1 Using Data to Better Understand Worker RemittancesDecember, 2016 Using Data to Better Understand Worker Remittances Manuel Orozco Talk presented at the International Conference: ‘Improving Data on International Migration’ Towards Agenda 2030 and the Global Compact on Migration Federal Foreign Office, Berlin, 2-3 December 2016

2 How to improve data on remittances and remittance transaction costs?When it comes to looking at data within the context of migration and development, is important to take into consideration a few points: First, what is the research framework informing the scope and depth of the relationship migration-development? What is the link between remittances and development? What policy considerations should be addressed within that link?

3 Units of analysis that guide data collectionData, or the systematization of facts through methods that make knowledge measurable depends on a conceptual framework, measuring methods, analytical tools and policy guidance; Conceptualization is not arbitrary but respond to five units of analysis, namely: Actors (primary, intervening, secondary), Dynamics (mobility, engagement, return), Economic [social, political] activities (remitting, investing, consuming, giving, sharing); Norms and rules and spaces of operation

4 Activity associated with …Some Units of Analysis intersecting Migration and Development during the life as migrants engaging their homeland Adult Migrants Participating Host Country Intermediation Home country Activity associated with … Family remittances 60%-80% The decision to remit a share of the workers’ income Remittance service providers Effect of remittances on family household economics Consumptio n 80%-90% Consumption of home-country goods or services Supply chain of products and services Production chain of home country goods Philanthropy 10%-20% Raise funds to donate to the hometown Transfer and donation implementation mechanisms Funds received and projects implemented Entrepreneu rship 5%-10% The decision to create or maintain a minority owned business The enabling environment to form a business Creating a micro or small enterprise by an immigrant or family member in homeland Investment The effort to allocate capital for a particular investment or business venture The investment environment Allocating capital for a particular asset or venture in the hometown Knowledge transfer 5% Information and skills acquired as development tools Institutions forming skills in the knowledge economy Methods to share information, knowledge and skills that enhance local and national development The scope of engagement: complex and goes beyond costs:

5 More specifically on remittances…Activities or Issues Associated to Remittances Market intermediation for remittances Regulatory environment: access-barriers to entry, foreign currency deposits; AML, anti-terrorism, and other rules Type of intermediaries: licensed-unlicensed Competition on the payout Financial inclusion issues Remittance recipients and effects of remittances on income Expenditure and local market demand Expenditure and taxation Savings capability, money management and financial access Banking services to remittance recipients: scope (loans, payments, savings) Banking services to remittance recipients: depth (geographic dispersion) Microfinance credit and financial inclusion to recipients

6 Marketplace Intermediation: -Players -Dynamics -Activities; -Norms, rules; -Spaces of operation

7 Unit of Analysis: Marketplace IntermediationRemittance transfers are shaped by rules and the existing marketplace that intermediates the transfers. These rules, as well as supply and demand in this remittance marketplace, significantly shape the transfer process. Migrants buy foreign currency to send to relatives at a certain price; in this context, money is treated as a commodity, or a good for which people have a demand. The purchase of such currency is regulated through legislation pertaining to foreign currency controls of different kinds (authorized entities, financial crimes, consumer protection, sovereignty). These rules are one component of the transfer process, as intermediaries must deal with different issues relating to development. Other aspects of the money transfer include The legal position of the transfer (licensed or unlicensed) The sending methods (cash or account) The mechanisms utilized (front-end technology or ancillary tools) The extent of competition in the origin by remittance service providers The destination by payers (Banks, Forex, Microfinance institutions, etc). In addition, there are value added elements in the transfer, such as opportunities for migrants to achieve financial access.

8 Unit of Analysis: Marketplace Intermediation

9 The Costs of Sending

10 An Issue for Debate: the Costs of SendingRemittance services are often considered to be expensive and inefficient. However it is important to consider three questions: What drives the assumption that costs are high? Can costs reasonably be lowered? What impact would this have on development? Finally, are we asking the right question, given the relationship between migration and development and the role of intermediation? The literature on transaction costs does not say why prices are ‘high’ or ‘low’, they simply say they are expensive. The statement appears more as a normative rather than empirically founded explanation. Why is 6% to send $200 considered expensive? Or why is it expensive to pay $9 to send $300? Is it an arbitrary pricing scheme or is it based competition and operating costs?

