Cross border remittances and financial access issues: topics to understand the market base of MSBs

Manuel Orozco

October 25th, 2007; Chicago

FDIC Committee on Economic Inclusion

2

A. The context: migrants, development, and financial access

1. One key trend in the global context is increasing labor market integration and transnational economic activities resulting from such integration

2. For one, the increased competitive capacity of the U.S. economy depends of an adequate demand for foreign labor to increase the country’s productivity;

3. Our demographic composition will experience faster aging without immigration;

4. Moreover the current transnational context has strengthened ties while already changing U.S. demographic composition;

5. Market supply and access to wealth among migrants is a critical factor to enhance development and competitiveness in our economy;

6. Efforts to expand access remain shy and highlight the need for greater intervention among government, private sector and grass roots civil society.

7. Efforts that work include grassroots marketing, alternative banking products, IT innovation and partnerships.

8. Alternative products such as cards are still a work in progress. . .

3

The relationship between a declining unemployment rate among Hispanics in the U.S. and the increase of remittances to Mexico is an indicator of the increasigng demand for foreign labor in the U.S.

300.00

800.00

1,300.00

1,800.00

2,300.00Ja

n-99

May

-99

Sep

-99

Jan-

00

May

-00

Sep

-00

Jan-

01

May

-01

Sep

-01

Jan-

02

May

-02

Sep

-02

Jan-

03

May

-03

Sep

-03

Jan-

04

May

-04

Sep

-04

Jan-

05

May

-05

Sep

-05

Jan-

06

May

-06

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Remit

HispUn

Source: Orozco, Manuel data compiled by the author

4

Transnational ties: Remittances to Latin America and the Caribbean, 2001-2006

Countries 2001 2002 2003 2004 2005 2006 (% of GDP)

Argentina (S.Am) 100 184 225 270 780 800 0.4%

Belize (C.Am) 73 76.65 81 93.15 7.7%

Bolivia (And) 103 104.2 340 421.6 860 989 1.0%

Brazil (S.Am) 2600 4600 5200 5624 5792.72 7372.65 0.8%

Colombia (And) 1756 2431 3067 3857.307 4126 4200 3.2%

Costa Rica (C.Am) 80.25 134.82 306 320 400 520 2.4%

Cuba 930 1138.5 1194 1194 1100 1000

D. Republic (Carb) 1807 2111.5 2216.55 2438.205 2559.5 2747 9.6%

Ecuador (And) 1430 1575.2 1656.9 1739.745 1827 2893 7.0%

El Salvador (C.Am) 1910.5 2206.1 2316.3 2547.6 2830.2 3316 18.2%

Guatemala (C.Am) 584.3 1689.53 2106 2680.7 2992.77 3609.81 12.2%

Guyana (Carb) 90 119.25 136.5 143.325 260 270 32.5%

Haiti (Carb) 810 931.5 977.55 1026.428 1077 1100 25.7%

Honduras (C.Am) 460 770.4 862.05 1134.3 1762.98 2359 26.2%

Jamaica (Carb) 967.5 1228.8 1425.9 1497.195 1651 1770 16.6%

Mexico 8895 10502.05 13266 16612.84 20034 23053 2.8%

Nicaragua (C.Am) 660 759 787.5 809.55 901 950 17.7%

Panama (C.Am) 220 231 254 292.1 1.7%

Paraguay (S.Am) 506 550 650 7.5%

Peru (And) 930 1265 1295 1359.75 2495 2869.25 3.2%

Suriname (Carb) 50 55 102.3 6.6%

T.&Tobago (Carb) 40.9 58.5 88.2 92.61 97 110 0.6%

Uruguay (S.Am) 42 105 110 115 0.6%

Venezuela (And) 136 235.4 246.75 259.0875 271.9 300 0.2%

LAC 24290.45 32044.75 38048.2 47000.89 52878.07 61481.26 2.2%

5

Outbound remittances from the United States

Region Total

East Asia & Pacific $ 23,178,936,263.59

Europe & Central Asia $ 6,702,514,444.62

Latin America & Caribbean $ 53,131,672,060.37

Middle East & North Africa $ 3,611,726,578.29

South Asia $ 10,109,629,219.20

Sub-Saharan Africa $ 3,257,968,230.42

6

Main countries of destination of remittances from the U.S. Host Countries

Mexico 24,242,813,200

India 8,400,000,000

Philippines 8,201,485,776

China 3,807,711,180

Viet Nam 3,788,610,840

Guatemala 3,210,327,839

Germany 3,129,595,560

El Salvador 2,969,952,963

Colombia 2,856,000,000

Dominican Republic 2,081,384,881

Honduras 2,075,889,556

Nigeria 1,790,358,198

Ecuador 1,312,379,841

Poland 1,203,720,840

Jamaica 957,665,520

7

The profile—migrant remitters

Mexico Dominican

Rep.

