When COVID-19 cases first appeared in late 2019, its contagion abilities were wildly unanticipated by world leaders, and it was ungracefully downplayed by mainstream media. This caused a subsequent uncontrollable outbreak that eventually dampened the quality of life for billions and dented economies across the globe. Among numerous heavily affected sectors, remittance flows remained one of the most resilient, with the World Bank in their May 2021 report recording flows to low- and middle-income countries at $540 billion in 2020, merely 1.6% below the 2019 total of $548 billion.
Forward to 2021, the severity of the virus outbreak heightened. Yet, a negative impact on remittance flows was avoided, and remittances to low- and middle-income countries, according to World Banks’ data points published in May 2022, have grown a robust 8.6% to reach $605 billion, surpassing the sum of foreign direct investment (FDI) and overseas development assistance (ODA). Most regions experienced a noticeable rise in the transaction flow, with Latin America and the Caribbean leading by a 25.3 percent increase, 7.6% in the Middle East and North Africa, 6.9% in South Asia, 14.1% in Sub-Saharan Africa, and 7.8% in Europe and Central Asia. Remittance to East Asia and the Pacific fell by 3.3%, mainly caused by the slowdown in China; excluding it, the region would have seen a growth of 2.5 percent. Based on predictions made in the same report, remittance flows are looking to increase by another 4.2% in 2022 in line with global macroeconomic guidance, though a resurgence of COVID-19 cases and geopolitical uncertainties caused by reimposition of mobility restrictions, especially in China, do pose downside risks.
The pandemic also catalyzed rapid growth in digitalized remittance adoption. In 2019, 90% of remittances still left the sender and recipient handling cash since a significant portion of the global population remained unbanked. However, as the COVID-19 pandemic forced numerous developed countries, such as the US, the UK, France, and Italy, into their worst contraction in 74 years, migrants rallied, dipped into their savings, and 15% even borrowed money to send funds back home. And for benefits, including better efficiency, convenience, transparency, access, and reduced cost, many decided to alter their habit and go digital.
According to the International Association of Money Transfer Networks, 40.2% of remittance transactions that were traditionally made in cash went digital in 2020; 34.1% of remittance customers worldwide opted for online channels for the first time, including elderlies who tend to be late adopters of technology, and 25.6% of senders who used to utilize informal channels, switched to digital. And as reported on May 9th of 2022 by Globe Newswire, the digital remittance market size has already reached $17.5 billion, surpassing the average consensus of $15.8 billion, with an expected compound growth rate of 15% to reach nearly $40 billion by the year 2028.
Three drivers that helped remittance outperform
With COVID-19 affecting citizens around the globe, national leaders in every country sought to take action to minimize not only hospitalization rates but also avert the possibility of significant economic depression. The United States reported its first case on January 20th of 2020, and quickly by March, more than 20 million unemployment claims were filed. Aimed at such catastrophic aftermath, federal policymakers responded by enacting five relief bills, the largest amount in recorded history. The majority of the funding went to households, SMBs, and local institutions and establishments, which quickly helped lower the unemployment rate from its April peak of 14.8% and ended the shortest economic downturn in U.S. history, lasting merely three months.
However, the benefits of stimulus injections did not end there. With a record amount of capital poured into the economy, pockets that were usually empty were being filled up, and the United States saw the largest decline in poverty in 2020 since 1967.
Besides the robust economic recovery experienced in 2020 and 2021, another factor that fueled the resilience of remittance flows is migrants’ desire to help their families living abroad by cutting consumption or savings and sending the money back home. Historically, developed regions such as Europe or North America have substantial migrant populations serving the retail and hospitality sectors; when the unemployment rate reached its pinnacle in April, remittance flow suffered a steep drop. In a report published by Pew Research Center with a concentration on remittance inflow to six Latin American countries, data showed that El Salvador and Colombia led the decline, with the flow to the countries decreasing 40% and 38.5%, respectively, in April 2020 compared to April 2019, while Mexico experienced the smallest drop. However, as soon as the stimulus implementation occurred worldwide, the broad market regained its February levels by the end of May, with an increasing trend afterward.
Based on recent data collected, personal transactions almost doubled that of business transactions in remittance in 2020 and over tripled in 2021. When dividing transferring by application, it is noted that for both years 2020 and 2021, money sent for the purpose of living-expense and consumption outweighed saving and investment purposes combined.
The third reason that promoted remittances growth during the pandemic was the customers’ preference shift from informal channels to formal channels. Informal channels, including legal methods such as physically carrying cash abroad or illegal methods such as services offered by unregistered, unlicensed, or unofficially-exempted entities, often face weak or no regulation and supervisory attention. Nonetheless, they have long competed with formal remittances channels, offering in some instances, lower costs while providing a simpler process. Today, this is no longer the case.
