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Saturday, April 19, 2014

Remittances: the huge cost to Africa in money transfer fees | Overseas Development Institute (ODI)

Remittances: the huge cost to Africa in money transfer fees | Overseas Development Institute (ODI)

The world’s poorest region is burdened with the world’s highest money transfer fees. That’s the finding of a new report on remittances from ODI.
These excess fees cost the African continent $1.8 billion a year; enough money to pay for the primary school education of 14 million children in the region.

This is because workers are paying an average of 12% in fees to transfer money back to relatives in sub-Saharan Africa. To put that in context, a worker sending $200 home to provide for a relative’s education would incur a $25 fee.
The global community pledged to cut remittance charges to 5% by 2014, yet this ‘super tax’ shows there is a long way to go.
Our report urges governments to increase competition in money transfer remittances and to establish greater transparency on how fees are set by all market operators.

Executive summary

Remittances – the money sent home by migrant workers – play a vital role in Africa. They help to pay for health, education and productive investment in agriculture. During periods of crisis they provide a financial lifeline. For many economies in the region, remittance transfers now occupy an important position in the balance of payments. Yet Africa is failing to secure all of their potential benefits. No region faces higher charges for remittance transfers.
In effect, Africa’s diaspora face a ‘remittance super tax’ that hurts families and holds back development.
There is no justification for the high charges incurred by African migrants. In an age of mobile banking, internet transfers and rapid technological innovation, no region should be paying
charges at the levels reported for Africa. In this report we argue that market concentration in the global money transfer industry, financial regulation in Africa, and high levels of financial
exclusion are driving up costs.
Remittances to Africa are rising. In 2013, transfers to the region were valued at $32 billion, or around 2% of GDP. Projections to 2016 suggest that remittances could rise to over $41 billion. With aid set to stagnate, remittances are set to emerge as an increasingly important source of external finance.
Charges on remittances to Africa are well above global average levels. Migrants sending $200 home can expect to pay 12% in charges, which is almost double the global average. While the
governments of the G8 and the G20 have pledged to reduce charges to 5%, there is no evidence of any decline in the fees incurred by Africa’s diaspora.
Remittance corridors
within Africa have some of the highest charge structures in the world. Migrant workers from Mozambique sending money home from South Africa, or Ghanaians remitting money from Nigeria can face charges well in excess of 20%.
Why does Africa face such high remittance charges? That question is difficult to answer because of the highly opaque nature of remittance markets and the complex range of products
available. Much of the relevant commercial information needed to establish detailed structures is unavailable.
However, three factors combine to drive up charges. The first is limited competition. Global markets are dominated by an oligopoly of money transfer operators (MTOs) and regional markets by a duopoly: Just two companies – Western Union and MoneyGram – account for an estimated two-thirds of remittance
pay-out locations in Africa. As in any market, limited competition is a barrier to cost reduction and efficiency gains. Second, there is evidence of ‘exclusivity agreements’ between MTOs, agents and banks. These agreements restrict competition in an already highly concentrated market.
Third, financial exclusion and poor regulation in Africa escalate costs. Few Africans have access to formal accounts (which limits access to pay-out providers) and most governments require payments to take place through banks, most of which combine high costs with limited reach and low efficiency.
No measure would do more to strengthen the development impact of remittances than a deep cut in charges. Cutting the ‘remittance super tax’ would enable Africa’s diaspora to make a bigger contribution the region’s development. It would also strengthen self-reliance. Unlike aid, remittances put money directly into people’s pockets, providing a source of investment and support for consumption.
In this report we estimate the additional finance that would be generated under a range of charge-reduction scenarios. We build these scenarios by comparing current charges in Africa with two benchmarks: the current global average charge of 7.8% and the 5% target charge set by governments. We treat the gap between current charges and these benchmarks as indicative of the lower- and upper-bound estimates for the ‘remittance super tax’.
Converting that gap into financial terms, we estimate that Africa is losing between $1.4 billion and $2.3 billion annually as a result of high remittance charges.
Tracing this implicit loss through the remittance system is a hazardous enterprise. Africa’s diaspora is linked to families, friends and communities through a complex web of intermediaries. The commercial terms on which MTOs interact with African banks are not widely available. Similarly, the real costs associated with regulatory compliance, foreign currency trade, agent fees and other dealings are largely unknown.
Despite these limitations it is possible to derive some indicative figures. Using market share (as defined by share of payment outlets) as a proxy for indicative shares in the ‘remittance super
tax’, operations involving MTOs would account for between $807 million and $1.3 billion of our estimated global loss. As market leaders, Western Union and MoneyGram would account for $586 million of the revenue loss associated with the gap between African and world average charges.
Detailed research for the United Kingdom identifies a number of distinctive features of the remittance market for Africa. As in other remittance-sending countries, the charges incurred by Africa’s diaspora are high relative to global average charges.
Using one of the major remittance channels – credit/debit cardto- cash – we identify what appears to be an ‘Africa charge’ – a consistent fee of around 8% for Western Union applied across countries regardless of the size of the market, regulatory costs or market risk. The same analysis conducted for credit/debit card
remittances through MoneyGram reveals that there are marked variations in the charges applied by the two major MTOs in the same country. This is suggestive of limited competition or market segmentation
within the receiving country, and imperfect consumer information. Evidence from the UK identifies foreign
exchange conversion fees as a significant, and often arbitrary, share of overall costs – information on these fees is not always provided to consumers in a readily accessible form.
As one of the largest sources of remittance transfers to Africa, the UK contributes to the loss of finance through high charges.
Some $5 billion was remitted to Africa from the UK in 2012. Reducing average UK remittance costs to the global average.

Economic remittances from migrants are an important and growing source of finance for Africa. These remittances representa source of opportunity and, for many, a financial lifeline during periods of hardship. Yet Africa is failing to realise the full potential of remittances.
Migrants from Africa, the world’s poorest region, face the highest charges on remittances. At an average of just over 12%, these charges are almost double the global average (excluding Africa). If remittance charges were reduced, there would be a double benefit: the overall flow of transfers would increase and a greater share of the transfer would reach the intended beneficiaries.
The excessive charges levied on African remittances raise wider questions. Migrant workers make enormous sacrifices to secure the higher income that comes with changed location. They bring far-reaching benefits to destination countries, generating economic growth, meeting demand in labour markets and creating more diverse societies. Many take considerable risks in moving to higher-income countries. Yet the international community and Africa’s own governments are failing to support their efforts to improve their lives, support their families, and promote self-reliant development.
This paper makes the case for putting remittances at the centre of international cooperation on development. It is divided int four parts. The first looks at the level of remittances to Africa and at the drivers of migration. Part 2 provides a summary overview of evidence on the benefits of migration. Part 3 looks at the high costs of remittances to Africa, examining underlying global and regional remittance-market structures and highlighting the domination of two global money transfer operators (MTOs).
While there is no evidence of collusive pricing or other cartel-type behaviours, the remittance market is characterised by limited competition, restrictive business practices and extensive rentseeking.
Part 4 looks at strategies to increase the development impact of remittances. While highlighting a wide range of potentially innovative options – including diaspora bond issues and partnerships between diaspora and local governments – it offers a simple message: namely, no measure would have a greater impact than deep cuts in the costs of intermediation.
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