Competition Cuts Cost of Wiring Money
Friday, May 12, 2006
The cost of sending money around the world has dropped significantly in the past five years, saving immigrants nearly $5 billion in fees, according to a report released today by the Inter-American Development Bank and the Annie E. Casey Foundation.
Latin American and Caribbean immigrants sent money home last year to support their relatives to the tune of $52 billion, and the lower fees mean more money is reaching poor families in developing countries, the report said. In much of Latin America those familial financial flows, called remittances, have surpassed development aid from the United States, the report said.
Prices have been driven down with the help of competition, said Manuel Orozco, author of the report and a senior associate at the Inter-American Dialogue in Washington. The fees charged to send money from the United States to Latin America have dropped from about 15 percent before 2000 to 5.6 percent last year, meaning the cost of sending $200 went from about $30 to $11. The report covered only licensed money-transfer companies.
Donald F. Terry, manager of the IADB's Multilateral Investment Fund, said there is room to push costs even lower by converting more remittance senders into bank-account holders, which would also have the benefit of offering wider access to financial services. "Poor people have to pay these fees because they are outside of the formal financial system," Terry said. "Most of this money is still sent cash to cash, which is still a very expensive way of doing things."
MoneyGram International and First Data Corp.'s Western Union are the dominant money-transfer senders with more than 35 percent of the market, but new entrants include more than 100 credit unions and several large Latin American banks that see the large U.S. immigrant population as a growth market. Banks and some credit unions have relationships with foreign financial institutions and charge less than traditional money transfer companies, thus fueling the race to lower prices.
"I want to make sure that it is just as easy to come to a nonprofit credit union to send a money transfer as it is to go into an ethnic grocery store or Western Union and send a remittance, because at a credit union you can open a savings account," said Dave Grace, senior manager of the World Council of Credit Unions, a trade association for credit unions.
There are also benefits on the receiving end, where remittance receivers are more likely to have bank accounts than others, Orozco's study shows. In El Salvador, for example, 31 percent of people who receive remittances have bank accounts, compared with only 19 percent of the general population.
Many companies have sprouted to serve the market. Microfinance International Corp., a money-transfer and micro-loan company founded in Washington in 2004, has begun using remittance flows as a measure of creditworthiness and offers low-cost loans to Latin American remittance recipients to help them build a credit history.
To a similar end, Carlos Calderon, president of the Organization of American States Staff Federal Credit Union, helped to found a credit union branch in Washington targeting the city's Latino immigrants. "We want to encourage our members to trust the financial institution and get familiar with financial institutions," he said.
The growing competition from banks and credit unions is bringing increased consolidation among money-transfer companies, Orozco said. Western Union recently purchased Vigo. Other large money transmitters are expected to follow suit.
The consolidation is also being driven by regulatory hurdles facing the industry, said David Landsman, the executive director of the National Money Transmitters Association. After Sept. 11, 2001, remittances came under greater scrutiny and several large banks have refused to do business with money-transfer companies, fearing that they could be held responsible under the USA Patriot Act for ensuring that the companies are not used to launder money.
"We are definitely under threat," Landsman said.
Continued consolidation could eventually push prices back up, Orozco said.