research or checks on effectiveness or efficiency of the various services. Non-governmental organizations could contribute significantly by educating money recipients about being informed customers.

The experience of Quiesqueyana, Vigo, and RapidMoney of partnering with small banks and credit unions points to important options to help reduce costs (see annex). These three companies offer an alternative to remittance recipients that enhance their use of this income source through lower fees or access to an ATM for cash or a Visa debit card for purchases. Expanding these alternatives will also increase market competition and improve an imperfect remittance market.

Another important strategy to help lower charges is to increase bank-to-bank agreements in the U.S. and Latin America regarding money transfers. Currently, banks generally charge over $30 for an international wire transfer. However, when the prospect of increased volume is considered, banks often show interest and are prepared to lower these fees. Harris Bank and Wells Fargo are important examples of this type of initiative. These banks arrange money transfers through Mexico’s Bancomer. Money recipients in Mexico are also encouraged to use the banking industry by the mere act of receiving their currency at a bank rather than at a money transfer agency.

Debit card access to shared bank accounts is one way to greatly reduce transfer charges. But it is important that credit unions and banks encourage money recipients to have credit union or bank accounts as well. Credit unions and other banks can enhance the welfare of remittance recipients by encouraging them to opening accounts and earn interest on their money. The percentage of Central American and Caribbean people with bank accounts is generally below 20 percent (except in Jamaica which has a much higher percentage). Banks and financial institutions are key development agents and, as they reach out more to society, the multiplying effect on development increases.

Home | Menu | Links | Info | Chairman's Page