What is a Remittance? An Introduction to International Money Transfers

Remittances are the primary source of foreign cash to low- and middle-income countries (accounting for even more than foreign direct investment [FDI] and official aid funding), according to data from a World Bank 2020 report.

But what is a remittance to begin with?

While the word remittance can be used as a synonym for words such as “payment,” “disbursement,” and “compensation,” the meaning of “remittance" today is often used as a technical term for the transfer of money to a country (most commonly and relevantly to developing nations) by its citizens who are working in other countries (typically developed countries).

These remittances are often to the family and friends of the sender and they have come to represent an important part of the economy of many developing nations.

In some countries like Lebanon, Somalia, the Philippines and Kyrgyzstan, these remittances account for more than 30% of GDP (according to the World Bank report mentioned above), making them a key component of economic growth of these low-income countries.

A convenient and cost-effective way to send money home thus becomes a primary need in countries with many foreign workers. In the UAE, which is the second largest source of remittances in the world, this need becomes even more pronounced.

In this article, we will answer the question “what is a remittance,” as well as how to handle one in the most effective way from the UAE.

We will cover:

1. What is a remittance? (And its impact on developing countries)

2. The need for a good remittance system

3. Qualities of a good remittance system

4. How to make remittances from the UAE

[Do you want to send money abroad in a more efficient and effective way? Download the Hubpay mobile money for free on Apple or Google play store to enjoy convenient, low-cost, timely, and valuable international remittances or visit our website to learn more.]

1. What is a remittance? (And its impact on developing countries)

Let's look to some expert sources for insight when it comes to defining remittances today.

Remittances are "usually understood as the money or goods that migrants send back to family members and friends in origin countries," and are often "the most direct and well-known link between migration and development," according to the Migration Data Portal.

The International Monetary Fund (IMF) says remittances occur "when migrants send home part of their earnings in the form of either cash or goods to support their families."

Wikipedia agrees, defining remittances as "non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland."

These remittances are different from aid funds and FDI, which are also important components of foreign inflows to any economy.

However, as we saw above, developing economies now get more inflows from remittances than they do from FDI and official aid funds (development aid) from developed countries. As the World Bank said, "remittances now stand more than threefold above official development assistance and, excluding China, more than 50 percent higher than foreign direct investment."

The World Bank also noted that remittances were key financial support to many developing economies during the COVID-19 pandemic: "In all developing regions of the world, migrants stepped up their support to families back home, especially to countries affected by the spread of the COVID-19 Delta variant." In other words, remittance flows have become one of the key advantages of international migration.

But who are the largest beneficiaries of remittances?

According to 2021 data from the World Bank, India, Mexico, China, the Philippines, and Egypt are the top five recipients of inward remittance in dollar amounts. As a percentage of GDP, Tonga, Lebanon, Kyrgyzstan, Tajikistan, and Honduras were the biggest recipients.

On the other hand, the US, the UAE, Saudi Arabia, and Switzerland were the top four sources of outward remittance to foreign countries.

In essence, while "remittances" as a general-purpose term can be used as a synonym for "payment," it has now been adopted as a technical term.

This means that today remittance now mostly refers to the transfer of money back home by a migrant living abroad for non-commercial purposes.

2. The need for a good remittance system

As we have seen, remittances are now crucial to the growth of many developing economies.

We have also seen this importance in crisis situations like the COVID-19 pandemic where migrants in high-income countries were able to send funds overseas to family members and friends in need. And this importance is even more pronounced in nations where a significant portion of the economy is dependent on such remittances.

Since these remittances are sent mainly to family and friends, foreign workers tend to consider it as a crucial basic need. That is, for many foreign workers, sending money abroad is often one of the strongest motivations for hard work and counted as basic necessity.

This means a good method of remittances is beneficial and important to the individual recipients, the receiving country, and the sender.

Consequently, making the process as seamless as possible is crucial for both those who receive remittances and those who send them. Both parties must be able to access a good remittance system that will be convenient, efficient, and effective. This is especially needed for migrant workers in the UAE, since the country is the second-highest sender of remittances globally.

Before considering the qualities of a good remittances system, let’s highlight some of the options currently available in the UAE.

Local exchange houses

There are many exchange houses in the UAE that facilitate the transfer of remittances abroad. Senders have to visit the local exchange house, create a transfer request, and wait for the exchange house to convert the funds from dirham to the recipient country’s currency and send it abroad.

Local bank branches

Sending through local branches of commercial banks is similar to sending through a local exchange house. However, this method will most likely require that you have an account with the specific bank you want to use, which isn’t always possible because of high salary account minimums.

