• The remittance conundrum: Why comparing is important


    LAST year the Philippines received $28.5 billion as remittances its overseas citizens have sent home to their families or as their nest egg. It made up a tenth of the nation’s GDP and the Philippines ranked third in line among countries receiving foreign remittances—trailing India (2nd) and China (1st), both with significantly bigger populations and economies. However, in terms of Remittances-to-GDP ratio the beautiful archipelago is trailing behind only Nepal where almost 30 percent of GDP comes from remittances.

    The remittance landscape is scattered and lacks transparency. Banks are charging exorbitant fees, remittance companies differ greatly in terms of service offerings and new digital platforms have yet to be fully adopted. The best proof for this is a visit to Singapore’s Lucky Plaza on a Sunday afternoon. What appears like a normal shopping mall six days of the week suddenly turns into a vibrant Filipino hotspot. When faced with the choice of fund transfer, most Filipinos follow suggestions from the money exchanger and opt for one of the outlets of domestic remittance companies. Often, their choice is constrained by the bankability of the recipients as most of the times a bank account is needed to receive funds. This leaves many OFWs vulnerable to hidden fees, unfavorable currency rates and above all, long lines at the remittance shops.

    With hundreds of options available, it pays off to compare the market before making a decision.

    According to a recent World Bank report, the cost of sending money has been declining worldwide, thanks in large parts to new digital innovations such as Bitcoin and Transferwise. Fees, however, are still high. An average remittance to East Asia cost 8.5 percent of transaction value while sending money to South Asia is notably less expensive at 5.6 percent (World Bank, 2016). This means that sending $100 to the Philippines adds around $8.5 in fees. The Federal Reserve Bank of San Francisco recently found that commercial banks still offer the most expensive form of remittance payment with an average total cost of 11.3 percent. In contrast, mobile payment services and new financial technology platforms charge roughly 4.1 percent transaction fees. Comparing options could save OFWs easily 50 percent on transaction fees or more than $4 on a $100 transaction.

    In order to save money, frequent remitters should try to understand the payment landscape first. There are numerous regulatory and legal reasons that make some international payments more expensive than others.

    For example, commercial banks are subject to stringent security measures and are required to verify that parties are not remitting funds for illicit reasons such as launder money, finance terrorism or other criminal activities. Especially after the recent Bangladesh money laundering scandal, costs to comply with international laws and regulations increase for the local banks. Of course, a bank is just one out of many options to send money to the loved ones. Newer platforms and services are likewise subject to increased regulatory costs but are poised to gain market share and may offer significantly lower fees.
    Remittance services can be divided into three kinds:

    Traditional cash-agents: Western Union and MoneyGram are the leading international brands and are known for their large branch networks. Big domestic rivals are CebuanaLhuillier or LBC, which were both able to leverage on their existing branch network from other operations (Pawnshops, Logistics). Cash-agents are often the most straightforward way of remitting money as customers can pay cash over-the-counter and recipients also receive cash over-the-counter.

    Banks: While some banks have a large branch network, using banking services will always require a bank account with the respective bank. Big local banks such as BDO and BPI have opened branches in foreign cities with large Filipino population such as Hong Kong and Singapore. Banks have a wide variety of service and can, in an ideal scenario, service almost all your financial needs.

    Online Channels: While cash-agents and banks offer online services too, this channel refers to newer platforms and technologies that were developed in recent years. Examples include Xoom, PayPal, Remitly, or Transferwise. For the more adventurous consumers, Cryptocurrencies such as BitCoin may be a great way to send money although they are still unregulated for the most part.

    Why should every OFW spend time to compare and understand the different options?

    First, you might not be eligible to use all channels. The biggest constraint in the Philippines is the lack of access to even basic non-cash financial services that require bank accounts. This underscores the need for broader coordination of financial inclusion efforts as part of economic developments to assist the poor. For recipients with no bank account, the only option is often a cash-agent. When using a cash-agent, understanding its fee structure is importance. Such agents apply mark-ups on the exchange rate that they receive and often charge a flat transaction fee as well. The so-called FX mark-up is based on the actual currency exchange rate that changes daily. Some providers apply different mark-ups for different send-receiving methods. While loyalty to a provider has been very strong among overseas Filipinos, blind trust can lead to significant additional expenses.
    Other important factors to consider when remitting money through a cash-agent are the receiving currency and the amount. Sending money less often but larg amounts can save you additional costs, as margins for cash-agents tend to be lower for larger transactions. The receiving currency can be important because some providers are charging less for receiving dollars or pesos. Many OFWs first stop is an exchange-agent. For instance, you earn Dirhams and subsequently convert it into US Dollars with an agent making a small spread on the said transaction. The cash-agent, Western Union, then makes a transaction fee if US Dollars are sent to the Philippines and the receiving party accepts US Dollar. When the US Dollars are converted back to Philippine Pesos, the local exchange-agent earns a small fee as well.

    Irrespective of your transaction mode, timing your transaction is important but is often over-emphasized. Unless large amounts are sent or the sending currency has significantly fallen in value (such as the British pound after the Brexit vote), the impact of timing is very small. The best overall strategy for sending money is different for each of us based on preferences on cost, speed, convenience and customer service. If cash-agents are not your only option because you or your recipients have bank accounts, sending money online should be your preferred choice. On average, cash-to-cash transfers are 3-5 times more expensive than bank-to-bank transfers and are often less convenient as well. Online transactions can save you from patiently standing in line for hours outside Lucky Plaza. Once an account is set up, the data is saved and there is no need to fill-out papers again. A popular tool for online remittances from and to the Philippines is Xoom, which was acquired in 2015 for $890 million by PayPal. Xoom scores exceptionally well on speed and convenience. With its easy user interface and fast service, it has become a popular choice for remittances. Similar services such as Transfast, Remitly and Worldremit have gained popularity as well in recent years.

    One platform that started servicing the Philippines early last year has gained huge popularity especially in Europe. Founded by the first employee of Skype, TaavetHinrikus,Transferwise made it its mission to improve transparency of remittances. In contrast to the majority of the above-mentioned services, Transferwise competes very aggressively on prices and only charges a flat fee. Currently it is available only for bank-to-bank transfers received in pesos but is set to open different channels. The company’s success can be largely attributed to its consistency. Fee’s remained stable over the years and customers do not need to be afraid of hidden costs.

    In a nutshell, saving money on remittances is not easy but worth the additional time spent on comparing. If transaction fees on remittances could be lower by a few percentage points, roughly the rate for some online-channels and prepaid card transaction in the Philippines, the gains could put nearly $1.5 billion more in recipients’ pockets. This is equal to roughly 0.5 percent of GDP and double the level of development assistance the Philippines received from the World Bank in 2015.

    Remittance flow to developing Asia are expected to grow 4 percent over 2016-2017 and lowering transaction costs by expanding the use of less expensive payment methods is a low-hanging fruit for local policy makers to boost welfare, increase consumption, and improve financial inclusion.

    Moritz Gastl is the managing director of MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.




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