11 An Issue for Debate: the Costs of SendingIt is important to unpack the attributes and properties shaping a transaction cost as they relate to the intermediation process. Thus, we find that cost operates in an interplay of supply and demand factors. Region Average Total cost* Rural Population Regulations Competition Economies of scale Operating costs Southern Africa 9% 61% Restrictive Weak Limited Expensive Pacific 68% Moderate Northern Africa 40% Eastern Europe 8% 39% South East Asia 53% Strong Large Low Middle East 7% 32% Caucasus-Balkan 37% South Asia 67% Caribbean 41% Open South America 6% 33% Central America and Mexico 5% Central Asia 2% 59%

12 Analyzing Data on Costs depends on Assessing the Units of Analysis: attributes and properties of sending money. Determinants of costs Variable Source Fee World Bank Remittance Pricing Database, 3rd Quarter 2015 Exchange rate spread Total cost Fee as percent of total cost Total percent cost Exchange rate spread as percent of total cost Number of Agents in the US IAD data collection Payout Branches (number of agent locations in the destination) Payout locations as share of all RSP locations RSP Market share, 2014 Country Market size (Volume USD Million) World Bank Data Number of Annual Remittance Transactions AML Index Score Basel Anti-Money Laundering Index

13 Analyzing Data: Latin America and Southern EuropeSpecifically, increases in price is statistically significant and positively correlated with increases in more agents in the origin and payout, with higher risk posed to a country and with the spread of the exchange rate. The model shows that prices increase 7 basis points when a country risk is higher and 9 basis points when the exchange rate spread increases. Agents in the origin and destination also affect pricing, but particularly in the payout. Southern Europe is one of the most expensive regions to send money from, with transfer costs typically around 7% There is a statistical correlation between costs and economies of scale, type of RSP, number of payout locations in the destination, presence outside the capital and number of RSPs in the origination.

14 Competition & Financial AccessAn alternative way to look at remittance marketplace intermediation: competition and financial access Variable Metric Scope of services and operation Competitors Number of RSPs in a country corridor Products Number of products offered by the RSP Countries in which it operates Number of all countries served Consumer transaction costs Fee charged Average fee for all countries FX charged Average Fx for all countries Total cost Average fee plus Average Fx Network of operation Payment points Sum of an RSP’s total payment points Payment points / Country Sum of an RSP’s total payment points divided by the number of countries in which the RSP operates Payment points / Network Average percentages for each country Financial access Rural/Urban Ratio Percent of all payment points that are rural Bank partners as ratio of all payment points Banks payment points / All payment points MFI partners as ratio of all payment points MFI payment points / all payment points Client support Extent to which call centers or tellers are helpful to clients

15 Some conclusions… We are not asking the right questions…what is the relationship between migration and development, and how should it be addressed? What role do remittances play in development? A matter of bias: remittances have been assumed to be the only practical measurable unit related to development; The choice of using cost for analysis reflects a crude rational choice approach Consequences: incomplete and inaccurate policy guidance Issues are excluded, such as asset building and financial inclusion Cost assumptions were not validated but posed normatively not empirically

16 The Policy Problem Choice of data depends on framing the issues.Issue framing is shaped by uniformed decisions, untested assumptions and limited consultation and cooperation; The problem is not lack of data; we live in a noisy knowledge space, rather there is prevalence of messaging over content and rigor;

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18 Transfers Costs from Southern EuropeIf the… Cost will Size of the market is larger ↓ Originator is an MTO Number of partner locations is widespread Larger share of payout locations are in the capital ↑ Number of RSPs is large Source: Manuel Orozco, The Remittance Marketplace in Europe, See

19 Transaction Costs: Supply Side IssuesRemittance pricing is the byproduct of the operating costs to run a particular business. These operating costs are based on fixed and variable costs; for example, quantities, production costs to run known quantities (commissions to agents), and other cost center related expenses (administration, compliance, information and communication technology support, marketing, and call center client support, for example).  The current and prevailing business model is predominantly demand-driven: immigrants continue to prefer cash transfers, at least on the payout. To break it down, this model includes costs related to origination and destination agents (typically 40% of the revenue), and operating costs related to the management of the business. However, as data on costs has shown, average pricing is quite variable across countries and service providers. Why, if remittance transfer services are sold or serviced as a commodity (a product delivered), do their prices vary across corridors and companies? What determines price differences between Haiti and Honduras, for example? 

20 Transfer Costs to Selected Countries

21 Analyzing data: Latin America & Southern EuropeOne way to analyze costs is by considering whether price differences are influenced by some of the components that make up for the expenses (such as fee and exchange rate commissions to agents, compliance, or economies of scale).    To assess pricing determinants, one can look at factors directly connected to the business operation: agents in the origin and destination, changes in the exchange rate (fees are typically fixed, so don’t change), compliance costs resulting from higher risk locations, market share, and economies of scale.  The following model is thus used to test some of the determinants of cost. Log (Pricing) = Agents + Payers + FX + Country Risk + RSP market share + Country volume

22 Analyzing data: Latin America & Southern EuropeThe following assumptions are highlighted from the model: An RSP that has a far greater number of originating and/or paying agents will have a higher price because it has to recover its commission costs distributed to a larger group; otherwise it faces the law of diminishing returns (it can add more agents, but its ‘product’ will be the same, yet, it will cost more, and therefore it has to adjust its price).  An RSP that has a higher market share in a corridor will be able to ‘afford’ or ‘risk’ offering a higher price because it can bet on losing a fraction of clients if the price is too expensive; An RSP that works in a country with higher financial risks will have to spend more on regulatory compliance (AML practices, for example), and thus will increase pricing. An RSP that works in a country with small economies of scale in its volume or number of transfers will face diminishing returns.

