Harnessing the Potential of Remittances

Lessons and strategies for developing countries

In a globalized economy, remittances are a pivotal financial flow for developing economies. These cross-border payments not only support individual livelihoods, but they also help alleviate poverty by providing financial resources for basic needs like healthcare and education, enhancing national economic stability, and helping to take the pressure off burdened social services systems. Given their counter-cyclical nature, remittances can help smooth consumption when income from sources like tourism or international investment falls, as could be seen during the pandemic, when remittances to low and middle-income countries totaled $540 billion worldwide in 2020—only 1.6 percent below 2019 totals. Even such numbers may not capture the full extent of the remittance economy: for example, while Nigeria’s officially recorded remittance inflows ($19.5 billion in 2021 and $20.1 billion in 2022) were markedly greater than official inflows of other Sub-Saharan African countries, an estimated 50 percent of remittances enter through unrecorded, informal channels.

Social sector leaders have historically channeled substantial portions of poverty alleviation spending and efforts toward programs aiming to improve traditional forms of aid, yet supporting initiatives that enhance remittance flows could be just as impactful, or more. A Mexican study of several Latin American countries found that over the last 35 years, every 10 percent increase in remittances was correlated with an approximately 7 percent decrease in the number of people living on the equivalent of less $1.9 or less per day. Unlike most forms of aid, remittances are directly controlled by the beneficiaries, who know how best to spend them, and are thus likely more cost-effective than aid programs with sizeable overhead costs.

So, how can countries with developing economies harness the full power of remittances? While there is no silver bullet approach, it is beneficial to understand how select countries are facilitating remittances through different approaches (with varying degrees of success). The case studies below offer lessons from global counterparts on how emerging technologies and policy frameworks can unlock the untapped potential of remittances in developing countries.

1. Singapore: Leveraging the Blockchain and Making Bilateral Deals

Singapore is known for being a hub of innovation, especially for “deep tech” solutions; it is also a country of immigrants, who make up more than 40 percent of its population, many of whom send remittances back to their home countries.

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Project Ubin was therefore a five-year initiative designed to develop blockchain technology for interbank financial transactions and cross-border payments, one which, at its conclusion in 2022, dramatically reduced transaction times, enhancing the financial sector's global competitiveness. The project’s success lay in a transparent, shared ledger system, simplifying the verification of international transactions and eliminating typical delays caused by multiple banking intermediaries. Through collaborative efforts between financial institutions, technology firms, and regulatory bodies, the project sought to develop and test innovative blockchain solutions that could fundamentally impact the way remittances are conducted. After the success of the project, the Monetary Authority of Singapore announced Ubin+ to advance cross-border connectivity with wholesale central bank digital currencies.

At the same time, Singapore continues to iterate on its payments network prototype, which was developed in partnership with J.P. Morgan and Temasek. Blockchain’s widespread adoption still may face challenges due to regulatory concerns and technological barriers between countries, but if successful, these efforts could set the stage for Singapore’s leadership in blockchain remittance technology globally. If government-led research initiatives like Project Ubin and Ubin+ are successful, they could encourage other countries to build up their own blockchain and payments networks to facilitate remittances and other cross-border payments.

Beyond technology, Singapore's bilateral agreements with countries like India and Thailand have also streamlined remittances. The agreement between Singapore and India, for instance, set up a joint working group on fintech and allowed India to internationally launch its RuPay Card and expand its remittance app linked to India’s Unified Payments Interface (UPI) system. In addition, this agreement allowed for the direct transfer of funds between banks in both countries, minimizing delays and lowering remittance fees. Bilateral agreements don’t simply benefit individual remitters, but also contribute to strengthening diplomatic and economic ties between nations, fostering coordination and cooperation with multiple stakeholders across borders.

2. Venezuela: Fixes in a Broken System

In Venezuela, falling oil prices and sanctions have led to more than a decade of high inflation and financial instability. At the peak of the crisis in 2018, the inflation rate was at 63,000 percent—though as recently as December 2023, its 360 percent was still the highest in the world—which forced more than seven million people to migrate to nearby countries such as Colombia and Peru. Remittances are therefore an important source of income for those remaining in the country: In 2022, $4.2 billion was remitted to approximately 29 percent of Venezuelan households.

