A mobile global population means a constant stream of money transfers between countries. Initiatives are under way to ensure the process is simple, safe and affordable, as Wendy Atkins reports.

International migration is exercising the hearts and minds of leading political and banking thinkers. According to the UN, migrant workers make up 3% of the world’s population. Whether migration is temporary or permanent, for economic or other gain, it inevitably leads to a flow of money between countries. In 2004, money transfers by migrant workers reached $110bn, an increase of 52% on 2001. A recent World Bank report indicated that money transfers (the second largest source of investment in developing countries after foreign direct investment) can help reduce poverty because they enable migrant workers to help the families they have left behind gain access to important social benefits.

One of the challenges of sending remittances is to make the process as simple as possible. The Universal Postal Union (UPU) is looking at ways of interconnecting corridors of migration to make processes smoother between, for example, India and the United Arab Emirates, and between Mexico and Spain. “Our approach is similar to that taken by the airlines – we’re opening links between countries sending and receiving immigrants,” says Edouard Dayan, director general of UPU.

Another issue is to ensure there is enough choice available to migrants who want to send remittances back to their country of origin. “People don’t know what the total cost of sending money back home will be,” says Norbert Bielefeld, deputy director of payment systems, European Savings Bank Group. “We are working to address this. One approach is a service level agreement model. We have developed a system-neutral, end-to-end model and we are encouraging more banks to comply with this model.”

How remittances are sent home is important from a macroeconomic point of view, as Mr Bielefeld explains: “Half of all global remittances go through informal channels, which can give rise to criminal activity and does not trigger any economic leverage. The challenge is how to absorb such funds into formal, supervised channels. This needs governments to look at regulations. If you pile regulations on to migrants and financial institutions, you only entice migrants to move towards more informal methods of sending money home. And as an ancillary area, there is a lot of cash involved in remittances. This is not helpful because cash-to-cash remittances won’t help banks build their assets or help countries improve their balance of payments. There is an estimated multiple of three impact of remittance money when it becomes account-based.”

Technological drive

The way remittances are handled is changing, driven by innovations in technology as well as an increase in the number of educated migrants. “A growing number of Asian immigrant households remit online, as do a high number of eastern European and Caribbean households. These groups present significant market opportunities for money transfer companies that are market savvy and have the technology and operational know-how,” says Dan Schatt, senior analyst in the banking group at research firm Celent. The online world could prove an attractive option for remittance business. Celent predicts that by 2007, 42% of all foreign-born households will do some level of banking online.

There are now also several card-based initiatives, which have been driven by the growth in the market for gift and pre-pay cards. Here, remittance services may be bundled with other products. “In this market, MasterCard is stronger than Visa thanks to the Cirrus network,” says Mr Schatt. However, questions remain about where the card networks should participate in the remittance value chain. Working with European banks has been difficult because they want to customise their product. There are no cohesive capabilities and banks promote payments through outlining media, rather than tellers.

Anti-money laundering measures

In the remittances world, anti-money laundering initiatives have led to increased requirements for real-time checking against a designated base, verifying that remittees are not sending money to countries that have been blacklisted and improving the ability to identify customers as well as fraudulent activity.

The UPU says it is working with other organisations, such as the International Organization for Migration and Interpol, to identify best practices. “The biggest challenge is to ensure good levels of security that are not yet available everywhere,” says Mr Dayan. “In some cases, commission charged on money transfers is as high as 20%-30% and this encourages the creation of informal networks that are not always secure. Such weaknesses encourage money laundering, so we need to address the problem of affordable security.”

The UPU aims to establish a framework that complements the services offered by the banks.

“Our first priority is to look at the organisation of the remittance service, including legal aspects, and we have to adapt the technology to the size of the country,” says Mr Dayan. “The software has to offer all the guarantees in security. More than 30 countries and territories are currently using the UPU’s International Financial System (IFS) solution for money transfers.”

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