Jamaica

El Salvado

r

Guatemala

Bolivia Nicaragua

Over 40 years of age

18% 15% 17% 15% 26% 24% 51%

Female 40% 55% 43% 64% 33% 52% 41%

Some college or college degree

14% 60% 75% 19% 12% 42% 35%

Income $35,000 3% 3% 4% 3% 3% 18% 8%

U.S. Citizenship 13% 43% 56% 17% 12% 16% 14%

Use Internet 24% 63% 76% 31% 23% 36% 24%

Daily 45% 40% 44% 30% 57% 36% 41%

Monday - Friday 17% 18% 27% 20% 9% 14% 15%

Weekends 12% 19% 19% 25% 9% 10% 15%

Rarely 26% 23% 9% 25% 26% 40% 29%

Source: Orozco, Manuel and Jacob, Katy. “Remittances, prepaid cards,

8

Length of time in the US and average remitted

0

50

100

150

200

250

300

350

400

450

<1 year 1 to 3 years 4 to 6 years 7 to 9 years 10 to 12 years 13 to 15 years 15+ years

South America Mexico Africa

Central America Caribbean MigrantsSource: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

9

Gender and average remitted

0

50

100

150

200

250

300

350

400

450

Jamaica Guyana Bolivia Guatemala Mexico Ghana El Salvador Nigeria Colombia Ecuador Dom. Rep. Nicaragua Cuba Honduras

FemaleMale

Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

10

US citizen and average remittance sent

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Guyana JAMAICA GUATEMALA NICARAGUA MEXICO COLOMBIA Total BOLIVIA EL SALVADOR REPUBLICADOMINICANA

No US Citz.Citizen

Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

11

B. Issues on the marketplace of money transfers

1. Players in the market: type, size,

2. Pricing: operating costs and consumer costs;

3. Market structure and concentration;

4. Regulatory environment;

5. Financial intermediation: demand and supply side dynamics;

6. Technology innovation

12

Changes in the demand side . . .

Preferred sending method . . . (2007)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Money TranfserOperators

Banks Travelers Internet Other

Account to account transfers to Mexico: 1.00% (2004); 2.55% (2006); 7.28% (2007)Informal networks declined from 20%+ in 2000 to about 10%.

13

Consumer preferences to change …

0%

10%

20%

30%

40%

50%

60%

No change- Keepcurrent method

Remittance card Direct deposit ina bank account

Internet Mobile phonebased transfer

Other

14

Costs influence decision to switch

Amount sent and cost of sending by preference to change method

257 251285 280

264

433470

9.0 8.69.9

11.410.6

13.5

18.4

0

50

100

150

200

250

300

350

400

450

500

I would notchange my

currentmethod

RemittanceCard

Directdeposit in a

bankaccount

Internet Mobilephone based

transfer

Other, didnot specify

A cheapermethod

0

2

4

6

8

10

12

14

16

18

20

Average amounnt sent eachtime

How much do they chargeper transfer

15

Nigerian migrants preference to change to a more efficient way and current cost of sending as % of principal sent

0%

1%

2%

3%

4%

5%

6%

7%

8%

INTERNET

Mobile Tr.

If there is a better one

If there is cheaper one

Remittance card

Account to account

I wont change

If there a better than Western Union

16

- Remittances and cost in Latin America and the Caribbean

5

6

6

7

7

8

8

9

9

10

2001 2002 2003 2004.01 2004.06 2004.11 2005.12 2006.07

$20,000,000,000

$25,000,000,000

$30,000,000,000

$35,000,000,000

$40,000,000,000

$45,000,000,000

$50,000,000,000

$55,000,000,000

$60,000,000,000

$65,000,000,000

Cost to send $200

Remittances

Source: Orozco, Manuel, International Flows... (2006)

17

C. Issues on financial access . . .

Usability: capable of opening accounts affordably and with small balances

Openness: capable of reaching everyone without underserving any social sector;

Formality: capable of enforcing regulations without compromising use and openness;

Functional capacity: capable to serve the four core product needs: (payments, savings, credit and risk mitigation);

Migrants are in a space where they often lack financial access, and where it exists, the access is not linked to formal depository institutions

18

Most migrants use businesses that offer none or few financial services . . .

19

. . . Partly because they have few financial obligations and no banking access. . .

20

Immigrants without bank accounts

0

10

20

30

40

50

60

70

80 Mexico

Honduras

Guatemala

Nicaragua

El Salvador

Cuba

Colombia

Dom. Rep.

