NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

International migration has become such a pressing global issue that one can hardly read or watch the news without hearing about it. Migration is typically driven by economic interest or forced displacements. Though it often delivers substantial benefits to the migrants themselves, it has also led to social upheaval and protectionist policies to expel migrants in host countries (e.g.: Nigeria in 1983, South Africa in 2006 and the U.S. in 2016). But since migration is likely to continue and accelerate in this age of climate change and global conflict, it’s in the best interest of migrants and their host countries alike to both address the issues that are driving mass migration, and to explore ways for economies to absorb migrant populations with minimal disruption.

One way to accomplish these goals is to improve migrants’ access to affordable, formal cross-border remittance platforms. This access allows migrants to send financial support to loved ones back home, which can enable them to remain in their countries of origin. It also encourages regional financial integration and cross-border trade, a foundation upon which regional economic growth can be built. Consequently, with the appropriate public policy approach, affordable remittances can allow migration to provide socio-economic gains for migrants’ host and originating countries alike, without jeopardising the integrity of formal financial systems.

However, achieving this goal may be easier said than done. Though the cost has been decreasing in recent years, sending remittances still costs an average of 6.82% percent of the amount sent, globally. The lower that cost, the more money goes into the pockets of migrants and their loved ones, and the greater the economic and social impact. That’s why the United Nations’ Sustainable Development Goal (SDG) 10.C aims to reduce the transaction costs of migrant remittances to less than 3%, and to eliminate remittance corridors with costs higher than 5%. Though these may not be as flashy as other global goals, in light of the current cost of sending money internationally – and the ongoing growth in global migration – a reduction in the cost of remittances could have a major impact.

However, in order for public policy and other approaches to address these costs, we need an accurate tally of how high they actually are. And in some cases, that’s more complicated than it may seem.

Seeking the True Cost of Remittances in South Africa

For instance, the corridor connecting South Africa (SA) to the rest of the Southern African Development Community (SADC) is estimated to be among the most expensive in the world. According to the World Bank, the cost of sending US $200 from South Africa to other SADC countries was 14.9% in the third quarter of 2019, far higher than the global average. But it’s not clear if these numbers provide an accurate sense of the actual price of remittances in the SA to the rest of SADC corridor.

This percentage is much higher than recent estimates by FinMark Trust; We assessed the cost of sending the same amount in the SA to the rest of SADC corridor to be 7.7% (unweighted) and 9.5% (weighted based on volumes per type of remittance service provider – e.g.: banks, non-banks). In assessing pricing, we used a mystery shopping methodology, in which real transactions were made at multiple leading remittance providers to establish the pricing per corridor, based on actual receipts of the payments made. These conflicting findings on the pricing of cross-border remittances from SA to the SADC need to be resolved, to ensure that any market interventions (e.g.: by regulators, policy makers or donors) are based on appropriate parameters.

However, it’s not a simple process to acquire more accurate numbers. For one thing, the idiosyncrasies of the remittance corridors between SA and the rest of the SADC make an “average price” application misleading. For instance, there is a Common Monetary Area (CMA) that includes some countries within the SADC, where the pricing (through commercial banks) of remittances from SA is as low as 2.9% for $200 transfers, since the banks cover most of the cost. This factor may also be skewing the World Bank’s numbers, and should be taken into account in any revised averages.

The Trouble with the World Bank’s Averages

Additionally, the World Bank’s use of an average transaction value of $200 in the SA to SADC remittance corridor is fallacious. Looking at the four countries that make up over 80% of that remittances market, the average transaction sizes are US $64 for Lesotho, US $56.5 for Malawi, US $58.4 for Mozambique and US $69.6 for Zimbabwe, according to South Africa Reserve Bank data. Taking remittances between SA and all 15 SADC countries into account, the average transaction size is US $70. Since a higher transaction value implies higher costs, using a $200 average is likely leading to an inaccurate sense of how much people are actually paying on average.

Based on a (more realistic) value of US $55, and using the least expensive category of remittance provider (as people are unlikely to use expensive options when they have cheaper ones available), the price of SA to SADC remittances hovers around 5% per transaction. With 80% of the 3.7 million SADC to SA migrants not allowed to work legally (and likely to be earning a living in the informal economy with low-income jobs), the average transaction size for funds sent back home is much more likely to be in the US $55 – $70 range across SADC countries, rather than the $200 average that the World Bank uses in its analyses.

What’s more, considering the fact that the majority of the migrants who immigrate from the SADC to SA lack legal documentation, many are unlikely to use service providers like commercial banks, which are subject to strict requirements for customer due diligence. Cross-border remittances sent on commercial bank rails are also the most expensive – another reason the majority of low-income migrants are unlikely to step into a bank to send funds to their home countries. With non-bank providers (such as World Remit, Mukuru or Hello Paisa), far outpacing commercial banks in remittance volumes in the top countries in the SA to SADC corridor, it’s not accurate to use unweighted averages that allow expensive commercial bank providers to pull up the average price, as the World Bank does.

The Value of Formalizing Remittances

Determining an accurate average of remittance pricing isn’t simply an academic question: It’s an important part of recognizing and building upon the progress that has been made in the SA to SADC corridor, in terms of offering remittance options that are both formal and affordable. The growth of non-bank providers with relatively cheaper services is driving the increased uptake of formal options, allowing immigrants to use regulated institutions that comply with the requisite consumer protection laws, and that are not subject to the inefficiencies of the informal remittances market. Recent research commissioned by FinMark Trust estimated that SA to the rest of SADC cross-border remittances via formal providers increased by 68% in value between 2012 ($432 million) and 2018 ($724 million). In 2012, 68% ($912 million) of the cross-border remittances from SA to the rest of the SADC were delivered through informal financial arrangements. By the end of 2018, we estimate that informal or unregulated flows from SA to the rest of the SADC had dropped to 52% ($779 million) of the corridor’s total value.

However, there is still progress to be made in bringing the cost of sending money from South Africa to the rest of SADC down, while increasing the flows via regulated service providers. For one, a sender of remittances is required to have a bank account in South Africa, in order to initiate a cross-border transfer that is done on full digital rails. Low-income migrants need other alternatives to store value digitally – or alternately, banks and regulators need to adopt and implement less stringent customer due diligence requirements. Once immigrants can access digital-to-digital products, pricing will fall dramatically, as cash handling fees/agent expenses on both the sender and recipient sides will no longer drive up costs. This is especially necessary in non-CMA countries, where bank offerings are more expensive, and usage is driven by non-banks whose transactions are mostly cash-based.

In conclusion, improving data quality and accounting for the unique regional characteristics of the SADC would go a long way in establishing the true cost of remittances in this key corridor. This would help inform the work of public and private policy makers with a vested interest in formalizing and lowering the cost of cross-border remittances, and boosting their ability to benefit the growing migrant population.

Damola Owolade is the Head of the SADC FI Programme at FinMark Trust.

Main photo courtesy of Monito.

Homepage photo courtesy of WorldRemit Comms.