Can America Change The Remittance Game?

October 01, 2016

Economic Growth and the Flow of Remittances

2015 was a year of highs and lows for America’s economic outlook. Even with revised 3rd and 4th quarter forecasts, the year reflected a trend of moderate growth, thanks to strong domestic demand. The uptick was tempered by a strong dollar that has lowered international demand for trade and tourism. (The Wall Street Journal and Kiplinger) Amid this economic upswing, international remittances are increasingly put under the global economic spotlight.
According to a recent CNN iReport, “The United States has one of the largest populations of migrant workers using international remittances in the world. This means there’s a large number of migrants working in the United States, sending a healthy portion of their paycheck back to their home countries.”  Migrant workers rely on money service businesses to send their remittances home. Through the check cashing process, individuals cash their paychecks, wire money home, and complete other financial transactions.
As the US economy expands, what does the channel of remittances flowing outward from America mean for our economy at home and the global remittance market as a whole?
The most obvious positive effect of a growing U.S. economy on the flow of remittances is the increased amount of money sent by migrant workers home to their families abroad. Since some third-world economies depend on remittances for up to 50% of their GDP, any increase in the amount of money sent home can have a big impact on their day to day lives.  Economic migrants are seizing this opportunity and even more are trying to make their way to the United States.
The draw of prosperity is so strong that many African migrants are spending their life savings to illegally cross into the U.S. and seek asylum. (Newsweek)  Despite stronger remittance activity in the U.S., and it’s position as a top migrant destination, global remittance as a whole is on track to slow down this year due to the weakened European and Russian economies. (World Bank)

The Economic Effects of Remittances

How is the current remittance landscape affecting the U.S. economy and the local economies where they end up?  In many cases, remittances are cashed and spent immediately on day-to-day expenses, rather than invested in the formal banking system. As a matter of fact, most of the poor countries that rely on remittances from abroad do not even have a formal banking system in place, and if they do, their people do not trust it.
Even though remittances are not traditionally invested, they help rejuvenate their local economies by freeing up the population to spend money on non-traditional investments like housing, work supplies, and cars.  These investments have a positive impact on the economic ecosystem as a whole and work to slowly move the country towards growth and prosperity.
In the U.S., the best example of a migrant remittance economy can be seen in the Hispanic immigrant population.  As the American economy has recovered and expanded, the flow of remittances from migrant workers home to Mexico has increased.  “Remittances to Mexico, the largest provider of foreign workers to the US, have this year risen above the $2bn a month mark they last breached on a consistent basis in 2008, according to data from Banxico, the central bank.” (Financial Times)
The benefits for relatives receiving money are undeniable. “Remittance payments are currently Mexico’s third-biggest source of dollars, ahead of foreign direct investment and tourism, BofA says.”  (Financial Times) But what about the impact on the US economy?
As native Mexicans “back home” see the benefits of remittance, they are lured to immigrate themselves by the ability to send money home and support their families. When the number of immigrants increases, the available pool of cheap labor drives down the price of goods and services and lowers the cost of living.  Because of this cost depression, many immigrants become stuck with low-paying jobs and continue to live below the poverty line.
Additionally, when money is sent home (out of the US), it is harder for the U.S. to determine income for tax purposes.  U.S. regulatory bodies like FinCEN enforce MSB compliance, which requires documentation of transactions. This helps to record the flow of remittances and protect against illegal activities. Despite these cons, the global flow of remittances is healthy for the world economy and generally spurs growth both at home and abroad. For this reason, and the potential profits to be had, American companies are cutting themselves a piece of the pie.

American Innovation, Money Transfer, and Regulation

As remittances flow across US borders, American companies are rushing into the marketplace to meet demand.  Specifically, companies are racing to make transferring money online and via mobile phone easier and more innate. American technology and social media giant, Facebook, rolled out free international money transfer services earlier this year. While the service will be free for consumers, Facebook will use financial data to lure in advertisers.
Their competitor, Snapchat, countered with their own money transfer platform, SnapCash. Social media companies are a natural fit for money transfer, as we discussed in “Is Social Media the Key to Money Transfer Success?”– and these companies are meeting their target market where they already are, online social networks.   
Money transfer giants MoneyGram and Western Union refuse to take back seat as they race to stay relevant with the younger generation sending money within the US and abroad. Every company hopes to simplify money transfer and decrease costs, but is this possible? Can mobile money transfer really cut down on the cost of remittance? Or will regulation get in the way?
The regulations for mobile payments revolve around one issue, identity. Where is the money going? Who is receiving it and how are they using it?  Regulatory bodies are implementing new rules as they go, hoping to stay one step ahead of money laundering and terrorism financing without hampering legal transactions. This is definitely a key issue to watch going forward.
At NCC, we stay on top of the latest regulatory requirements and arm our MSB clients with the information and technology they need to stay compliant and profitable as the game changes. We provide real MSB bank accounts and supported MSB services to help you operate your business efficiently, compliantly, and profitably. Our network of MSB friendly banks provides you with redundant banking partners to protect your business against indiscriminate derisking.

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