What is Remittance?

Updated on April 8, 2024

If you need to send a money transfer to family abroad, you will come across many different options and transaction jargon. One of them will be remittance. So, what is remittance? And is it an option you can use? 

If you are wondering what is remittance you are in the right place. In this article, we will explain what is remittance and how people use it globally. It’s an important concept to understand as it’s not only relevant to the transfer of money. It actually has a global economic impact!

Let’s take a look. 

What is Remittance?

In essence, remittance is when you exchange money using a transfer. It is where one person sends funds to another person or entity (like a business). The term remittance is derived from “remit,” which means “to send back.” The most common methods used for remittance are electronic transfers and wire submissions. 

People often use remittance to transfer money to other countries. Many people, including U.S. immigrants, often use remittance to send money back to their families in their home countries. As a result, remittances are playing a growing role in the economy of developing countries. Because money is often sent to families in low-income and developing countries, it represents one of the largest income sources for these nations. Sometimes it even exceeds the amount of direct investment and official assistance for the country. 

How Remittances Work

Remittances work similarly to any other payment you’d make. There are also a few different methods you can choose from. The option you choose will depend on a combination of factors such as whether you have bank account access, how quickly you need to have the transaction completed, and the cost you are willing to pay for the transaction. 

When you do a remittance, you need to have the funds for the remittance available in your bank account. Once you’ve completed the remittance transaction, these funds will be sent to the receiver’s bank for processing. If you do a remittance to another country, the receiving bank will apply the applicable foreign exchange rate. They may also deduct banking fees before the funds reflect in the recipient’s bank account. 

Once everything is done, the funds (less the fees deducted) will be available in the recipient’s bank account in the local currency for them to use as they please. 

Special Considerations

Even though remittance is a great solution for sending money across borders, it comes with some broader challenges. Many transfers occur through methods that aren’t transparent. So, even though most remittances happen through web or wire transfer, which can easily be accounted for, there is still a significant amount of money that gets transferred for which it isn’t clear what methodologies were used. 

As a result, financial intelligence agencies are concerned that remittances are a big way violent activities like terrorism are funded. It is also very likely an easy way through which money laundering takes place. 

Remittance Examples

Remittance isn’t only something that is utilized every now and then. In the past few years, the volume of remittances done worldwide has surged. This surge is mostly due to two factors:

  1. Globally connected businesses – these days, clients, suppliers, and employees are situated all around the world, so the remittance payments for business invoices have increased globally.
  2. Migration – more and more people choose to live and work away from their families and home countries. As a result, more and more remittance payments are being made by these workers to relatives back home. 

Here are a few examples and statistics of the actual volume of remittances people do worldwide. 

According to the World Bank, the countries that receive the most remittances are:

  1. India – $79 billion in 2018 and $82.2 billion in 2019
  2. China – $67 billion in 2018 and $70.3 billion in 2019
  3. Mexico – $36 billion in 2018 and &38.7 billion in 2019
  4. The Philippines – $34 billion in 2018 and $35.1 billion in 2019
  5. Egypt – $29 billion in 2018 and $26.4 billion in 2019.

In 2018, a total value of $529 billion remittances was sent to low and middle-income countries. This number was a stark increase of 9.6% from 2017. Compared to the foreign direct investment these same countries received (only $344 billion – excluding China), the value of remittances is significantly larger. When you look at all the countries (including high-income countries), the total remittances in 2018 were $689 billion. 

In 2015, the money coming into Mexico from remittances were more than the money it generated from selling oil! 

How to Send a Remittance

If you want to pay a remittance (for example, you need to send money to your family back home), there are a few ways you can go about it. Your remittance options include: 

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

As we explained above, the option you choose will depend on things like accessibility and cost. The cost related to each option will also depend on the specific service provider or bank you use. 

The most popular method is using a traditional bank transfer (for example, an ACH transfer or wire transfer). All that is required is two bank accounts – one for you to pay from and one for your family member to receive the money into. If the second bank account isn’t with the same bank you are paying from, an additional fee may be applicable. 

Checks and money orders are often the least popular methods to use as they are slow and involves quite a few steps the bank has to complete. But sometimes, these two options are the cheapest. 

Some of the options that are still growing in popularity are blockchain and remittance apps. Paying through an app is quick and convenient and will probably become the most popular method in the future. Although security might be an issue, the method is instant, and the transaction can be confirmed through text message, for example. 

Before you try to do remittance, make sure your bank can transfer to the receiver’s bank. Sometimes certain banks can’t receive a transfer directly through remittance. If this is the case, an intermediary bank will receive the funds you transfer and then deliver the funds to the receiver’s bank account. The intermediary bank will charge a fee for their service. It might also take a few extra days for the funds to reflect. 

Conclusion

Now you don’t have to keep on wondering, “what is remittance?”. Remittance is a great way to get money to family or friends abroad. If you need to send funds, check with your bank on the remittance options available. Make sure your payment method is safe and secure, and remember to check the cost and fees that will apply before making payment.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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