Unlike most forms of aid, remittances are directly controlled by the beneficiaries, who know how best to spend them, and are likely more cost-effective than aid programs with sizeable overhead costs.

However, the country's limited access to the global financial system and its efforts to establish fixed exchange rates to control inflation have added complexities to the process of sending and receiving remittances. Cryptocurrency has filled in the gap: as reported, a food delivery driver in Bogota might use an app called Valiu to move money from his Colombian bank account to his families’ Venezuelan account, using Bitcoin as an intermediary (buying Bitcoin with Colombian pesos on normal exchanges and then using LocalBitcoin to sell the cryptocurrency for Bolívars, Venezuela’s currency).

Despite its popularity with users, Valiu closed at the end of 2021, citing the difficult risk environment. But decentralized and informal solutions continue to play a crucial role in facilitating remittances to Venezuela. A recent report by Insider Intelligence found that only 3 percent of remittances to Venezuela go through formal channels, with the vast majority of foreign cash sent either by mail, delivered in-person, or via cryptocurrency. Since the Venezuelan government has increasingly embraced the U.S. dollar for transactions in the country to stabilize the economy, remittances are also increasingly being sent in dollars rather than bolivars through platforms such as Zelle. In the long run, this remittance activity could undermine central bank control over monetary policy and limit government oversight. But in the short and medium-term, the additional influx of dollars helps prevent further depreciation of the Bolívar and ensures families can afford the food, medicine, and daily essentials needed for life in Venezuela.

Financial isolation and stringent currency controls can undermine the remittance economy, raising costs, settlement times, and creating hardships for local families. Countries with volatile economies can learn from Venezuela’s case by noting the upsides of dollarized remittances to help manage foreign reserves and influence the larger macroeconomic context and the downsides related to long-term monetary sovereignty. It also highlights how blockchain and other disruptive financial technologies can help reduce friction in cross-border payments, even in a broken financial system.

3. Philippines: Leapfrogging Fintech

The Philippines presents a particular challenge: though more than 10 million Filipino emigrants live in more than 200 countries, nearly half of the Filipino adult population are unbanked, making formal methods of receiving remittances, such as bank wire transfers, not possible for many. However, since most of its population has smartphones, the Philippines has leapfrogged to mobile payments, which have grown from 1 percent of total payments in 2013 to 30 percent in 2021. The Philippines leads Asia and the Pacific in the share of first-time e-cash or mobile payment app users, with 37 percent adopting solutions like GCash for the first time during the pandemic. GCash also illustrates that customizing add-on services to address specific challenges and preferences of the addressable market (such as credit) can enable licensed remittance operators to compete effectively with informal remittance players, The adoption of digital remittance solutions has also helped reduce transaction costs and improve accessibility, particularly for Filipinos in remote areas. The Philippine central bank, Bangko Sentral ng Pilipinas (BSP) has also implemented policies to ensure the stability and competitiveness of the remittance market, such as promoting competition among remittance service providers and enhancing consumer protection measures.

Emulating the Philippines' mobile banking push could help countries with high unbanked populations—such as Pakistan, Indonesia, and Egypt—expand financial services and foster broader economic participation. Rather than allowing the remittance industry to flourish informally, the Filipino government has intentionally designed competitiveness policies around remittance platform providers and formed bilateral agreements with key remittance sending countries. This proactive approach has allowed the country to fully capitalize on the upsides of the remittance industry.

4. Bangladesh: A Government’s Partnership Response to Hawala

Bangladesh is one of the world’s top recipients of remittances. Bangladeshis rely on these payments as a key source of income, which made up about 5 percent of Bangladesh’s GDP in 2022. Changes in transaction costs or settlement time can have a powerful impact on the country’s economy, as when Bangladesh’s government caps its dollar exchange rate (which reduces proceeds to beneficiaries), most recently in response to a plummeting Taka. For years, therefore, Bangladeshis and other South Asians have used hawala/hundi, an unregulated underground system based on a network of agents who receive the money from migrants and use their remote associates to pay the final recipient. Exchange rates in the hawala/hundi network are not bound by government caps, which makes the networks particularly attractive when there are wide spreads between the government-determined exchange rate and the market-determined one.

