Enhancing competition and

reducing costs in the remittance

markets: A Matter of Principles

Massimo CirasinoHeadPayment Systems Development GroupThe World BankOttawa, November 19, 2008

Overcoming Shortfalls: The World Bank Role in the Transformation Process in Payment,

Remittances and Securities Settlement Systems

2

World Bank Payment Systems Development Group

KnowledgeDissemination

Researchand New

Developments

CentralBanks and

SCs

MajorStakeholders

Multilateralsand

Standard-setters

DevelopRegionalInitiatives

PaymentSystems

DevelopmentGroup

KnowledgeDissemination

Researchand New

Developments

CentralBanks and

SCs

MajorStakeholders

Multilateralsand

Standard-setters

DevelopRegionalInitiatives

PaymentSystems

DevelopmentGroup

•The Payment System Development Group is at the center of an international network, whose main objective is supporting countries to reform Payments, Remittances and Securities Settlement Systems

Arab Payments InitiativeWestern Hemisphere ForumCIS Payments Initiative, SADC, others under preparation

G-10 andnon G-10CentralBanks andSecurities Commissions

CPSS, IMF, IFC, IOSCO, Regional Development Banks, other multilaterals

SWIFT, card networks, CLS Bank, commercial banks, other financial institutions, payment system operators, vendors, at the global and domestic levels

World Bank Payments Weeks, SIBOS, Regional events, International Conferences

Economic research on broad range of payment system issues (also remittance payments), new technologies (mobile payments)

Financing: WB loans-grants, fee-based and other TA, Regional Initiatives, FSAPs, support to FIRST-funded Initiatives, Others

Stocktaking &Policy Advice

Implementation Support

•Vision & Strategy•Legal Framework•Large-Value Systems•Retail Payment Systems•Government Payments•Remittances•Securities Settlement•Oversight & Cooperation

Help develop sound and efficient payment, remittance and SS systems, to:

1. Strenghten Financial Stability2. Support Access to Finance

4

PSDG Role

Keep role at center of international network

PSDG: Strategic Focus

Assist in all areas of payment system

developmentPivotal role in efforts to reduce cost of remittances

• 110 countries supported

• Growing focus on retail payment system issuesCPSS-WB GPs

Remittance price database

Continue workingwith all WBG Regions

• Demand-based• Other prioritization (e.g. crises)

Leverage resources and capacity

Total Potential Payment VolumeTotal Payment Volume

$-

$500

$160,000

Remittances Payment Systems

Bil

lio

ns

2006 Emerging Market GDP = $11,527 BN

$155,000

$64,845

$89,351

$154,196

$222

$240

$462

Notes: (i) Preliminary Figures. (ii) Estimates for Remittances based on IDB figures. (iii) Preliminary estimates on Payments Systems based on 2007 World Bank Global Payments Systems Survey. Estimates for retail payments systems only. Does not include value of Real Time Gross Settlements transactions.

Least efficient system Most efficient system

Total potential reduction in costs

$0

$5

$10

$15

$20

$25

Remittances Domestic PaymentsC

os

t p

er

$1

00

se

nt

75%

90%

Appropriate Infrastructure helps reducetransaction

costs

Notes: “Total potential reduction in costs” is indicative of the broad range of potential cost reduction. Actual cost savings realized is contingent ultimately on the efficiency of the system. For remittances, costs are of sending remittances to remitter’s home country. For domestic payments, costs are sending payments within a country.

Payment volumes and cost savings for Remittances & Payment Systems

Implementing the BIS-World Bank General Principles on International Remittance

Services

7

Lower costs, better performance, safer transfers

Single country implementation with authorities and stakeholders

Regional initiatives with regional partnersGlobal Public/Private Partnership

Coordination group to develop implementation guidelines and monitor implementation

Development of the General Principles

Request from the International Community

•The General Principles are a multilateral effort to address a global challenge

The World Bank PSDG and the Bank for International Settlements CPSS chaired the Task Force that developed the Principles.