23 Analyzing Data: Latin America and Southern EuropeThe results of a regression OLS model confirm the hypotheses of cost determinants. Specifically, increases in price is statistically significant and positively correlated with increases in more agents in the origin and payout, with higher risk posed to a country and with the spread of the exchange rate. The model shows that prices increase 7 basis points when a country risk is higher and 9 basis points when the exchange rate spread increases. Agents in the origin and destination also affect pricing, but particularly in the payout.

24 Transfers Costs from Southern EuropeSouthern Europe is one of the most expensive regions to send money from, with transfer costs typically around 7% There is a statistical correlation between costs and economies of scale, type of RSP, number of payout locations in the destination, presence outside the capital and number of RSPs in the origination. In addition to the number of competitors, particularly MTOs, the presence of payout locations contributes to lower costs. Consumers like to ensure that their transfers arrive as close as possible to their family’s residence. The more payers and closer their locations to the beneficiary, the lower the cost because all companies seek to capture as many locations as possible. In South Eastern Europe there are over three hundred thousand payout locations, two thirds of which are in Ukraine. Not only are there numerous payment points, but the types of payment points are more diverse than other regions.

25 Transfers Costs from Southern EuropeIf the… Cost will Size of the market is larger ↓ Originator is an MTO Number of partner locations is widespread Larger share of payout locations are in the capital ↑ Number of RSPs is large Source: Manuel Orozco, The Remittance Marketplace in Europe, See

26 Understanding Transaction Costs: Consumer Side IssuesAlthough the destination country is a significant factor in the cost, there are some consumer-side characteristics that help differentiate between those that pay more and those that pay less. Those who send to their closest relatives pay less. Part of the reason is that the more one remits, the less one is paying relative to the principal amount. Therefore, those sending over US$300 will pay $9 compared to those sending $250, for example (closet relatives receive more). Those who have full time employment also pay less, relative to what they send. Moreover, the choice of company determines cost. Those who think their RSP is inexpensive and transparent in its pricing pay up to 10% less, but those who say their RSP is easy to use pay up to 7% more for the service. Those who send more often and for longer will be paying 5-10% more. However, if they are sending more they will pay less as a percentage.

27 Beyond Remittances: The Units of Analysis in Migration and DevelopmentOne of the problems with the analysis of transaction costs is the assumption that it is a key development policy issue. Instead, we need to start by validating the intersecting issues between migration and development. The engagement or links that migrants establish through transnational economic activities, such as family remittances, are accompanied by several processes that together constitute or a development chain. These activities include Money transfers (family remittances), Entrepreneurship, Capital investment Philanthropy, Consumption of home-country products (the nostalgia trade), and Knowledge transfer. These activities occur at various stages in the migration process, and relate to the host country, to intermediation, and to the home country. They represent central units of analysis. These activities and moments are what form the value chain.  At least two critical development factors, financial and market access are present in this relationship, and the efficient performance of these two ensures the success of the value chain.

28 Beyond Remittances: The Units of Analysis in Migration and DevelopmentThe scope of engagement is more complex and goes beyond costs: Adult Migrants Participating Host Country Intermediation Home country Activity associated with … Family remittances 60%-80% The decision to remit a share of the workers’ income Remittance service providers Effect of remittances on family household economics Consumption 80%-90% Consumption of home-country goods or services Supply chain of products and services Production chain of home country goods Philanthropy 10%-20% Raise funds to donate to the hometown Transfer and donation implementation mechanisms Funds received and projects implemented Entrepreneurship 5%-10% The decision to create or maintain a minority owned business The enabling environment to form a business Creating a micro or small enterprise by an immigrant or family member in homeland Investment The effort to allocate capital for a particular investment or business venture The investment environment Allocating capital for a particular asset or venture in the hometown Knowledge transfer 5% Information and skills acquired as development tools Institutions forming skills in the knowledge economy Methods to share information, knowledge and skills that enhance local and national development

