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 money transfer organizations (MTO) like Western Union and MoneyGram, who primarily offer remittance services.
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 cash 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 transfers, via electronic transfer or wire submission.
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.
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%.
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 transferred, 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.
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.
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 pay your suppliers
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.
Author: Syahirah Aiman
Illustration: Kate Faldina