Chairs:

World Bank PSDG and CPSS

Members:

AMF, ADB, Central Banks of Brazil, Europe, Germany, Italy, Mexico, Philippines, Sri Lanka, Turkey, EBRD, HKMA, IADB, IMF, Fed Board of Governors, Fed of New York, World Bank

Secretariat:

World Bank PSDG, CPSS, DFID

Typically by migrant workers to their families. Especially from developed to developing countries

Person-to person, low value - ie not commercial or wholesale payments

Domestic remittances also exist

Recurrent - but typically made by individual transfers (eg not by standing order)

Typically credit transfers

For remittance service providers (RSPs), often indistinguishable from any other retail cross-border transfers

An international remittance is a cross-border, person-to-person payment of relatively low value

Issues with remittances:

Usually expensive Sometimes slow Sometimes inconvenient Occasionally unreliable

Focus here is on payment system aspects (not developmental, immigration, balance-of-payments or other aspects)

GP1: The market for remittances should be transparent and have adequate consumer protection

GP2: Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged

GP3: Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework

GP4: Competitive market conditions, including appropriate access to domestic payments infrastructures, should be fostered in the remittance service industry

GP5: Remittance services should be supported by appropriate governance and risk management practices

Who should take action?Many people may need to take action. But Remittance Service Providers and the authorities have particularly important roles:

Remittance Service

Providers

Public Authorities

should participate actively in the application of the general principlesshould evaluate what action to take to achieve the public policy objectives through implementation of the general principles

Direct provision?

Less interventionist More interventionist

Monitoring? Dialogue?

Monitoring and

outreach?

Catalyst/facilitator? Regulation?

• Form of action by authorities?

The General Principles have been formally endorsed by the G-8, G-20 and the Financial Stability Forum

Both Sending and Receiving Countries have been urged to adopt them!!!

Lower costs, better performance, safer transfers

Single country implementation with authorities and stakeholders

Regional initiatives with regional partnersGlobal Public/Private Partnership

Coordination group to develop implementation guidelines and monitor implementation

Development of the General Principles

Request from the International Community

•The General Principles are a multilateral effort to address a global challenge

The World Bank PSDG is chairing a Coordination Group that developed Guidelines for the application of the General Principles and stocktaking methodology

Membership:

ADB, AMF, CEMLA, CGAP, DFID, EBRD, IADB, IMF, UNDP, US Treasury, USAID, World Bank

Lower costs, better performance, safer transfers

Single country implementation with authorities and stakeholders

Regional initiatives with regional partnersGlobal Private-Public Sector Partnership

Coordination group to develop implementation guidelines and monitor implementation

Development of the General Principles

Request from the International Community

Remittances: the BIS-WB General Principles for International remittance service are a multilateral effort to address a global challenge

Assessments:

El Salvador (September 2006)Morocco (November 2006)Honduras (April 2007)Haiti (September 2007)Nigeria (February, 2008)Uganda (April 2008)Guatemala (April 2008)Czech Republic (May 2008)U.A.E (January 2009)

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Improvements in the remittance market are achievable, when international and national authorities work with the private sector to achieve the goals of the Principles.

The pilots undertaken so far have led to remittance market improvements, and the assessments developed are a good tool to provide recommendations and promote cooperation between authorities.

The World Bank will continue to lead teams in implementing the principles (with an increased focus on Africa and South Asia within regional initiatives going forward)

Lower costs, better performance, safer transfers

Single country implementation with authorities and stakeholders

Regional initiatives with regional partnersGlobal Private-Public Sector Partnership

Coordination group to develop implementation guidelines and monitor implementation

Development of the General Principles

Request from the International Community

Remittances: the BIS-WB General Principles for International remittance service are a multilateral effort to address a global challenge

Remittances Partnership:

•Launched during Global Payments Week 2008 in Vienna

•Focus is on regional and thematic issues

•Pragmatic approach

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The G8 Global Remittances Working Group

Chair: WB (Michael Klein)Secretariat:FPDPR

TG 1Data

TG 2Developmental

issues

TG3Payment & Market

Infrastructure

TG4 A2F

G8G8

Advisory Commitee

Private/Public Partnership

World Bank Remittance Price Database LAUNCHED SEPTEMBER 2008!