Bank transfers can also take as much time (or more) as transfers from local exchange houses, though they can be a bit faster if both the sender and recipient have bank accounts with the same (multinational) bank.

Online international remittances services

To make the remittance process more seamless, some financial organisations have developed remittance systems that allow electronic transfer of funds that can be done online without any visit to a physical location.

The transfer of funds through most remittances systems occurs through either an international wire transfer (through the SWIFT network) or ACH. International wire transfers tend to be faster and more expensive (higher transfer fees). You can get a SWIFT copy of remittance, confirming a SWIFT transfer, within 2-3 business days. On the other hand, transfers through the ACH system tend to be slower but cheaper.

A good remittance system must try to negotiate between these two extremes by providing a service that is both cheap (low transaction costs) and fast (quick processing). This is the burden that many money transfer operators have been trying to bear.

3. Qualities of a good remittance system

Now that we have briefly introduced the three major remittances systems, let’s consider some of the qualities that a sender of remittances must consider in choosing a remittances system.

Low fees and exchange rates

In the 2021 report we saw above, the World Bank commented that “it costs more to send remittances through banks than through digital channels or money transfer services.” The National also reported in 2021 that the fees for remittance flows vary from 7.11% with bank accounts, 7.012% with cash transfers, 6.13% with a credit or debit card, and 4.9% with mobile money.

In other words, the transaction costs of local exchange houses and commercial banks can be very exorbitant compared to those who offer online money transfer service.

However, online remittance systems are also becoming more expensive.

The exchange rate is another consideration under cost-effectiveness. Online remittances systems tend to offer better exchange rates than local exchange houses and banks.

Timley transfers

In addition to convenience and cost-effectiveness, a good remittance system should also be timely. Having to wait for days before the completion of a transaction can be uncomfortable for both sender and recipient, especially when there is an urgent need.

On this point, online money transfer systems are better than local exchange houses and banks. They do not require travelling, joining queues, and waiting for days before transactions are processed.

Value-added remittance services

In today’s digital world, users are always demanding more.

Today, senders of remittances also want to be able to pay bills and purchase airtime for their family and friends abroad directly from their own phones. Instead of sending money abroad for these expenses, they prefer to incur them directly.

Access to these value-added remittance services is one of the advantages that newer remittance fintechs like Hubpay provide.

Convenience

In this digital world, convenience is key.

Senders of remittances should not need to make round trips to a physical location to complete an international transfer. The stress associated with such trips is needless in this day and age.

This is why going to local exchange houses and local bank branches should not be an option. With an electronic payment system, you can send money to your family and friends abroad through your phone without having to leave your current location.

4. How to make remittances from the UAE

Hubpay is a money transfer service and electronic payment system in the UAE that combines all the four qualities of a good remittance system.

As an online international transfer system, Hubpay does not require a visit to any physical location. Transactions can be initiated and completed on the Hubpay app at your convenience. You only need your phone number, emirates ID, and simple biodata information to open an account.

Furthermore, Hubpay is a low-cost international money transfer system that charges low fees and offers better exchange rates.

Unlike many online international transfer systems that now limit you to paying with credit or debit cards (which are more expensive), you can fund your Hubpay account from your bank account through Lean. With Lean, you only have to connect your bank account with your Hubpay account once. After that, you can initiate direct transfers without even logging in to your bank app.

Also, Hubpay transfers are processed quickly so the recipient can receive the money as soon as possible. As soon as a remittance transaction is initiated, you will see the estimated transaction time – how long it will take to complete the transfer.

In addition, Hubpay app has a chat feature that allows you to exchange messages with recipients after a remittance transaction has been initiated.

Moreover, Hubpay provides additional services like airtime recharge and bill payments. You can purchase airtime or pay bills for your family and friends abroad straight from the Hubpay app.

Understanding that remittances have become such an important part of life to many people, Hubpay now aims to make them as convenient, cost-effective, timely, and valuable as possible.

[Do you want to send money abroad in the most convenient, cost-effective, timely, and valuable way possible? Download the Hubpay mobile app for free on Apple or Google play store or visit our website to learn more about our services.]

Takeaways

• Though the word “remittance” can be synonymous with “payment,” it is now used predominantly to refer to non-commercial money transfers from migrants to their family and friends abroad.

• Remittances have been contributing immensely to the economic growth of small and developing countries and larger developing countries, even more than official aid (development aid) and FDI, according to the World Bank.

• Sending money home to their loved ones is one of the key motivations for many migrant workers.

• Since the UAE is the second-highest sender of remittances, there is a need for a more effective and efficient remittances system for UAE expats.

• A good remittances system will be convenient, cost-effective, and timely. And in today’s world, it will also provide various value-added services.