Thread: Cost of remittances strains Latinos

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Cost of remittances strains Latinos
Sending cash to relatives back home is a process filled with fees and hassles
- Carolyn Said, Chronicle Staff Writer
Sunday, July 16, 2006

Nubia comes down to a storefront in San Francisco's Mission District every month to wire $100 to her family back in Medellin, Colombia. Retired from housecleaning, Nubia, 63, saves the money out of her Social Security pension. She was dismayed last week to find out that the $4 cost of sending the money had increased to $6.

"The extra money is too much," she said in Spanish through a translator, declining to give her last name. "All these places have become very expensive. I want to find out if I can send from one bank to another" for less money.

A $2 price hike doesn't sound like a big deal. But that extra $2 multiplied by millions of remittances -- the money immigrant workers send to relatives back home -- adds up to a staggering amount of money paid by those who can least afford it.

No less an august body than the leaders of the G8, the world's top industrialized countries, cares about how much Nubia and others like her pay to send money home. Last year the G8 made it a key goal to make remittances cheaper and easier to send. And the business of transferring the money is such big bucks that a huge roster of players -- including Home Depot, Wal-Mart, the U.S. Postal Service, leading banks and many entrepreneurs -- are vying for a piece of it.

Remittances sound like small change, the crumbs of the United States' great prosperity. The majority of those who send remittances are on the bottom rungs of the economic ladder -- janitors, housekeepers, gardeners, dishwashers. The average remittance is about $240.

But remittances are a huge global phenomenon, surpassing $250 billion worldwide every year and far outweighing international foreign aid, according to the World Bank. In many Latin American, Caribbean and African countries, remittances are a key pillar of the gross domestic product.

Immigrants in the United States send home at least $40 billion a year, almost half of it to Mexico, said Dilip Ratha, development prospects group manager for migration and remittances at the World Bank in Washington.

"Remittances are the largest source of external financing for developing countries," he said. "They tend to be more stable than other types of external financing, such as export revenue and private capital like foreign development investments."

Moreover, Ratha said, remittances end up directly in the hands of overseas residents who can immediately put the money to use. "Remittances go to individuals," he said. "That makes them better targeted than some types of flows that are intermediated between institutions."

For years, wire transfers through market leader Western Union and its competitor MoneyGram were the main game in town for people in the United States sending remittances back home, other than informal channels such as asking a friend to carry money home. But in the past few years, increased competition from banks, credit unions and all kinds of new businesses has begun to chip away at the wire-transfer services' grip on the market -- and their prices.

"Costs used to be outrageous; now they're simply too high," said Donald Terry, managing director at the Inter-American Development Bank in Washington, which lends billions of dollars to Latin American and Caribbean nations.

Before 2000, remittance costs averaged a whopping 15 percent of the money being transferred, he said. Today, costs to transfer money abroad are down to about 5.7 percent on average. His group hopes to push the cost still lower, to about 3 percent.

Unfortunately, even while lowering remittance costs has become a priority, tough new Patriot Act laws designed to stamp out money laundering have made it harder than ever for small players to provide remittance services. Many banks have started to refuse to provide money processing services for small companies because they don't want to be liable if any of those subcontractors have dodgy practices.

There's a distinct lack of consumer advocacy in the remittance market, although Profeco, the Mexican consumer protection agency, does offer an array of advice, comparison charts and complaint assistance for those remitting money to Mexico. Unlike banks, which are subject to strict federal laws, money-transfer services are regulated by states, which have looser controls. It's not easy for consumers to compare costs because a lot of the costs are hidden. Besides the fee a remitter pays to send money overseas, sometimes the recipient has to pay a fee to collect the money.

But a bigger issue is the exchange rate used to convert the money to foreign currency -- something many money-transfer agencies don't disclose. In one 1999 study, leading researcher Manuel Orozco found that wire-transfer companies were offering an exchange rate of 9 Mexican pesos per U.S. dollar at a time when the benchmark rate was 10.13 pesos per dollar. The difference meant the wire services pocketed an additional $55.80 profit on a $500 transfer, plus the fees they charged.

Such rates led to a class-action suit against wire-transfer companies for "exorbitant hidden fees." Western Union and MoneyGram settled by agreeing to issue discount coupons for customers who had used their services to wire money to Mexico.

Many advocates for immigrants say the high cost of remittances is an economic justice issue.

"The people who can least afford it are being taken advantage of and ripped off by check-cashing and high-cost money transferrers," said Lauren Leimbach, executive director of Community Financial Resources, an Oakland nonprofit that works as an advocate for worker centers. Leimbach said her group is assessing the costs of various remittance methods and plans to select vendors who offer favorable rates for their product at worker centers.

Not too far down the road, she could see immigrants organizing to demand more reasonable remittance rates, she said.

"People think it's just their own individual transaction, but when they start finding out how many members of their community are sending money home, it quickly becomes consciousness raising in terms of consumer power," she said. "The next step will be some organizing around the consumer power behind those dollars."

The consumers sending remittances have plenty of powerful backers in their court. One is Ben Bernanke, the chairman of the Federal Reserve. In a speech two years ago, he underscored how critical he thinks remittance services are and how important it is for mainstream financial institutions to offer them.

"The sending of remittances is the most important type of financial transaction for many immigrants and their families," Bernanke said. "This fact engenders both a challenge and an opportunity. The challenge, for regulators, researchers and immigrant advocates, is to ensure that remitters can send funds to their home countries conveniently, safely and at a reasonable cost. The opportunity, primarily for banks and other mainstream financial institutions, is to find ways to leverage immigrants' need for remittance services into a broader relationship, one that will both be profitable for the bank and will also provide immigrants and their families with greater financial access."



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Profile of Latino remitters in U.S.
Latinos in the United States sending money back to their home countries tend to be on the lower rungs of the economic ladder and lack formal financial relationships.

High school dropouts: 59%

Rent home: 72%

Speak little or no English: 54%

Work in low-skilled jobs: 64%

Don't have credit cards: 55%

Don't have bank accounts: 43%

Source: "Billions in Motion: Latino Immigrants, Remittances and Banking," Pew Hispanic Center/Multilateral Investment Fund, 2002



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E-mail Carolyn Said at csaid@sfchronicle.com.

Costs to remit money to Mexico


Cost to send Cost as %
Method $400* of amount sent
Dual debit cards: U.S. customer loads money
here, Mexican customer withdraws at ATM $7.40 1.51%
U.S. bank as money transfer agent
with pickup at Mexican bank/agency 16.20 3.36
Credit unions 21.40 5.30
Traditional wire transfer 38.30 9.94
Source: Manuel Orozco for Inter-American Dialogue, 2003

Nubia comes down to a storefront in San Francisco's Mission District every month to wire $100 to her family back in Medellin, Colombia. Retired from housecleaning, Nubia, 63, saves the money out of her Social Security pension. She was dismayed last week to find out that the $4 cost of sending the money had increased to $6.

"The extra money is too much," she said in Spanish through a translator, declining to give her last name.

This lady can't even speak English and she is drawing social security in the United States? There is something very wrong with this picture!

I say we tax the money being sent out of the country.

Originally Posted by MW

Nubia comes down to a storefront in San Francisco's Mission District every month to wire $100 to her family back in Medellin, Colombia. Retired from housecleaning, Nubia, 63, saves the money out of her Social Security pension. She was dismayed last week to find out that the $4 cost of sending the money had increased to $6.

"The extra money is too much," she said in Spanish through a translator, declining to give her last name.

This lady can't even speak English and she is drawing social security in the United States? There is something very wrong with this picture!

It's all apart of Senor Bush's master plan.