Latino Remittances Swell Despite U.S. Economic Slump
Over the past two years, while the U.S. economy has dropped from its boom time peaks and slogged through a recession, one indicator has been on the rise: the amount of money sent home by Latino immigrants living in the United States. From 2000 to 2001, remittances to Mexico and Central America grew by 28 percent from $10.2 billion to $13 billion, even as the Hispanic unemployment rolls were swelling. In 2002 the money transfers reached $14.2 billion or more, a flow of $39 million a day. By 2005 the sum, which does not capture all remittances to Latin America, will go beyond $18 billion, according to projections by the Pew Hispanic Center, a Washington, DC-based research and policy analysis organization.
These figures are not merely evidence of a kind of economic activity that seems resistant to the U.S. business cycle. They also reflect the needs pressed by economic hard times in Latin America and efforts by governments in those receiving countries to smooth the flows. Moreover, they are indicators of an international financial traffic that has grown markedly in the last few years, not only in size but also in the levels of competition and efficiency. Those sums are also the monetary expression of a profound human bond between people who come to the United States to work for long hours at low wages and the families they left behind.
From Cottage Industry to Big Business
Until recently, the money management practices of Latino immigrants in the United States aroused little attention outside their own communities. That changed as the remittance flow doubled in size during the second half of the 1990s. Although the size of the average remittance transfer is miniscule -- about $200 -- in the world of international finance, the cumulative sums have now captured the attention of government policy makers and bankers in the United States and Latin America.
Not long ago this was a cottage industry in which cash was often hand carried across borders. In the 1990s it evolved into a traffic dominated by wire transfer services such as Western Union, and now it is becoming increasingly formalized with the introduction of electronic banking products that allow a remittance deposited in an automatic teller machine (ATM) in the United States to be retrieved almost instantly from an ATM in Latin America.
What has not changed is the population of remittance senders -- except that it continually grows larger. They are, as they long have been, mostly recent immigrants with little education and low earnings, and not much familiarity with banking systems either in the United States or in their home countries. They are, however, both the generators of wealth in this industry and the prime consumers. Their decisions about how to manage their money will decide how the remittance flow evolves.
Billions in Motion
In order to better understand how remittance senders view the rapid changes taking place in the money transfer industry, the Pew Hispanic Center and the Multilateral Investment Fund of the Inter-American Development Bank joined forces to produce a report published in November, 2002: "Billions in Motion: Latino Immigrants, Remittances and Banking." The key element of the report is an intensive study of how remitters choose the means to send money home. The report was conducted by Bendixen & Associates, a public opinion research company based in Miami that specializes in polling Latinos in the United States. Extensive interviews with 302 remittance senders in Miami and Los Angeles focused on their understanding of the costs involved and their willingness to use new methods such as the electronic transfer products that U.S. banks are now putting on the market.
Some of the key findings of the recent Pew report include:
- Remittance senders are often unaware of the full costs they are paying to send money home and make little effort to explore alternative methods. Instead, they tend to rely on word-of-mouth recommendations, familiarity, and convenience in choosing a means of transferring money even when they are concerned that they are paying high fees.
- When they become aware of innovations, remittance senders are willing to entertain new money transfer products and are not particularly wary of new technologies such as the use of ATMs for international transactions. Remitters in the United States, however, judge such products not only by how they operate on the sending end of the operation but also by the convenience, security, and reliability on the receiving end. Thus, the quality of the financial services infrastructure in Mexico and the rest of Latin America is as important as the quality of the service in the United States to the future development of this industry.
- Many remittance senders take a skeptical view of banks and other financial institutions, and these opinions are based on impressions rather than first hand-knowledge because most remitters and their families do not have any kind of bank account or credit card. Minimum balances and transaction fees are widely viewed as excessively burdensome and expensive for the services rendered. Remitters who were not lawfully admitted to the United States have faced a specific obstacle because of the requirement to present U.S. identity documents when applying for a bank account. This situation is now rapidly changing with the growing acceptance by banks of the "matricula consular," a simple identity card issued by Mexican consulates that makes no reference to the holder's immigration status.
- If present trends continue, remittance transfers from the United States to Mexico and four Central America countries with large immigrant populations in the United States -- Nicaragua, El Salvador, Honduras, and Guatemala -- will exceed $20 billion a year within five years. In this decade, the transfers are likely to total more than $180 billion. These calculations are based only on the largest and most carefully monitored remittance flows to Mexico and the four Central American nations (see chart).They do not include the substantial amounts going to the Dominican Republic, Jamaica, and other nations of the Caribbean and South America with large and growing immigrant populations in the United States.
- These very large amounts of money are coming from one of the least prosperous segments of American society. Remittance senders tend to be young immigrants who have relatively little education compared to the rest of the U.S. population and who are employed predominately as laborers for low wages.
This is an important moment to discuss the remittance traffic because it is experiencing rapid growth and change. The cost of sending money home from the United States has declined sharply in recent years. Research conducted by Manuel Orozco, project director for Central America of the Inter-American Dialogue, shows that, on average, transfer fees and foreign exchange charges for sending a $200 remittance to Latin America in the summer of 2002 were $16.32, which is a little more than half of what it was three years ago. While the cost of sending money home has declined, individuals still pay a significant portion of the total amount they remit towards various fees and charges. This is especially so once the cost of cashing a paycheck and other fees are added into the picture. By that time, the total cost of the average remittance transfer often reaches 10 or 15 percent of the amount sent.
There is every reason to believe, however, that costs could decline further. "One of the reasons that prices have remained high is a lack of competition in the money transfer business," said Sheila C. Bair, then assistant treasury secretary for financial institutions, at a multilateral investment fund regional conference earlier this year. "The industry continues to be dominated by a small number of money transmitters that generally tend to charge higher fees than banks or credit unions. By increasing competition, the price of remittances should continue to drop."
Reducing the cost to five percent of the amount remitted would free up more than $1 billion next year for some of the poorest households in the United States, Mexico, and the Central American countries covered in the Pew Hispanic Center projections. Between now and the end of the decade, the savings could amount to some $12 billion. It goes without saying that such a sum could change many, many lives. Whether this promise is realized depends on the interaction between financial institutions and a population of new consumers.
Bair, Sheila C. February 26, 2002. Remarks to Multilateral Investment Fund of the Inter-American Development Bank Second Regional Conference
Orozco, Manuel. 2002. "Attracting remittances: Market, Money and Reduced Costs." Report commissioned by the Multilateral Development Investment Fund of the Inter-American Development Bank. Washington D.C.