Defination of remittance

Remittance: Definition, Understanding, Examples, Process

What is Remittance?

Generally speaking, sending money from one account to other as a payment or gift is called remittance. Particularly, remittance is used when a migrant worker working abroad sends money to his/her family or friends back to the origin country for non-commercial purposes. The origin of remittance is remit which means to send money to someone.

Recmmended: Economics Definition: Examples, Types, Theories

More Understanding about Remittance

Migrant workers go to different countries for jobs and send a part of their earnings back to their home countries for the wellbeing of their family members or other purposes. The process of sending money from abroad is difficult and time-consuming,  sender has to give service charge for this transaction.

The payment made for the purpose of business, like, if someone does freelance work and get paid from an international client or someone makes a payment internationally for purchasing a product, can be termed as a remittance. As these payments are for commercial purposes, in such cases, the remittance term is not used.

However, the total remittance of a country plays a big role in the GDP of a country, for some countries the remittance is up to 10% of GDP. Although, the collection of actual data of remittances is almost impossible. Different organizations and countries calculate remittance based on the online overseas transaction, the money or goods send physically are not generally considered.

The remittance amount is more for developing countries because people from those countries go to different developed or gulf countries for work.

World Bank predicted that remittance in 2020 can be declined by 20% due to restrictions and economic crisis induced by Covid-19, but remittance flow remains almost steady. Remittance flow reached US$ 540 billion in lower-middle countries, a 1.6% deep from US$ 548 billion seen in 2019. India has been the largest recipient of remittance since 2008 and in 2020 is at the top. The United States is the largest source country in terms of the recipient of remittance in 2020.  

Types of remittances

In the process of sending remittance, two persons stand at two terminal points; the sender and receiver. Considering two circumstances remittance is classified into two types:  

  1. Outward Remittance
  2. Inward remittance

Outward Remittance: Any type of transfer outside the country can be called outward remittance. Suppose father is sending money to her child for buying an iPhone, this is outward remittance.

Inward Remittance: Receiving money from abroad can be termed as inward remittance. The girl/boy receives money sent by her/his father, this is inward remittance.

How does remittance work?

Remittance works in the same way as the normal overseas transaction occurs. The only difference is the purpose of sending money. In order to send remittance, both parties, sending and receiving parties must have a bank account. If a person has his own account then he/she can send it online via mobile apps or direct bank transfer. In most cases, migrant workers don’t have a bank account in that country where went for work. In such a case, wire transfer is the best option. Wire companies help customers sending money through their channels for which service charge is deducted.

If someone wants to give less amount as service charge, he should choose money order or check facility. But both methods are time-consuming.

Blockchain and remittance apps are gaining popularity, as they are less time-consuming and traceable.

Wire transfer is the most familiar method of sending remittances. The wire networks such as SWIFT (Society for Worldwide Interbank Financial Telecommunication), Fedwire, generally take 3-5 business days or it may take longer for overseas transactions.

 One popular non-bank wire transfer company is Western Union, whose international money transfer service is available in more than 200 countries.

The reason for taking 3-5 days is the use of Automated Clearing Houses (ACH) and foreign processing method. A domestic wire transfer only has to go through a domestic ACH and can be delivered within a day. International wire transfers must clear a domestic ACH and also its foreign equivalent thus adding additional days to the process).

Banks charge high fees for this transaction depending on the currency and amount being transferred. In addition to this bank will apply a currency exchange rate and all have to pay by the customer. If a bank does not have a direct connection to receiving bank in other countries, then the money transferred through various channels/banks and take more time and charge very high fees.

Popular remittance providers

The remittance industry is big and Wire transfer is the most used remittance method. The remittance industry mostly dominated in  European financial centers and the American West, with Western Union.

In wire transfer no physical money is sent, banks send details to recipient banks as provided by the sender. Recipient banks confirm that and then relatives or family members collect money from the bank.

Across the globe, various companies provide wire transfer services. A sender gives money and address to these companies and they manage all, for which they charge high fees.

