What is remittance? Explained simply
As the tide of globalization reaches new shorelines, increasing numbers of people — from low-skilled migrants to international merchants — make remittance payments.
This means that a lot of income is flowing from advanced countries back to developing countries, and according to the World Bank that number is increasing. Indeed, remittances can prop up an entire economy. In 2020, nearly one half of Tonga’s GDP was made up of personal remittances.
But what exactly is a remittance? And how is it different from a money transfer?
In this article, we’ll look at what a remittance is, how it’s different from a regular online payment, and give you some advice on the making of a remittance.
This article at a glance
Remittance is a payment sent from abroad back to an individual’s home country. Undoubtedly, you’ll be familiar with some of the remittance transfer providers like Western Union and MoneyGram, well known money transfer organisations (MTO).
There are two types of remittance. An inward remittance, which is a remittance made locally or received from abroad. Whereas, sending a payment back to your home country while overseas is called an outward remittance.
Remittance payments can be made via wire, online, or money transfers. The sending remittance agent will receive the payments from the sender in one country, while the paying remittance agent disburses them to the beneficiary in another country.
What is remittance?
Remittance is a payment method used for making international money transfers, via electronic transfer or wire submission.
Remittance transfer, refers to the transfer of money, typically by a foreign worker to their home country. It can be in the form of cash, checks, or electronic transfers. Remittance transfers are often sent by migrant workers who have moved to other countries for employment opportunities and wish to support their families back home.
What is a Bank Transfer?
A bank transfer is a method of transferring money from one bank account to another. It can be done either online, through a mobile app or by physically visiting the bank branch. Bank transfers can be made between accounts within the same bank or between different banks. Typically, a bank transfer requires the recipient’s name, bank account number, and routing number or SWIFT code to initiate the transaction. Once the transfer is initiated, it may take a few hours or a few days for the funds to become available in the recipient’s account, depending on the banks involved in the transaction.
How Does a Bank Remittance Work?
A bank remittance is a transfer of funds from one bank account to another. Here is how it typically works:
1. The sender provides their bank with the necessary information for the recipient’s bank account, such as name and account number or IBAN number.
2. The sender’s bank sends the payment instruction to the recipient’s bank through the banking system.
3. The recipient’s bank receives the funds and verifies that the account details match.
4. The recipient’s bank credits the money to the recipient’s account and sends a confirmation to the sender’s bank.
5. The sender’s bank confirms to the sender that the funds have been successfully transferred.
The time frame for a bank remittance can vary depending on the sending and receiving banks, the countries involved, and the method of payment chosen. Typically, it may take 1-5 business days for the funds to be credited to the recipient’s account.
What is the difference between a remittance and a bank transfer?
It’s simple. Remittances don’t require a bank account. Usually, all you need is a valid ID document, proof of address and a phone number. However, the simplicity is deceptive. Many remittance services are vulnerable to fraud.
A remittance transfer allows an individual to send money to another person, usually in a different country, typically using a third-party transfer service such as Western Union.
On the other hand, a bank transfer refers to a transfer of funds from one bank account to another, which can be done either online or in-person at a bank branch. Bank transfers can be done domestically or internationally and are usually more secure and have fewer fees than remittance transfers.
Why are remittances needed?
Remittances are needed because they play a critical role in improving the quality of life and economic well-being of many people across the world. Remittances refer to the money that is sent by migrant workers back to their families and friends in their home countries.
These funds can be used to cover a range of needs such as basic living expenses, education, healthcare, and investments in small businesses or property. In some cases, remittances can also be used to support local economies by providing a source of capital for businesses and entrepreneurs.
Overall, remittances help to support financial stability for both individuals and communities, which can have far-reaching positive impacts on broader social and economic development.
Who uses remittance services?
Remittance is synonymous with people sending money back to their home countries — particularly, developing countries. However, remittance is a multi-headed animal: it can be used for commercial investments and to finance small businesses situated in rural and remote regions, particularly when capital access is limited — for instance, in the aftermath of a natural disaster.
Indeed, one survey found that up to 15% of remittances sent to developing countries are marked as capital to start or grow a business. However, sending payments internationally remains costly — especially to Sub-Saharan Africa, forcing the sender to pay 8% of the overall transfer, when compared to the global average of 6.4%.
Example
Raj is an Indian who works in the USA. He transfers USD $ 200 fortnightly to his business partner in India for their small tailoring business. According to the World Bank’s Remittance Prices Database, the average cost of making a cross-border transfer is 6.4% of the sum trsending moneyansferred, which is $ 12.80. For his partner to receive $ 200, Thomas must transfer $ 212.80.
Types of remittance
There are two types of remittance: inward, and outward remittances.
Outward remittance is when a person sends funds to his bank account back home, while inward remittance is money you receive from abroad, or from another bank in your home country.
Let’s look at an example of what an inward remittance is.
Example
Rina is from Malaysia and she owns an apartment in Kuala Lumpur. She rents out the apartment because she found a job in Brunei, and relocates there. The rental fee from her KL apartment is remitted to her monthly, and that is considered an inward remittance.
There are several types of remittance. Some of the common types include:
1. Bank transfers: This is the most commonly used method of remitting money. It involves transferring money from one bank account to another.
2. Online payment platforms: These include services like PayPal, Payoneer, Skrill, and others that allow users to send and receive payments online.
3. Money transfer operators (MTOs): These are companies that specialise in transferring money internationally. Examples include Western Union, MoneyGram, and Ria.
4. Mobile money transfer: This allows individuals to send and receive money using mobile phones. This service is popular in developing countries where access to banking services is limited.
