In the developing world, remittances from family members working abroad are a means of subsistence for many people. Unfortunately, with the stagnation of the European and American economies, the flow of remittances to developing countries has decreased since the onset of the recession, reducing incomes for those who rely on them. And since a major part of this reduction is tied to the costs associated with transferring remittances through formal economic channels, this means that even as the flow of remittances decreases, the reliance on less reliable informal means for transferring money is going to increase.

The increasingly precarious nature of the remittance sector is problematic from a development standpoint. Remittances are generally considered much more effective than traditional aid, since they directly target the poorest and they bypass the bureaucracy and corruption of government projects or aid disbursement. Last year, remittances to the developing world far exceeded expenditures in official development aid – a sum the World Bank estimates at over $400 billion. And this number only includes “official” remittances sent by formal means, not the large amounts sent through unrecorded, informal channels – channels which are on the rise, due to high fees and other barriers to accessing formal banking systems. 


In the developing world, remittances from family members working abroad are a means of subsistence for many people. Unfortunately, with the stagnation of the European and American economies, the flow of remittances to developing countries has decreased since the onset of the recession, reducing incomes for those who rely on them. And since a major part of this reduction is tied to the costs associated with transferring remittances through formal economic channels, this means that even as the flow of remittances decreases, the reliance on less reliable informal means for transferring money is going to increase.

The increasingly precarious nature of the remittance sector is problematic from a development standpoint. Remittances are generally considered much more effective than traditional aid, since they directly target the poorest and they bypass the bureaucracy and corruption of government projects or aid disbursement. Last year, remittances to the developing world far exceeded expenditures in official development aid – a sum the World Bank estimates at over $400 billion. And this number only includes “official” remittances sent by formal means, not the large amounts sent through unrecorded, informal channels – channels which are on the rise, due to high fees and other barriers to accessing formal banking systems.

These informal networks are more involved than many recognize. By taking advantage of informal channels, a worker can transfer money from the US to Africa, for instance, with a negligible amount of effort and at an exceedingly low cost. An immigrant in New Jersey, for instance, would approach a contact, recommended to them by fellow workers. The immigrant would pay this contact, and through a series of phone calls, this informal “banker” arranges for that sum of money to become available, in cash, to an intended recipient in, say, Nairobi. Once the money trades hands, the sender will pay their contact a fee that includes the phone bill, but that is significantly lower than the nine percent fee that formal institutions usually charge.

While this system may not seem overly worrisome, an overreliance on informal networks can be dangerous. These transfers are not only unreliable – senders have no legal or practical recourse in the event of theft – but are also often dominated by criminal or terrorist organizations to raise money for their own purposes. To stabilize this market, ensure that the poorest families are not being defrauded of their meager incomes, and siphon off revenue to organized crime, a sustained effort to formalize the remittance sector is necessary. This means lowering costs and streamlining legitimate credit mechanisms.

The stakes for a region like Sub-Saharan Africa are particularly high. These remittances are often a critical lifeline, contributing directly to improvements in citizens’ livelihoods, financing proper nutrition, health services, and education, and thus bolstering the broader civil society. The EU’s economic woes are especially troubling, since over one third of the remittances sent to the region come from Western European countries, with France and Germany leading the pack.

Reducing costs and fees is the first step towards drawing informal remittances into the formal credit network. Here there is some cause for optimism: within the past year the cost of sending remittances has been dropping in some of most important origin countries. In France costs fell from an 11.8 to 10.7 percent fee, while in Germany the decline was from 11.2 to 10.2 percent. But despite these recent cost reductions, more must be done to lessen the financial burden that senders incur. The World Bank, for instance, has addressed the issue as part of its post-2015 development goals, pushing for a broad international effort to reduce sending costs by 5 percent.

Some global multilateral institutions are taking action, with the World Bank teaming up with the Africa Union (AU) and other partners to establish an African Institute for Remittances (AIR). The AIR seeks to develop the capacity of AU member states to leverage remittances as a tool for poverty reduction and economic development, and they have also focused on costs. But the private sector must be engaged on this issue as well. Organizations like Western Union, which facilitate the transfer of remittances around the globe, must develop strategic plans to reduce costs.

Another crucial step will be to increase the transparency of the remittance market. Greater transparency will mean greater trust, and more customers, which will in turn lower costs through increased competition. Data tools provided by projects like the World Bank’s “Send Money Africa” program can allow customers to easily compare rates and provides other information on issues like local exchange rates and currency distribution centers.

These changes can’t come soon enough. The primary result of the current economic struggles of the United States and Europe, the decrease in remittance transfers, has already begun to manifest itself in the market. In 2012 the World Bank estimated that the growth in remittances to developing countries decelerated to 5.3 percent. To reverse this, and to reverse the trend towards the expansion of informal remittance networks that is threatening economic development from Mexico to South Africa, global action is needed.