Some most popular remittance providers are:

#ProviderExchange Rate Markup
#2Wise (formally TransferWise)0.5%
#6Remitly1% – 2%
#8Ria Money Transfer0.5% – 2.5%
#9Xoom2% – 4%
#10MoneyGram4% – 5%

The other remittance options are:

  • Doing a bank transfer
  • Sending a wire transfer 
  • Home delivery
  • Mobile money
  • Blockchain
  • Remittance apps
  • Money order
  • Checks. 

Detailed method of sending and receiving remittances  

In recent times, sending and receiving remittances can be done within days. But it totally depends on the sender’s country and receiver’s country, method of payment, the network involved in the method. Ignoring other unprecedented factors it takes 1-5 working days to complete the transfer.  

Charges associated with remittance payment

Exchange Rate Margin: The difference between the mid-market exchange rate and the exchange rate offered to private customers by banks and currency exchange services – is called exchange rate margin.

India is the largest recipient of remittance, and the US is the top sender. So, let’s take an example, an Indian living abroad wants to send remittance to his family live in India. The current exchange (mid-market exchange rate)rate for 1 US dollar is approximately 75 rupees (Indian currency). But the remittance sender company/bank sticks to give an exchange value of 72 rupees for 1 US dollar. Clearly, the company makes a profit of 3 rupees. Sometimes they claim no additional charge imposed by them, but the difference between exchange rates gives them huge profit as internationally billions of dollar amount transferred in a single financial year.

Normally exchange rate margin varies from 1% to 5% on top of the mid-market rate.

Banks, PayPal, and traditional cash-based currency exchange services (e.g. Western Union and MoneyGram) charge the highest exchange rate margins. But digital money transfer specialists (e.g. Wise and Paysend) tend to charge the lowest exchange rate margins.

Transfer Fee: This is the charge that banks or companies take for sending remittances. Take an idea, TransferWise (a remittance transferrer) charges up to a maximum of $95.44 on a $10,000 transfer from the USA to India (rate may vary over time). Transfer fee changes country to country with time and, the method you choose to transfer.  

Additional Fees: If a bank doesn’t have a direct connection to another bank in a particular country, in such a case, another bank takes the role of a medium and transfers to the receivers’ bank. It may be the cause of additional transferring charges. Sometimes remittance sender wants home delivery of cash, for those services additional fees must be paid.

Remittance payment sending process

  1. Choose a service provider: First you have to choose a service provider for sending payment. While choosing this, important things to look out for are exchange rate margin and transfer fee for sending a certain amount of money. Generally, the more the money you send, the less amount of fees you have to pay, comparing to charges on less amount of money you send.  
  2. Sing Up and provide recipient details: You will need to provide your details like passport, visa, or other government ID or another legal document they ask you to provide. After that, they will complete the signup process for sending remittances. Receivers’ details, bank account number, bank branch, postal address (for home delivery of cash) all that information you need to provide. If a receiver has no account, then he may visit the agency office in that country to collect cash by providing details as provided by the sender.
  3. Pay money: Finally, pay the money you want to send along with the transaction and additional fees.

Receiving remittance payment

  1. Visit agent location and provide details: After sending process completes, a receiver can collect cash. Visit the nearest agent location and provide the details as provided by the sender with transaction ID (collect from sender).
  2. Collect Cash: Completing verification, the agent will give you cash. If bank transfer, you can withdraw as well.  

Top 5 remittance recipient countries

  1. India
  2. China
  3. Mexico
  4. Philippines
  5. Egypt

Remittance in India

World Bank predicted in 2020 the amount of remittance received in India could be low compared to the previous year as an effect of the Covid-19 pandemic. But, in May 2021 report claimed India received USD 83 billion remittances in 2020 slightly less than the previous year; 0.2% drop.

 India’s diaspora is distributed across the world, the majority in UAE (3.5 million), the US (2.7 million), and Saudi Arabia (2.5 million), the leading country in the number of migrant workers living abroad.

International Migration 2020 Highlights’, by the Population Division of UN DES report claimed 18 million persons from India were living outside of their country of birth.

