Remittance
A remittance is a cross-border transfer by a migrant worker to family in another country — small, regular, and in aggregate enormous: about $650 billion a year to low- and middle-income countries, more than foreign direct investment or aid. It moves through banks, money-transfer operators, fintechs and mobile-money networks; it costs an average of over 6%, which the G20 wants at 3%; and it is where AML rules meet the customers least able to bear their cost.
- Also known as
- Money transfer, International remittance, Migrant remittances
- Used at
- the corridors from the US, the Gulf, Europe and Russia to India, Mexico, the Philippines, Egypt, Pakistan, Nigeria, Bangladesh and dozens more; the World Bank tracks flows and costs corridor by corridor
- Binding
- money-transmitter and payment-institution licences in the sending country, often in each US state; AML and sanctions rules on both ends; the receiving country's rules on payout, FX and, sometimes, the exchange rate itself
- Typical cost
- the World Bank's global average was about 6.4% for a $200 transfer in 2023 — banks the dearest (12%+), mobile money and fintechs the cheapest (3–4%); the cost is a fee plus an FX margin, and the margin is where most of it hides
- Typical model
- the provider collects locally (cash, card, bank transfer, wallet), converts at its rate, and pays out locally (cash pickup, bank deposit, mobile wallet) from a pre-funded balance in the receiving country, so nothing crosses the border per transaction
- Parties
- the sender, the recipient, the provider and its payout partners (banks, agents, wallets), the correspondent banks that keep the provider's accounts, and the regulators and screening systems on every corridor
How a remittance works in practice
A nurse in London sends £200 to her mother in Manila. At a money-transfer app she pays by card; the app quotes a rate and a fee — say £2 and a rate 1.5% off the mid-market — and her mother's bank account, or her mobile wallet, is credited in pesos within minutes. The app did not send £200 across the border: it holds pesos in the Philippines from previous flows and its treasury rebalancing, and it paid out from that; the pound stays in London. Its cost was the card fee, the payout partner's fee, the screening, the treasury's FX at wholesale — and its revenue the £2 plus the 1.5% margin, about £5 in all.
The market's structure follows the corridors. Each is a licence in the sending country, a payout network in the receiving one, a treasury position between, and a compliance programme on both. Incumbents built agent networks for cash at both ends over decades; fintechs built apps that collect by card and pay out to bank accounts and wallets, cheaper because no agent takes a cut, and grew as recipients acquired bank accounts and phones. Mobile money — M-Pesa and its cousins — made the last mile a text message in East Africa and South Asia. The regulatory weight is the de-risking: correspondent banks that closed accounts of remittance providers after AML fines, which left whole corridors to informal channels.
For fintech M&A the corridor networks, the payout partnerships and the licences are the assets — Western Union's, MoneyGram's (taken private in 2023), and the fintechs' — and the compliance record is the diligence.
Example
A remittance fintech runs 40 corridors from the UK and the EU with €4bn of annual volume at an average all-in cost to senders of 2.9% — €116m of revenue, of which €80m is FX margin and €36m fees. Its costs: €28m of payout-partner fees, €14m of collection costs, €18m of compliance (screening, onboarding, a team of 90), €9m of treasury and FX hedging, and €20m of marketing. Contribution €27m. A corridor to a high-risk jurisdiction produces a sanctions match the screening catches and reports; a correspondent bank asks questions and keeps the account; a competitor whose screening missed a similar match loses its euro clearing and its corridors within a month. A strategic buyer — a global operator wanting the fintech's app and its EU licence — pays €900m, and its diligence spends longer on the compliance files than on the app.
Common mistakes
- Comparing providers on the fee and ignoring the FX margin, which is the larger cost. - Building corridors on one correspondent bank's tolerance. - Screening that catches the sender and not the recipient, or the name and not the transliteration. - Treating remittances as a low-value, low-risk product; regulators treat the corridors as high-risk by default. - Valuing a provider on volume without the corridor mix, the margins by corridor, and the licences each one needs.