Migrants are hit with high fees to send money home

Migrants are hit with high fees to send money home

Jerry Lukendo Mbokani has to do some math when he sends money to his elderly mother in the Democratic Republic of Congo.

In Kampala, Uganda, where Mr Mbokani has lived for 16 years, he needs to buy US dollars first. To exchange about $100 (£80) of Ugandan shillings is worth almost $3, he reports.

He also added a withdrawal fee of $7, so that his mother would not be charged when receiving the money.

He sends these remittances through mobile money, usually a phone-based digital transfer, rather than through a physical location such as a bank, post office or Western Union-style money transfer company. Actually 10% of that amount can be consumed in fees.

Mr Mbokani, chief executive of the Refugee-Led Network of Organizations (Relon), knows he is far from alone.

One target of the UN Sustainable Development Goals is that by 2030, remittance fees should be less than 3%, and the total fees for sending and receiving money between a pair of countries should be no more than 5%. Some researchers believe that to be truly affordable, the first goal must be less than 3%.

The International Monetary Fund has estimated that meeting this target could generate $32bn (£26bn), even apart from direct cost savings.

This is because remittances have such a strong effect on the economy, and people tend to send more remittances when fees are lower.

But the world is far from this goal. According to the World Bank, the global average is 6.2%, more than double the target.

It is very expensive to send money to sub-Saharan Africa, with an average transaction fee of 7.4%. For certain country combinations, the fee percentage can rise well into the double digits.

One reason for the high fees is inconsistent regulations.

In Africa, a payment company cannot use one license in several countries, says Nika Naghavi. He is the head of the growth group at Onafriq, a digital payment network that reaches more than 40 African countries.

The result is that even between neighboring countries with robust trade and frequent population movements, money does not always flow freely. For example, Ms. Naghavi said, transfers between Togo and Benin are frequent and easy, helped by having the same currency.

Yet money cannot be easily sent between Togo and another neighboring country, Ghana.

“That’s why the costs are heavy: most of them are in compliance and regulation,” Ms Naghavi said.

This requirement may not apply as much to low value transfers. Sending $50 to a relative in another country is less risky, but may still fall under a complex chain of regulations meant to protect against money laundering.

In some countries, “the rules governing who can act as a remittance provider can be quite restrictive,” said Ravenna Sohst, a policy analyst at the European Migration Policy Institute.

“For young companies to enter this market requires a lot of technical, financial and legal knowledge, which I think is one of the reasons why this field has seen few players for a long time.”

Ms. Sohst said that Mexico-US is an example of a major remittance corridor, where more competition has helped lower prices. Without competition, rates can be set by several companies (or informal, cash-based agents) that can facilitate transfers between a pair of countries.

Limited competition also means companies may not feel the need to disclose much information about fees. “It’s sometimes up to service providers what they want to show clients,” said Uloma Ogba, a gender and learning specialist for the UN Capital Development Fund’s (UNCDF) Migration and Remittance Programme.

This can include misleading claims about zero-fee transactions, which “often means that service providers and other agents involved throughout the transaction process make money in other ways”.

“Our North Star should ensure that these customer fees are as close to zero as possible,” Ms Naghavi said. “But today it’s just not possible because of the basic cost of running your business.”

Companies may temporarily lower or eliminate transaction fees during disasters, such as happened immediately after the 2023 earthquake in Morocco. But emergency expenses arise at other times as well.

Female migrants, especially, send money home to cover invisible expenses. In Ms. Ogba’s own monthly remittances from the US to Nigeria, she prioritizes her parents’ healthcare, her cousin’s education, and communal obligations such as funeral expenses. Also is a donation for home renovations.

A flexible pricing structure will help women a lot. They typically earn less than men and often send smaller and more frequent remittances for things like health care and education, Ms. Ogba said.

Because digital remittances are more affordable than traditional banking (with average fees of 4.8% versus 6.2% respectively) and because they can require less documentation, most innovation takes place in the digital realm.

For example, a fintech company providing services to Gambian migrants in the UK found that its customers wanted to be able to directly pay utility bills for their families in The Gambia.

It’s impossible to talk about digital innovation in sending money without mentioning cryptocurrencies. Some enthusiasts believe that Bitcoin and other types of cryptocurrencies promise smoother money transfers anywhere in the world.

However, uncertainty, irregular regulations and limited knowledge remain barriers to the adoption of cryptocurrencies for remittances.

Even more basic technology is beyond the reach of people sending and receiving remittances. Although it is cheaper to send mobile money, many of the world’s poorest people lack mobile phones and internet access.

Although at least half of remittances are now digital, cash remittances dominate in low- and middle-income countries.

It can also be very difficult for people on the move, or those unable to obtain official forms of identification, to provide tax ID numbers and other documentation.

In Uganda, Mr Mbokani said, the refugee ID card is not part of the same centralized register as the national ID. And there may be barriers to using a refugee ID at some money transfer agencies.

Such issues mean “we’re leaving a lot of people behind,” Ms Naghavi commented.

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