7 ways the coronavirus pandemic changed remittances

Before COVID-19, the cross-border money transfer industry was undergoing a gradual shift away from customers using local, walk-in agents to using digital channels — often in the form of mobile apps promoted by startups and fintechs such as Remitly, WorldRemitand TransferWise; as well as non-banks such as PayPal, which owns Xoom.

However, when the pandemic hit full-force and lockdowns closed many agent locations, the industry’s shift to digital accelerated quickly. Even as job losses rose among those sending money overseas, the demand from recipients kept money moving, including among legacy companies like Western Union and MoneyGram.

But that shift in demand wasn't enough to overcome the full effects of the pandemic. Here’s seven ways COVID-19 has impacted the remittance market.

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Before the COVID-19 pandemic hit the global community, the World Bank forecast in October 2019 that remittances would grow to a record $739 billion this year, followed by $758 billion in 2021.

Fast-forward one year later, and remittance payment volume was projected to fall a collective $222 billion over 2020 and 2021, due to the impact of the coronavirus pandemic. According to the October 2020 World Bank estimates, remittances will drop to $666 billion this year, down about 10% from the previous $739 billion estimate. In 2021, remittances will continue their fall to about $619 billion, an almost 20% drop from the previous estimate of $768 billion.

As a result of the rapid loss of remittance volume, coupled with other economic hardships, the World Bank is reporting that global extreme poverty will rise for the first time in 20 years. Further, the World Bank is now estimating that COVID-19 will push 88 million to 115 million people into extreme poverty in 2020, and the total will rise to 150 million by the end of 2021. Extreme poverty is defined as people living on less than $1.90 per day and affects between 9.1% and 9.4% of the world’s population.
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Despite the overall decline in remittances, the trend is not being felt evenly across the world. Some countries are actually experiencing an increase in remittance payments.

Three of the top eight inbound remittance markets — Mexico, Pakistan and Bangladesh — are all expected to see their payments rise this year in an overall declining market, based on data from The World Bank.

The rise in the three countries is being attributed to a number of factors. In the case of Mexico, the devaluation of the Mexican Peso relative to the U.S. dollar over the past year has created a remittance opportunity for immigrants, as the money sent home is able to buy more things for friends and families. Since 97% of Mexican immigrants live in the U.S., according to Pew Research Center, most of the money earned is in dollars.

As for Pakistan and Bangladesh, the World Bank says that much of the money being sent back was originally destined for a Muslim Haj pilgrimage to Saudi Arabia by workers living abroad. Since the Saudi government has issued fewer tourist visas and has restricted access to the holy city of Mecca and its shrines, these travel funds are now being sent back home instead of being spent on a spiritual retreat.
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The initial shock of the global emergency and resulting national lockdowns sent remittances into a tailspin. For Latin American immigrant workers, the month of April saw remittance volumes decline as much as 32% compared to April 2019, according to the Pew Research Center.

Then something unexpected happened — remittance volumes surged. In June, remittances sent to the Dominican Republic were up by 25.7% compared to the same month in 2019. Similar trends were seen with remittances sent to Honduras, which was up 15.2%; Mexico, which was up 11.1%; and Guatemala and El Salvador, which were both up almost 10% compared to 2019 levels.

One factor aiding the jump in remittances has been the acceleration in the shift to digital over traditional walk-in store traffic, as many retail locations hosting MoneyGram or Western Union agents were closed.

“The pandemic has dislodged the payment habits of remittance customers,” said Matt Oppenheimer, co-founder and CEO of Remitly, in an earlier interview. “People forget that 70% of remittances originate in physical locations. Unless the customer trusts the [remittance] service you can’t even talk about faster speed or better price. Getting over that trust hurdle is huge and it takes time. However, as many agents have closed locations or reduced store capacities and handling cash is now perceived as being unsafe and inconvenient, it’s a different situation.”
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Since COVID-19, there’s been a global economic slowdown, and the International Monetary Fund (IMF) projects that worldwide GDP will fall in 2020 by 4.4% — a figure much less severe than earlier projections, as national lockdowns were not as severe as previously forecasted. While the IMF predicts the global economy will grow again in 2021, the unknown nature of the virus may change the reality.

National economies that were heavily dependent on remittances to fuel their GDPs prior to the pandemic have become even more reliant on them, based on data from the World Bank.

Haiti, where remittances amounted to 37.1% of the country’s GDP prior to the pandemic, is now relying on the money transfers to fuel 38.2% of its GDP. In Jamaica, remittances as a percentage of the country’s GDP have grown from 16.4% to 18.3% as a percentage of its GDP. In the Dominican Republic, remittances now account for one-in-ten GDP dollars, up over 25% since the pandemic began.
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Western Union has more than 550,000 agent locations spread across 200+ countries, according to its third-quarter investor presentation. However, in an age where cash is perceived as dirty and visiting stores can be hazardous to one’s health, such a broad network is ripe for displacement.

According to Western Union’s financial documents, 88% of its revenue is derived from consumer-to-consumer (C2C) transactions, much of which relies on domestic and international remittances. While Western Union has been building a digital business to combat startups such as Remitly and WorldRemit, just 16% of its C2C revenues were derived from digital money transfers in fourth quarter 2019. By the end of third quarter of 2020, digital revenue rose to 21% of Western Union’s C2C franchise.

The impact is clear on the company’s overall business. Digital revenue grew by 50% in its second quarter, yet overall C2C revenue fell by 11%. In the third quarter of 2020, digital revenue continued to grow quickly, reaching 46% growth year-over-year; yet overall C2C revenue stayed flat.
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The most expensive way to fund a remittance is by using cash — and with COVID-19, it’s becoming even more expensive to do so. The average global cost to fund a remittance with cash was 7.29% in the third quarter of 2020, up from 7.05% for the same quarter in 2019 and 7.02% in 2018.

The cost to send money overseas is largely driven by how the money transfer is funded, since certain instruments cost the transmitter more money. Credit cards incur interchange fees, and bank transfers incur ACH charges or bank fees, for example.

The least costly funding instrument is mobile money or a mobile wallet. The logic behind a transmitter showing favorable pricing to money kept in a stored wallet is that the company can earn a fee when that money is used to make purchases, and has access to the funds when they remain unused in the wallet. Additionally, the fraud risk is lower since the transmitter already has possession of the funds.
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The COVID-19 pandemic appears to have stopped — and in some cases reversed — a five-year trend of slow, but steady decreases in the average cost or remittances. Based on data from the World Bank, which tracks pricing as part of an overall mission to lower the cost of funds transfers, money transmitters in certain large, developed economies have begun to raise remittance fees during the pandemic. This could be the result of money transmitters sensing an opportunity to maximize fee revenue in a declining market in order to keep their shareholders happy.

Between the first quarter and the third quarter of 2020, the average cost to remit money from Japan has gone from 9.4% to 10.58%. Italy, which has traditionally been one of the cheaper countries from which to remit money in Europe, has seen a 47 basis point increase in remittance rates.
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