According to the International Monetary Fund (IMF), Latin Americans living abroad who send money back home could reduce their costs related to remittances by using FinTech instead of traditional banking methods and money transfer operators, where the perceived charges are higher.
IMF’s “Working Paper” (more details here) states that financial services for cross-border payments is costly – about a 6 percent charge on the total amount – and these fees are typically paid by the sender. This means less money left over for the family or friends receiving the money. A more cost-effective approach for Latin American countries relies on using mobile banking to send money across borders. Mobile operators and mobile money can transmit remittances at a relatively low-cost, about 3 percent, compared to the cost of transfers using more traditional financial service providers, which is about 6 percent. This is critical when remittances are a source of income for many countries in the region. In El Salvador, Haiti, Honduras, and Jamaica incoming remittances exceeded 15 percent of each country’s GDP
Latin America’s share of remittances
The below IMF chart shows that Latin America’s use of mobile money both to send and receive remittances is relatively low – despite the region’s high share in total world remittances, which was about $80.5 billion in 2017. This stands in contrast to Sub-Saharan Africa, which is more advanced in using mobile money for remittances. Globally, Latin America’s share of remittances is larger than Sub-Saharan Africa’s share. But, as the chart shows, Sub-Saharan Africa accounts for the bulk of global mobile money remittance transactions, followed by East Asia and the Pacific.With Latin America’s large population abroad sending home sizeable remittances (about 1.5 percent of the region’s output in 2017) greater reliance on newer FinTech options may help reduce the costs of cross-border transfers.
FinTech is evolving rapidly in Latin America
According to a report by the InterAmerican Developmental Bank and Finnovista, FinTech startups in the region focusing on payment-related services are growing, recording a 61 percent growth in 2018. Moreover, global FinTech companies are starting to partner with local mobile network operators, money transfer operators, and banks in the region to provide financial services. Policies have a role to play as well. Across the region policymakers are already taking measures to improve the efficiency of payment systems. At the same time, policies should also guard against risks related to cyber security, money laundering, and terrorism financing. In addition, the IMF believes that a supportive regulatory environment will be crucial to spur the development of FinTech solutions for remittance transfers in Latin America.
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