Ecuador

Jamaica

Nigeria

Guyana

Ghana

Bolivia

21

. . . Migrants are not a monolithic group that either has no financial access and no obligations or has both….

2624

21

25

16

10

5

10

15

20

25

30

No bank account Owns an account in the U.S.

Owns an account in the home country

No obligations1-2 fin.obl.3 or more fin.obl.

22

Moreover, at least one third or more saves . . .

23

And the average amount is significant . . .

24

And some unbanked migrants are saving . . .

25

They also believe that the most important reason to have a bank account is to save money . . .

26

…and would be prepared to use banking services if . . .

27

Their access to bank accounts is determined partly by . . .

Demand for financial services Number of financial obligations Age Gender Citizenship, and not income (as is almost a constant) Moreover, their interest to switch to account to account

transfers is associated to changes among banks

28

Moreover, those owning accounts are more likely to send more money . . .

29

Recommendations

1. Accelerating financial access1. Targeted goals and standards to increase access to financial

services and access (who would be benefited)2. Develop methodologies to accelerate banking rates3. Increase a critical mass of the policy network4. Underserved vs. marginality

2. Partnerships between MTOs and depository institutions in the U.S. and LAC: Dinero a Mexico, Red de la Gente, and others…

3. Make clear the compatibility between financial access and mitigating methods that reduce security risks of transactions

4. Segment and target appropriate markets5. Lower the barriers to entry6. Develop effective distribution channels7. Educate the target market8. Consider mobile banking channels

30

Criteria defining consolidation of firms in the industry & stages at which countries are found . . .

Mature Consolidating

Undeveloped

• Composition of market share, • Efficiency of transactions (use

of modern technology, extended networks nation wide, safe transfers),

• Compliance to regulatory environment,

• Tradition of transferring money,

• Multiple new and old players (MTOs, banks, MFIs),

• Costs to customers are lower than average,

• Information and transparency, • Investment accessible

MexicoPhilippines El Salvador, Dominican Rep., Ecuador, Jamaica ColombiaGhanaIndiaArmenia

NigeriaTajikistan

Eastern Europe

Vietnam

Honduras PeruGuyanaHaitiCubaNicaraguaArgentina VenezuelaTajikistanNigeriaSomalia

Consolidation and maturation

Source: Orozco, Manuel. “Markets and Financial Democracy” (2005)

31

 Region of destination

Migrant’s origin

Russia

   

Japan/Sing/HK/Austra

lia

USA/Canad

a  

Western

Europe

   

Gulf States

Intra-Regio

nal

I

Intra-regio

nal II

Frequency and % remitting

6 * 85%

12 * 80%

12 * 65%

12 * 65%

12 * 80%

8 * 80%

5 * 80%

Region Amount remitted per sending frequency

East Asia & Pacific 250 400 450 450 100 150

Latin America & Caribbean

600 350 450 100 65

Middle East & North Africa

450 100

North America 200

Russia and Central Asia

300 350 100 150

South Asia 400 450 450 100 150

Sub-Saharan Africa 300 400 350 100 150 50

Western, East and C. Europe

400 400 300 200 150

Factor estimates of migrant remitting by region

0.00 0.20 0.40 0.60 0.80

Trade dependence on major partner=exppartner/totexp

0.20

0.40

0.60

0.80

FL

D (

maj

or

mig

rati

on

co

un

try

# m

igr)

/ (to

tal #

mig

r)

0 50 100 150 200

Durability of democracy

0.000

0.200

0.400

0.600

0.800

% m

igra

nts

% migrants = 0.09 + -0.00 * durableR-Square = 0.02

Some determinants of migration

33

Income dependence on remittances

0.00 25.00 50.00 75.00

% rural population

0.00

0.25

0.50

0.75

1.00

Rat

io o

f p

c re

mit

tan

ces

to p

c G

DP

20.00 40.00 60.00

POVERTY

0.00

0.25

0.50

0.75

1.00

Rat

io o

f p

c re

mit

tan

ces

to p

c G

DP

Ratio of pc remittances to pc GDP = 0.08 + 0.00 * povertyR-Square = 0.04

34

10 20 30 40

Transfer costs

0.00

0.25

0.50

0.75

1.00R

atio

of

pc

rem

itta

nce

s to

pc

GD

P

0% 2% 4% 6% 8% 10% 12% 14%

Middle East & North Africa

Landlock state

East Asia & Pacific

Western, Eastern and C Eur

North America

Russia & Central Asia

Sub-Saharan Africa

World

Island

Latin America & Caribbean

South Asia

MoneyGram Western Union