29 Competition & Financial AccessAn alternative way to look at remittance marketplace intermediation: competition and financial access Variable Metric Scope of services and operation Competitors Number of RSPs in a country corridor Products Number of products offered by the RSP Countries in which it operates Number of all countries served Consumer transaction costs Fee charged Average fee for all countries FX charged Average Fx for all countries Total cost Average fee plus Average Fx Network of operation Payment points Sum of an RSP’s total payment points Payment points / Country Sum of an RSP’s total payment points divided by the number of countries in which the RSP operates Payment points / Network Average percentages for each country Financial access Rural/Urban Ratio Percent of all payment points that are rural Bank partners as ratio of all payment points Banks payment points / All payment points MFI partners as ratio of all payment points MFI payment points / all payment points Client support Extent to which call centers or tellers are helpful to clients

30 Competition in Latin America & Caribbean2016 2012 2009 2006 Number of RSPs 31 37 40 Number of Products offed 4 3 2 Countries Operating 52 Fee 3.7% 4.4% 4.1% 4.7% FX 1.2% 1.3% 2.4% Total cost 5.1% 5.7% 5.4% 7.1% Payment points 15,602 5,809 4,860 4,047 Points Network 5% 7% 19% PP per country 2,509 2,208 1,570 Rural ratio 68% 74% 58% Bank ratio 38% 54% 78% 72% MFI ratio 8% 21% 27% 16% Consumer Support [1-4]

31 RSP Scope Cost (%) Payment Network Inclusiveness Products Countries Fee FX Total cost Payment Points Points/ Country Points/ Network (%) Rural ratio (%) Bank ratio (%) MFI ratio (%) Barri International 10 17 4 19379 2768 5.84% 72.45% 38.02% 4.86% CAM 5 4.75 1.53 6.28 1411 470 7.22% 63.83% 9.57% 5.24% Choice Money Transfer 7 134 2.98 0.66 3.64 10526 5263 4.28% 58.58% 45.24% 1.43% Cibao Express 3 14 3.44 0.27 3.71 1799 450 2.34% 50.23% 76.43% 3.61% Delgado Travel 32 2.5 8464 2116 2.37% 62.34% 33.78% 2.97% Dolex 6 63 4.5 1.01 4.51 27067 3007 5.27% 68.59% 38.76% 5.31% Giromex 11 2.92 1.71 4.63 18170 2596 3.51% 71.31% 38.24% 5.07% Girosol 2 38 3035 607 3.58% 59.00% 51.99% 13.21% Intermex 16 4.36 1.72 6.08 29803 4258 4.91% 69.67% 33.66% 4.96% JNBS 0.33 5.33 71 11.62% 70.42% 0.00% 35.21% La Nacional 85 16631 1848 71.10% 45.69% 7.37% MoneyGram 200 4.95 1.34 6.29 26899 2445 8.88% 64.74% 38.04% 12.99% Order Express 15 4.25 0.505 4.76 21446 3064 3.23% 68.90% 31.17% 1.25% Orlandi Valuta 2.11 6.11 507 254 0.95% 62.06% 90.53% Pangea 2.48 1.89 4.37 5174 2.17% 67.44% 27.83% Remitly 1.99 11457 4.80% 71.15% 33.02% 15.07% Ria 144 3.38 1.41 4.79 32341 2940 8.78% 68.75% 29.67% 9.76% ShareMoney 22 27363 3420 4.42% 70.67% 30.79% 5.54% Sigue 104 18931 1893 4.44% 61.51% 57.38% 3.63% Transfast 51 0.49 2.99 11574 2894 5.60% 79.55% 26.18% 6.75% Uniteller 22528 2253 4.75% 62.89% 50.24% 5.06% Unitransfer 437 146 2.38% 77.60% 9.38% 1.83% Univisión/BTS 24 2.495 1.536 4.031 22225 2469 5.37% 72.31% 40.19% 5.18% USPS Sure Money 28 5.5 1.5 7.003 7587 948 1.96% 69.60% 40.41% 0.11% Viamericas 36 1.47 4.47 30107 3011 6.22% 70.96% 28.84% 10.08% Vigo 21 1.03 4.67 10542 1318 6.10% 70.05% 35.78% 15.50% Wells Fargo 13 3.5 1.1 4.6 18009 2251 3.93% 62.37% 49.33% 0.97% Western Union 241 4.27 1.88 6.14 17291 1572 7.51% 63.70% 14.92% 10.14% WorldRemit 127 2.72 1.45 4.17 18562 1688 4.53% 73.62% 33.91% 5.99% Xoom 53 4.53 28732 2612 7.95% 71.07% 33.63% 9.02%

32 Additional Resources For more on remittance costs in the Latin American context, see For more on remittance costs in the European context, see For research on methodologies and applied work on migration and development, see: For research about the well being of migrants, see,

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