The Role of Cross-border Remittance in Financial Inclusion

Financial inclusion is a key enabler for reducing poverty and boosting prosperity around the world. It refers to people having access to useful and affordable financial products and services that meet their needs.

These include transaction accounts, savings, credit, insurance, and payments. When individuals and businesses have access to financial services, they are better equipped to manage risks, start or invest in productive activities, and build wealth and financial security.

One important financial service that promotes inclusion is cross-border payment. Remittances are funds that migrants send back to families and friends in their home countries.

In recent years, remittances have become an increasingly significant source of external financing in many developing countries. Improving the formal remittance process through policy changes, technology, and innovation can expand financial access for recipients in remote and rural areas.

The Importance of Remittances

The World Bank estimates that global remittances reached $689 billion in 2018, of which $529 billion flowed to developing countries. This far exceeded other major financial inflows like foreign direct investment and overseas development assistance.

Remittances often account for a sizable share of GDP in recipient countries – over 30% in Haiti and Nepal, and around 20% in Honduras, El Salvador, and other nations. For millions of families, remittances provide critical income that is used for everyday needs like food, housing, education, and health care. During natural disasters, remittances tend to rise sharply as migrants send more funds to assist relatives in recovering.

Challenges with Access to Remittances

While remittances provide a financial lifeline for many households, sending and receiving international transfers can be challenging for migrants and recipients respectively.

On the send side, migrants often have limited access to the regulated financial system. Factors like documentation requirements, distrust of formal institutions and language barriers discourage the use of banks and money transfer operators.

Instead, migrants rely on informal channels like carrying cash across borders or transfers through local ethnic grocery stores. This comes with risks of theft, loss, and high fees that reduce the funds that ultimately reach the recipient household.

The recipient side faces even greater obstacles to accessing funds. In remote rural villages, travel to urban bank branches or money transfer operator outlets can be time-consuming and costly. Recipients may also lack the ID documents required to collect remittances or open a transaction account.

How Cross-border Remittances Enable Financial Inclusion

Bringing remittance services into rural communities is an important starting point for financial inclusion. Here are some of the ways cross-border payments can expand access when sent and received through the formal financial system:

Enabling access to transaction accounts

Opening a bank account or mobile money wallet gives recipients secure storage for funds and an entry point for using other financial services. Remittances received into an account promote saving and prudent use of funds compared to cash handouts.

Many banks and money transfer operators are linking remittance payouts directly to mobile wallets. Recipients who may not have creditworthiness for a standard bank account can build a transaction history with their remittance activity. This helps bring financially excluded groups into the formal system.

Driving the adoption of mobile financial services

Mobile phones are expanding quickly in developing countries, even in rural areas outside the reach of physical bank branches. Digital remittances linked to mobile wallets utilize this infrastructure to economically bring financial access points to remote communities.

Services like small payments, transfers, savings, credit, and insurance can be layered on using the mobile phone. Using these add-on services helps recipients move beyond basic transactions into more advanced financial activities.

Serving as the "on-ramp" to broader inclusion

Getting funds electronically from remittances establishes the underlying payments and transaction account infrastructure. This initial onboarding of new customers serves as the gateway to adopting more financial services down the road.

Once users grow familiar with digital transfers and their mobile wallet, they often become more willing to explore saving, lending, insurance, and other offerings. Their financial sophistication and inclusion expand over time thanks to remittances being the initial stepping stone.

Supporting rural agent networks

Rural agents equipped with point-of-sale (POS) devices and biometric scanners are key for bridging the last mile to reach remote recipients. When remittances are paid out through agent networks, these independent "human ATMs" become viable businesses.

The steady flow of remittance payouts provides the transactional scale for agents to maintain cash flow and profitability. In turn, they can service the broader financial needs of rural communities beyond just remittances.

Linking to social assistance and aid programs

Governments and humanitarian organizations are increasingly disbursing social payments and emergency aid through digital channels, often directly to mobile wallets.

Layering remittances on the same platforms creates synergies where recipients develop familiarity by receiving both private remittances and public social payments into their accounts. This drives the adoption of transaction accounts and mobile money services.

Trends Improving Remittance Financial Inclusion

In recent years, several promising trends have emerged that leverage remittances to promote financial inclusion among recipients:

Shifting payout from cash to accounts

New government policies, partnerships between banks and money transfer operators, and customer education are helping shift remittance payouts away from cash into transaction accounts. This is expanding account ownership and banked remittance volumes.

Mobile money integration

Tighter API integration between remittance companies and mobile wallet platforms simplifies digital disbursement straight to recipients' phones. This builds the adoption of mobile financial services.

Biometric identification

Fingerprint, face, and iris scanning through biometric POS devices removes the need for official IDs. This enables account access, remittance collection, and customer onboarding in remote areas lacking paperwork.

Rural agent expansion

Network of banking agents, merchants, pharmacies, gas stations, and other touchpoints acting as cash-in/cash-out locations are extending formal remittance networks into rural areas.

Blockchain infrastructure

Cryptocurrency and blockchain payment rails facilitate cross-border remittance payments. These can lower costs and connect senders and recipients directly through decentralized financial networks.

Identity as a Service

Shared digital ID platforms like India's Aadhaar system enable remote identity verification. This simplifies KYC checks to onboard remittance customers without in-person registration.

Looking Ahead

Expanding access to digital financial services is essential for advancing economic and social development. Cross-border remittance serves as an important gateway to financial inclusion for millions of households worldwide. Lower costs, new technologies, and supportive policies are helping remittances act as the "on-ramp" to broader financial participation.

While there is significant progress, nearly 1.7 billion adults globally remain unbanked according to the World Bank. There is a substantial opportunity for remittances and mobile financial infrastructure to extend financial inclusion to more communities.

Realizing the full potential requires coordination across payment providers, mobile operators, FinTech companies, regulators, foreign aid donors, and policymakers. With ongoing efforts, the infrastructure built around cross-border remittances can play a key role in creating an inclusive financial system that leaves no one behind.