MICROCAPITAL STORY: World Bank Group Publishes Online Database of Global Remittance Prices to Improve Price Transparency in Remittance Provision Markets

The World Bank Group recently published a publicly-available online database of global remittance prices in 120 “country corridors” (i.e. two countries between which remittances are transferred) with the aim of informing low-income migrant workers and households in emerging economies. While global leaders have talked about reducing remittance-sending costs for some time, little has been done on the issue in the way of substantial quantitative data until now, says remittances specialist Dilip Ratha.

Remittances, the flow of migrant workers’ labor incomes across international borders, have garnered a growing amount of public attention over the past several years at least partly because they have exceeded the total value of international aid to become the second largest financial inflow to developing countries. The World Bank estimates that global remittance flows amounted to about USD 337 billion in 2007, of which about USD 251 billion reached some 190 million migrants in developing nations. The remittances studied in the dataset flowed from 14 major remittance sending countries to 67 receiving countries and represent about 60 percent of total remittance flows to emerging markets.

The new database, the World Bank Group hopes, will create a more transparent price environment and spur competition among transfer agents, who in turn should reduce prices and improve services. This rationale was articulated by Peer Stein, the International Finance Corporation (IFC) Manager for Financial Infrastructure and Institution Building, and it is not without its empirical precursors. One example is Latin America, where publishing prices helped reduce fees from about 15 percent in 2000 to 5.6 percent in 2006. Also, the United States-Mexico case showed that competition among providers can improve the overall quality of the services brought to market while reducing their associated fees. Mexico published data on remittance costs from 13 U.S. cities to several Mexican cities and towns, revealing a 56 percent decline in costs during the period from 1999 to 2004.

According to Michael Klein, the World Bank Group Vice President for Financial and Private Sector Development: “Any reduction in remittance prices will enable more money to remain in the pockets of migrants and their families. If the sending cost could be reduced by five percentage points relative to the value sent, recipients in developing countries could receive USD 12 billion more each year. This is equivalent to transferring the World Bank’s International Development Agency credits and grants, each year, straight to the people.”

Symbiotics S.A. noted in a recent article a number of interesting features in the dataset. On average, it is more costly to remit through banks rather than non-bank transfer agents, whose fees can range from 0.2 percent of the total value sent to as high as 40 percent. Geographic location also proved to be a significant determinant of price: remittances sent from Russia, Saudi Arabia, Singapore, Spain, the United Kingdom, and the United States are cheaper than average while those sent from Germany, Japan, and the Netherlends are more expensive.

In order to collect the data, World Bank Group researchers posed as customers and contacted 8 to 10 individual firms operating in each corridor. Both banks and non-bank intermediaries comprised each corridor’s sample of firms, and researchers made sure to select a composition of firms that covered collectively the maximum possible market share of remittance transfers. Information on transfer fees, exchange rate fees and the speeds of transfers were collected on either USD 200 or USD 500 transfers made in local currencies within each corridor. All transactions within a corridor occurred on the same day so as to prevent exchange rate risk and changes in fee structures from complicating subsequent data analyses. As a result, however, the data represents only a snapshot in time of time-variant prices and will require frequent updates (approximately every six months) in order to remain relevant.

Established in 1945 and headquartered in Washington, D.C., the World Bank Group is a family of five international organizations responsible for providing finance and advice to countries for the purposes of economic development and eliminating poverty. The five institutions are: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). The group helped craft the General Principles for International Remittance Services, a set of standards for remittance-sending practices. The Payment Systems Development Group offers financial infrastructure development (i.e. payment systems and remittances, credit reporting, and secured lending) in emerging markets. They also develop and support reform programs, offer advisory services, and provide multi-country development initiatives. Microcapital covered several important initiatives by the World Bank Group and its individual member institutions over the past year, including a study on Asian poverty, an IBRD loan program to support Chinese microfinance, an IFC agreement with microfinance institutions in Afghanistan, and an IFC loan to a microfinance bank in the Kyrgyz Republic.