To compete with hawala and bring more remittances above-board, the Bangladeshi government now provides remittance solutions in partnership with fintech firm TerraPay. Similar to the 2019 remittance incentive policy, remitters receive a roughly 2 percent bonus during the promotional period if they remit through the TerraPay platform. The initiative provides Bangladeshis with a fast, formal channel for sending remittances, and provides the government with an inflow of foreign currency to boost its reserves. Additionally, with the central bank’s blessing, Bangladeshi banks are shifting away from the official pegged rate and are instead accepting remittances at values closer to the market rate, increasing the flow of foreign currency and making it easier to remit in the formal market. To redirect remittances away from informal channels, the Bangladeshi government is leveraging the key draw of these channels: a market-determined exchange rate.

The Path Forward

Based on the above case studies, there are several strategic steps social innovators and policy makers in the remittance ecosystem can adopt:

1. Technological Innovations

Learning from Singapore's blockchain advancements, firms and regulators can collaboratively adopt cutting-edge payment technologies to reduce transaction costs and enhance payment security. India offers another example improving digital payments systems: The Unified Payments Interface (UPI) has increased the efficacy of cross-border payments along with its lower cost and stringent adherence to the Government’s Anti-Money Laundering and Combating the Financing of Terrorism regulations. At the same time, without regular collaboration between innovators and regulators, remittance innovations may be eventually overcome by the hostile regulatory environment in which they exist (as in Venezuela).

2. Strategic Alliances

Regulators and innovators can streamline remittance processes by forming bilateral agreements with key remittance sending countries and encouraging fintech collaborations. Along with Singapore, innovators in the remittance ecosystem can also look to budding cross-border partnerships in Southern Africa and Greece for inspiration on formulating alliances. The South African Reserve Bank (SARB), the South Africa Development Community Bankers Association, and the private sector are introducing a new way for people to transfer money directly to each other, a system which will be linked to the Southern African Integrated Regional Electronic Settlement System. Rules limiting foreign ownership for money transfer operators have been eased. This move is expected to encourage competition among banks and lower the cost of sending money abroad from South Africa. Similarly, the leading Greek Bank, Eurobank, signed a MoU with the Indian government toward enhancing the cross-border payments using the UPI platform. This strategic alliance is part of Eurobank’s commitment toward becoming the bank of choice for Indian entrepreneurs seeking to establish operations in Greece or Cyprus.

3. Facilitating Financial Inclusion

Emulating the Philippines' mobile banking push can expand financial services accessible by unbanked populations, fostering broader economic participation. As GCash illustrates, going beyond basic payment services and customizing add-on services to address specific challenges and preferences of the addressable market (e.g., access to credit) can enable licensed remittance operators to compete effectively with informal remittance players currently servicing the large unbanked populations in countries like Colombia, Mexico, Nigeria, and Ethiopia.

4. Policy Reorientation

Like Bangladesh's approach, policymakers in developing markets need to align their policies with market dynamics, facilitating more transparent and efficient remittance flows. Nigeria and Mexico offer other examples of payments policy reorientation. The recent partnership between Flutterwave, a prominent African fintech player, and Nigeria’s central bank, which aims to digitize the Nigerian foreign exchange market through the Swap platform, holds a lot of promise for remittances to Nigeria.

Since 2015, the Government of Mexico has introduced reforms focused on financial inclusion, including the introduction of “banking agents” and the development of suitable payments and savings vehicles to transition from cash-based economy to electronic/mobile payments. The Government has also implemented a policy called “Paisano” that provides information and support to migrants sending remittances. The program enables migrants to access information about exchange rates and fees as well as a hotline to call for assistance.

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Economic Development

Zainab Raji
Zainab Raji is a technology and impact investor, with an MBA and a Master in International Development from Harvard University. She has spent a significant part of her career engaged in economic development in emerging markets in Africa and the Middle East at firms such as British International Investment and McKinsey.