Remittanceprices.worldbank.org To design a refined methodology to

gather comparable remittance price data and measure the economic gains from lower costs to consumers

Increase transparency

Increase competition

Inform consumers The project will assist with the delivery of

General Principle 1

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World Bank Remittance Price Database Remittanceprices.worldbank.org

Benchmark to measure improvements in transparency, efficiency, and competition within remittance corridors

Comparisons of markets across countries and regions

Price reductions through a “name and shame” approach. An example of this has been the case of LAC, where publication of remittance fees was a factor in their reduction from 15%, on average, in the region in 2000, to 5.6% in 2006

Provides a uniform methodology worldwide

Does not replace national databases that are being encouraged for more frequent updates and a tailored outreach

Project Methodology Country Sampling methodologyA matrix has been constructed that selects 14 important remittance sending countries and identifies the volumes of remittances in the most important corridors for each country

Company Sampling MethodologyThe population of remittance firms in sending countries was identified using information from regulators where registration/licensing/oversight mechanisms exist. The sample is split between the most important non-bank RSPs and the most important banks/credit unions/MFIs in each corridor. The sample didl not include transfer mechanisms such as hawala and couriers

Amount and SpeedThe project collected data on two different price levels: the local currency equivalent of US$250, and the average amount (US$) for each corridor. The speed of the service was also recorded

World Bank Remittance Price Database Remittanceprices.worldbank.org

Project Methodology

Data acquisitionFirms were contacted to obtain the sending fees and exchange rates charged to transfer the local currency equivalent of US$250, and the average transaction amount (funds to be received in the currency of the recipient country). The day and time of the request was recorded, as was the interbank exchange rate at that day/time. The researcher also asked if there are any known fees for the recipient

Data VerificationIn some cases, actual transactions were undertaken through a random selection of firms in the corridor, including firms that cannot or did not give customers price information before a transaction has taken place. (“mystery shopping”)

Publication Published on world bank website

It is intended that the website be updated at least twice a yearThe project team is working proactively to raise awareness on the existence of the database

World Bank Remittance Price Database Remittanceprices.worldbank.org

The Country Pairs (“The corridors”)

The Country Pairs

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Remittance Price Database: Main Findings Transparency still insufficient in some corridors

In general, banks are more costly and slower

Corridors from Spain, Singapore, US, and UK

less expensive than average (i.e. 10.5 % for

US$200 and 6.5% for US$500)

Corridors from Germany, Japan and the

Netherlands among the most expensive

Reforms to National Payments Systems crucial

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The World Bank estimates that in 2007 global remittances reached $355 billion, of which $265 billion went to developing countries, involving some 190 million migrants or 3.0% of world population

Workers' remittances, (US$ billion) 2006 2007 % growth

World 307 355 16%

All developing countries 229 265 16%

Latin America and Caribbean 57 61 6%

The global crisis could impact remittances flows worldwide and the main Canada remittance recipients countries in 2008

Workers' remittances, compensation of employees, and migrant transfers, credit (US$ million) 2006 2007

% growth 2008e % growth

World 306,682 355,438 16% 375,015 6%

All developing countries 228,800 264,896 16% 282,793 7%

Haiti 1,062.9 1,222.1 15% 1,300.0 6%

India 25,426 27,000 6% 30,000 11%

Jamaica 1,946 2,144 10% 2,144 0%

Vietnam 4,800 5,500 15% 5,500 0%

The global average cost to consumers to send money from Canada is 14% for the local currency equivalent of USD200...

Canada USD200

14.46%

12.95%

14.11%

14.57%

Haiti

India

Jamaica

Vietnam

Corridor averages are unweighted and do not reflect the market shares of the different firms that compose the average.

..but banks are significantly more costly and slower than Money Transfer Operators

In Canada banks charge on average USD40 for a remittance of USD200 !!!!!

Canada USD200

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Haiti India Jamaica Vietnam

Bank MTO

Post office MTO/Development foundation

MTO/Building society

The cost to consumers of these remittance transactions is expensive relative to the often low incomes of migrant workers, the amounts sent, and the income of remittance recipients

Until banks are able to reduce costs to offer lower pricing, consumers will have little incentive to transfer remittances through banking channels, and get access to financial services

Any reduction in remittance transfer price would result in more money reaching remittance recipients and would have a significant effect on the income levels of remittance families

Indeed, if the cost of sending remittances could be reduced by just 5%, remittance recipients in developing countries would receive $13.8 billion dollars more each year than they do now – the equivalent of more than one IDA, each year, straight to the people

This added income could then provide remittance recipients more opportunity for consumption, savings, and investment in local economies

Coming Up: The World Bank Global Conference: “Redefining the Landscape of Payment Systems”, Cape Town, April 7-10, 2009

Thank you

Payment Systems Development GroupThe World Bank

mcirasino@worldbank.org

PPP Goals

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