Adults in developing countries remaining unbanked is a serious issue for local economies. One reason the unbanked population remains so high stems from people’s belief that they have inadequate funds to merit opening an account. By not having enough disposable income to make any substantial transactions or purchases, keeping money in any form other than cash seems unnecessary.
World Bank figures showed that economic migrants sent $689bn home in 2018, of which $462bn was sent to low- and middle- income countries such as India ($79bn), and Mexico ($36bn). Overall, more finance was injected into low- and middle-income countries via remittances than foreign direct investment ($344bn); this demonstrates the financial impact that remittances possess. The extra disposable income is encouraging people in developing countries to grow their wealth, to the point where opening a bank account seems worthwhile.
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It’s easy to see why migrant workers sending money back home is a catalyst to promoting financial inclusion, establishing a personal finance foothold, and contributing to the economic growth of regions globally.
However, the impact remittances is having on regional development is being negatively impacted by the cost of cross-border payments methods. Once recipients are able to receive the largest sum possible from the sender, regardless of their banking status, will we see the true potential of remittances realised.
Promoting financial inclusion and regional economic growth
The biggest hurdle to overcome for those who want to send money to their home countries is that many methods of remittances rely on the recipient having a bank account. This is a concerning problem for a percentage of overseas workers trying to send money home. The World Bank’s recent statistics showed that 1.7 billion adults are currently unbanked, of which 46% live in just seven countries (China, India, Indonesia, Mexico, Nigeria, Pakistan, and Bangladesh). These countries are also among the largest remittances markets in the world.
This removes one avenue of remittances for those that wish to support their families in becoming financially included. The process for recipients who need to open a bank account quickly is also challenging. Unfortunately many people do not have the right documentation necessary to open a bank account or more importantly, enough funds to acquire them without access to the finance in the first place.
There are options to send money back home which don’t require a bank account. However, these money transfer services are less advanced and can be hugely costly.
When recipients receive the maximum value of the transfer, it’s only then can we see the full economic potential of the remittances market. Through providing more flexibility and incentives when using a variety of financial services, those sending money back to their home countries provides more value to their local economy through expenditure. By compromising on the value, they are sending home, the impact remittances might have on regional economies is limited.
In the long run, for economic migrants to maximise the benefit of the finances they are transferring abroad, using a remittances solution that is both cost-effective, user friendly and adaptable (and not structured around a traditional bank account) is crucial to its success.
Growing the gig economy in developing nations
It isn’t only the beneficiaries of economic migrants that impact regional economies through the removal of transaction fees. Freelance specialists within the gig economy that provide digital services such as website design or coding to overseas companies is one of the fastest growing employment sectors in developing countries. For this form of the gig economy to continue to be applicable and thrive in the future, service sellers in emerging markets must prioritise a) making invoice settlements as efficient for overseas businesses as possible, and b) remaining competitive and operable in the rates they charge, as cost effectiveness is one of the most likely reasons businesses outsource these services overseas.
One method to combat invoice settlement efficiency is avoiding traditional overseas bank transfers that involve a lot of sensitive financial information to be distributed and collected. Where an email address is the only data needed to make a transaction, both the buyer and the seller are free from the rigmarole of securely storing and recalling multiple pieces of personal data.
As for the challenge of remaining competitive, one tactic service providers in developing countries can introduce is to maximise the value they receive when being paid in a foreign currency. As freelancers lose a percentage of their fees to marked up foreign exchange rates, they may be forced to pass the cost on to the business commissioning the work. Likewise, the business will have to accept the cost of the transaction fees; where this is substantial the overall expenditure increase makes the freelancer a less attractive option.
Overall, paying invoices for overseas freelancers via bank transfer might become a too costly; so much so that businesses think twice before outsourcing cross-border.
Going forward though, low cost cross-border transactions can play an important role in helping the freelance industry thrive and flourish. It must be acknowledged that the immediate and trickle-down effects of growing this sector will be indispensable in helping to increase financial inclusion and achieve sustained economic growth.
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