In countries where the value of remittance inflows as a share of GDP is significant, government administrators have started focusing on strategizing the transmissions to more formal channels by cracking down on illegal money transfer businesses, including hawala and other similar service providers, thus contributing to boosting their economy. Informal channels have also been losing their competitiveness during COVID-19; as a study by Nicole B. Simpson of the IZA Institute of Labor Economics demonstrates, when distance and the difficulty of traveling increases, the cost of sending remittance through formal channels relative to informal ones reduces. According to the report published by the Development Policy Centre in April 2021, southern US states were mainly responsible for informal remittances inflows to Mexico; and with the travel restrictions implemented in the face of the pandemic, border-crossing between the United States and Mexico dropped by 70% in April of 2020, which suddenly amplified informal channels cost and in turn drove more remittance flows to formal channels.
Advancements in technology also fueled the movement, with mobile applications and platforms such as Inter’s remittances offering (formerly USEND) and Xoom providing unmatchable convenience, time, and cost-efficiency. In the case of Inter&Co’s licensed and regulated digital money transfer platform, remittance can be initiated with simply a touch of a button, costing zero to a very low transaction fee, and funds transferred taking merely one to two business days to complete – and sometimes even in the same day –, outrivaling traditional methods including informal channels in every aspect.
Remittances’ growth by geography
Traditionally, the Asian Pacific region dominated remittance flow as they heavily engaged with their overseas counterparts for leisure, business, and education activities. Nonetheless, it is no longer the case since the pandemic. For 2021, East Asia and the Pacific region’s remittance fell by 3.3%, particularly cause by China posting a decrease as the government tightened its policy on cross-border transfer. Excluding China, the region registered a gain of 2.5%.
The leading participant since 2021 is Latin America and the Caribbean region, recording a surging flow increase of 21.6% vs. 2020, totaling $126 billion in 2021, leveraged by the adverse effects of COVID-19 and Hurricanes Grace and Ida. Numerous countries registered double-digit growth rate including Guatemala, Ecuador and Honduras.
Mexico, the region’s largest and world’s third-largest remittance recipient, saw a 25% growth in 2021, accounting for $52.7 billion of inflow, or 42% of the region’s total, as it remained to be the least costly receiving country in the G20 group. Between 2010 and 2020, the percentage of households in Mexico receiving remittances grew from 3.6% to 5.1%, and it doesn’t appear to be trailing off.
Another contributor worthy of mentioning in the Latin America region is Brazil. On September 9th, 2021, Resolution CMN No. 4,942 and Resolution BCB No. 137 were issued in dedication to the growing digitization of the financial system and new business models. These significant accomplishments have enhanced foreign exchange regulation considering the intensive use of technological solutions in international payments and transfers that contribute to competition, financial inclusion, and innovation in remittances. With these regulatory transformations, it will be feasible to carry out cross-border transmissions of up to US$10,000 more easily and competitively.
On December 29th, 2021, Federal Law 14,286 was published as a result of studies carried out by the BCB, bringing a renewed legal framework for the Brazilian foreign exchange market that will allow the adoption of requirements proportional to the worth of the operations in the foreign exchange market and the risks applied. Federal Law 14,286/2021 is in line with international standards and will allow the adoption of new business models that increase market efficiency.
Future Outlooks
Among numerous industries that unintentionally benefitted from easing policies and stimulus reliefs, the remittance market’s advance is permanent and implacable. The current growth potential is far from saturation. Millions of low-tech SMBs finally have transformational solutions to shift online, continuous workforce globalization, and working remotely blooming; things are only getting started. According to Allied Market Research, the global remittance market size was valued at $701.93 billion in 2020, and is projected to reach $1.23 trillion in the next decade, representing a CAGR of 5.7% from 2021 to 2030; within it, the digital remittance segment is expected to top $60 billion, a CAGR of 15%.
Looking forward, the pandemic is moving toward the rear-view mirror. Still, we have many challenges ahead, including inflation fears, macro-economic uncertainties, and geopolitical risks. Nevertheless, remittance, digital or traditional, will continue to act as the tool to connect people financially, assist in globalization, and help families and friends around the world to take care of each other, safely and affordably.
João Vitor Menin is Chief Executive Officer of INTER&CO (NASDAQ:INTR), a leading digital bank offering financial and non-financial services to more than 20 million customers in Brazil and the US. Menin graduated with a degree in Civil Engineering at FUMEC, in Belo Horizonte – MG (2005), and with an MBA in finance at IBMEC (2008). He joined Banco Inter, INTER&CO’s original name, in 2004 and served as a member of the Board of Directors from 2005 to 2019. In April 2008, he became COO and in December 2015 the company’s CEO. Menin has extensive experience in the financial and capital markets, and has supported and/or led the main projects of INTER&CO over the last 15 years.