Rupee Drawing Arrangement (RDA), a channel to receive cross-border remittances from overseas jurisdictions, under this arrangement, the Authorized Category I banks enter into tie-ups with the non-resident Exchange Houses in the FATF compliant countries to open and maintain their Vostro Account. 75.2% of the transaction is made through RDA, resulting in the most preferred method of receiving remittance. This method is cost-effective compared to the others.

India received remittance over years (in billions of US dollars)


Remittance in China

Another Asian country, China, is second largest remittance recipient country. China received USD 59.5 billion in remittance in 2020 against 70.3 billion in the previous year, declining effect due to covid-19 pandemic.

As per 2018 data, there are about 10 million Chinese diasporic workers living all over the world.

Year wise remittance received in China (in billions of US Dollar)


Remittance in Mexico

In 2020, Mexico received a total of USD 42.9 billion. Despite covid-19 pandemic remittance received in Mexico increased by 9.9% against the previous year. But the economic situation was the worst hit by this pandemic, it is estimated that after the 1930’s great depression such contraction occurred.

The biggest source of remittances in Mexico is the United States. Remittances to Mexico could grow by 7.0% in 2021. The accelerated vaccination of the population and the economic stimulus package for US $ 1.9 million in the U.S. may boost the growth of remittances to Mexico.

Year wise remittance received in Mexico (in billions of US Dollar)


Remittance in Philippines

Cash remittance from Filipinos working overseas dropped by only 0.7% in 2020 against the last year 2019. Philippines received a total of USD 34.9 billion.

According to the central bank of Philippines, 40% of total remittance received came from the US and the rest from Singapore, Canada, Hong Kong, Qatar, South Korea, and Taiwan grew while those from Saudi Arabia, Japan, the U.K., United Arab Emirates, Germany, and Kuwait, etc.

Year wise remittance received in Philippines (in billions of US Dollar)


Remittance in Egypt

Remittance from Egyptian living abroad rose by 10.5% in 2020 against the previous year, totaling 29.6 USD billion. In 2019 Egypt receive a total of USD 26.4 billion

Remittances of Egyptian expatriates, revenues of the Suez Canal, the tourism sector, and foreign investments, are the major sources of hard currency in the country. Other sources of hard currency except remittance faced a great hit by the financial crisis induced by covid-19.

Year wise remittance received in Egypt (in billions of US Dollar)

Top remittance recipient countries in the world

Top source countries for remittance

The United States, United Arab Emirates, Saudi Arabia, and the Russian Federation

Remittances from the United States

The United States was the largest sender in 2020, recording around $68 billion in outflows, followed by the United Arab Emirates ($43 billion)and Saudi Arabia ($35 billion) (migration and development brief 34).

According to the United Nations Department for Economic and Social Affairs (UNDESA 2020), the worldwide number of international migrants (including refugees) was estimated at 281 million in 2020. The top host countries for migrants are the United States (51 million), Germany (16 million), Saudi Arabia (13 million), Russia (12 million), the United Kingdom (9 million), the United Arab Emirates (9 million), France (9 million), Canada (8 million), Australia (8 million), and Spain (7 million).

1. What is remittance advice?

A document or note that provides you with the information about the payment you made. Remittance advice notes include the:
1. invoice number 2. payment amount 3. method of payment

2. How does remittance help the economy?

 Remittances received in a country is a big part of a country’s economy as well as GDP. The money migrant workers send helps their families to meet their routine expenses, thereby improving their standard of living and purchasing power.

3. What are the benefits of remittance?

1. Remittancehelps in providing relief in times of natural calamities such as floods, earthquakes, tsunami, etc.
2. Remittances can ease the credit constraints of unbanked households in poor rural areas, facilitate asset accumulation and business investments, promote financial literacy, and
reduce poverty.

4. What are the bad efffects of remittance?

1. Remittances can reduce labor supply and create a culture of dependency that inhibits economic growth.
2. Remittances can increase the consumption of nontradable goods, raise their prices, appreciate the real exchange rate, and decrease exports, thus damaging the receiving country’s competitiveness in world markets.

Read also: Economics Definition: Examples, Types, Theories

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