5. Cash remittance: This involves physically sending cash to a recipient through a courier or a trusted acquaintance.
Remittance fees
Remittance fees are the charges that a money transfer provider or financial institution may apply for sending money from one country to another. These fees vary depending on the provider, the amount being sent, and the destination country. In general, remittance fees are higher for smaller amounts and lower for larger amounts. Some providers also offer different tiers of service with different fees, depending on how quickly the money needs to be delivered to the recipient.
Step by step guide to remittance
This is how a remittance works:
- A person living abroad sends the remittance by paying in cash, check, debit card, credit card, debit instruction, or money order to a remittance agent — for example, Western Union, Wise (previously TransferWise), or OFX. This can be via telephone, email, or through mobile apps or websites.
- The sending agent communicates to its counterpart in the recipient’s country to fulfill the remittance.
- The paying agent in the recipient’s country pays the recipient, or the beneficiary.
Usually, there is no actual real-time funds transfer when a remittance is settled by agents. The amount that the sending agent owes the paying agent is paid over time through a commercial bank. Settlement could also be in the form of goods trade in informal remittances.
The sender is generally charged a fee for each remittance transaction by the sending agent, and a currency-conversion fee is also charged to allow the beneficiary to receive the remittance in his local currency. Sometimes a collection fee is charged to the beneficiary, to account for any jumps in the exchange-rate.
Remittance agents, notably banks, could earn interest, or ‘float' when they invest the remittance funds received before submitting them to the beneficiary. In countries with high overnight interest rates, the float might be a considerable amount.
How do I make a remittance payment?
Remittance payments can be made via wire, online, or cash transfers.
- Wire transfer. A wire transfer is a bank-to-bank transfer that may include many other intermediary banks between the sending and receiving banks. International wire transfers may take up to 5 business days to be completed, and are quite costly. A SWIFT (Society for Worldwide Interbank Financial Telecommunication) transfer, for example, is a wire transfer.
- Online transfer. Also known as an electronic funds transfer (ETF), an online transfer is a convenient method to make a remittance payment, and incur lesser transfer and currency exchange fees than wire transfers. Payments can be made via debit or credit cards, through banking apps or websites like PayPal. Online transfers are usually completed instantly.
- Cash transfer. Payments for remittance can also be made in cash — at physical remittance agent branches like Western Union and MoneyGram. Transfer fees and processing times differ. It all depends on the amount and currency that you want to transfer, and the type of service that you opt for.
What is remittance advice?
A remittance advice is a document sent by a customer to their suppliers when they make a payment. Far from being mandatory, it’s a form of courtesy. Some sellers attach a remittance advice with their invoices so that the customer can fill in and send upon making payment.
In many ways, remittance advice is an antiquated practice, fading away with time. However, some international merchants still send remittance advice to their suppliers to aid record-keeping. Moreover, remittance is now sent by email.
If you your supplier considers it good practice to send remittance advice, be sure to include the following in your email:
- The payment amount and method
- Invoice number
- Your name and address
- Your supplier’s name and address
- The transfer date
- The expected payment completion date
Remittance payments are useful — up to a point. Many migrants use remittance services to send money back to their families in their home country. They can also be used for commercial investments and disaster relief.
However, remittance services are often vulnerable to fraud. International merchants need a safer, more streamlined way to pay their suppliers.
There’s an easier way to make international payments
If you are an international merchant looking for a more direct way to accept and make payments, Silverbird offers an online business account with direct IBANs. We handle more than 30 currencies, and EU/UK/US and international payments are made easy with our user-friendly interface. Sign-up today here.
FAQ
What is a remittance payment?
A remittance payment is a transfer of money made by an individual who lives and works in a foreign country to someone located in their home country. Typically, the sender (often called the "remitter") will use a money transfer service to send funds to the recipient (often called the "beneficiary"), who can then access the money through a bank account or cash pickup location. Remittance payments are often used to support family members or friends in the home country, or to pay for expenses like healthcare or education.
What is an example of a remittance?
An example of remittance is when someone who lives in a foreign country sends money home to their family to support them. The person making the remittance may use a bank transfer or a money transfer service such as Western Union or TransferWise to send the money.
What do you mean by remittances?
Remittances refer to money that is sent or transferred by a person working in a foreign country back to their home country, typically to their family members. These funds can be sent through various means, such as wire transfers, online payment platforms, or physical cash transfers. Remittances are an essential source of income for many households in developing countries and are crucial for supporting basic needs such as food, housing, education, and healthcare.
Is remittance the same as a bank transfer?
Remittance is a transfer of money from one person to another, usually across international borders. A bank transfer is one way in which remittances can be sent or received. However, bank transfer typically refers to moving money between accounts within the same bank or different banks in the same country, while remittance generally involves transferring funds internationally or across borders. So while they are related, remittance and bank transfer are not exactly the same thing.
How long does a remitted payment take?
The length of time for a remitted payment to process can depend on various factors, such as the payment method used, the bank or financial institution processing the payment, and any potential issues or errors that may occur during processing. In general, electronic payments such as ACH transfers can take 1-3 business days to process, while paper checks can take longer, often up to a week or more depending on postal delivery times and bank processing procedures. It’s always best to check with your specific payment provider or bank for a more accurate estimate of how long a remitted payment may take to clear.
What’s the difference between remittance and payment?
Remittance refers to the transfer of money by an individual or entity to another person or organisation, usually in a different country or region. Remittance is often sent by foreign workers to their families living in their home country.
Payment, on the other hand, refers to an exchange of money for goods or services. Payments can be made through various methods such as cash, cheque, credit or debit card, bank transfers, etc.
While both remittance and payment involve the transfer of money, remittance is typically associated with cross-border money transfers, while payment is more commonly associated with domestic transactions.
