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					   International Remittances:

Characteristics and Comparisons




  Prepared for the Fannie Mae Foundation
          By Daniel M. Leibsohn
             December 2004
I. Introduction

Despite their typically low wages, many immigrants follow a common practice of regularly
sending money back to their home countries. The practice is expensive, but something that many
immigrants feel compelled to do.

―Remittances are the expression of profound emotional bonds between relatives separated by
geography and borders, and they are the manifestation of a profound and constant interaction
among these relatives regardless of the distances between them,‖ according to a study by the Pew
Hispanic Center and Multilateral Investment Fund (Pew/MIF 2003).

An example helps to illustrate the costs to the worker. Suppose that a Mexican immigrant to the
United States wants to send money home to a family member — $200 for example. On payday,
the immigrant receives a paycheck and may follow these typical steps:

   The immigrant goes to a check-cashing store to cash the paycheck, paying a fee of from a
    little over 1 percent to up to 3 percent, depending on the location. The nationwide average
    now is about 2.5 percent, which equals $5.00 for the $200 portion of the paycheck that is
    remitted. (If the entire check were $300, the total cost to cash the check would be $7.50.)
   The immigrant/sender can send money through the check casher or a different agent of a
    money transfer operator located elsewhere. In either case, the immigrant pays a fee. The
    average fee in 2004 to remit $200 to Mexico was about $11.59 (Orozco 2002d). Some
    remitting companies have higher costs, while others are lower.
   The sender then purchases a prepaid phone card from the check-cashing company and calls
    the family member to inform them about the remittance. The call costs an average of $3.
   The recipient goes to pick up the funds and may pay a fee for accessing the cash, depending
    on such factors as the type of transfer method, whether an ATM is used, and whether the
    recipient is required to have an account at the receiving institution.
   The recipient pays for converting the funds into the local currency. These charges, which
    may be higher than the official conversion rate, can be substantial and often are hidden. The
    average exchange rate fee for Mexico in 2001 was $6.54, with a 4.1 percent differential
    between the official rate and the rate charged in April 2001 by Western Union, or $8.20.
    These fees could be substantially higher or somewhat lower, depending on factors including
    the transmitting company, location of the sender, country of the recipient, and location of the
    recipient.

This process can result in significant costs in various fees and charges that can be especially
tough for a worker making $6 an hour (the minimum wage is currently $5.15). Besides the $200
monthly remittance, there is an additional cost of $31.20 in this example (excluding any fees
paid by the recipient other than the exchange rate differential), that can be very onerous for
someone earning perhaps $360 a week before taxes for a 60-hour week (and which might fall
considerably if the worker is employed in seasonal agricultural labor) and $18,700 per year (or
$1,560 per month if every week is worked at these same assumptions). Sending this amount each
month, the worker would spend nearly $375 per year — more than a week’s pay. This amount
could be higher depending on the sending and receiving locations, the amount of foreign
exchange fees, and other factors.


                                                 1
Considering the significant impact of remittances on immigrants’ financial well-being, this report
reviews the state of the remitting industry. It first discusses the characteristics of remittances and
of senders and receivers, and examines some of the impacts in different countries. It then
compares remittance practices across the major money transfer operators such as Western Union
(Part II) and banks and credit unions, including smaller and foreign banks (Part III) and some of
the lesser-known remittance methods (Part IV). It also compares costs across major providers
(Part V). The concluding section (Part VI) discusses recent industry trends, analyzes possible
future developments, and provides policy recommendations.

Remittance Characteristics

Cumulative Remittance Characteristics and Impacts1

Worldwide, total remittance flows amount to roughly $140 billion. About $80 billion is sent to
developing countries, up from $17.7 billion in 1980 and $30.6 billion in 1990. The United States
is by far the source of the largest amounts of remittances. Saudi Arabia is the next largest
remitting country, followed by Germany, Belgium, and Switzerland (Kapur and McHale 2003).
Mexico is the largest recipient country.

Despite the relatively low average amounts sent by individual immigrants, the cumulative
amounts sent from all countries are now enormous. Official estimates from government and
nongovernmental organizations of amounts remitted in 2002 indicated that Mexico received over
$10.5 billion, mostly from the United States; Brazil received about $4.6 billion (although
significant parts of this figure came from countries other than the United States); more than $2.2
billion went to El Salvador; more than $2.1 billion was sent to the Dominican Republic; and
almost $1.7 billion went to Guatemala. In total, more than $32 billion was sent from the United
States to Latin American countries (MIF 2003). In 2003, $13.3 billion was sent from the United
States to Mexico alone.

This level of remittances represents substantial growth in recent years. The increase from 2001 to
2002 for Mexico, El Salvador, the Dominican Republic, Guatemala, and the Caribbean was 17.6
percent. These countries are responsible for over 60 percent of the worldwide remittance growth
over the past three years (MIF 2003). In 1980, less than $1 billion was sent to Latin America. In
1990, about $3.7 billion was sent. In the late 1990s there was significant growth in remittance
flows as the U.S. economy boomed along with the need for labor, and immigration increased
commensurately.

Mexico receives the largest amount of remittances of any country. Before 2001, India was the
largest receiving country, and it is now the second largest recipient. In 2001, these two countries
were followed by the Philippines, Morocco, Egypt, Turkey, and Lebanon. The Dominican
Republic, El Salvador, and Columbia were 10th, 11th, and 12th on the list (Ratha 2003). Latin
America and the Caribbean receive about 31 percent of total worldwide remittances, South Asia

1
  Data about remittances is limited in both quantity and quality, and it is very difficult to find consistent numbers, as
there is no single official data source. As stated by Kapur (2003), ―Considering their volumes and relative
importance, the quality of data on remittances is quite poor.‖ This section is based on available data from various
sources, as referenced.


                                                            2
receives 20 percent, the Middle East and North Africa receive 18 percent, East Asia and the
Pacific receive 14 percent, Europe and Central Asia receive 13 percent, and Southern Africa
receives 5 percent.

Remittances have significant impacts on many receiving countries. For example, 2001
remittances to developing countries equaled 1.3 percent of their total gross domestic products,
3.9 percent of imports, and 42.4 percent of foreign direct investment inflows. However,
remittances had a much greater impact on the ―low-income‖ developing countries (countries with
less than $735 gross national income per capita), representing the equivalent of 1.9 percent of
total gross domestic product and 6.2 percent of exports. Specifically, remittances as a share of
gross domestic product were 22.8 percent in Jordan, 16.2 percent in Nicaragua, 13.5 percent in
Jamaica, 9.3 percent in the Dominican Republic, 8.9 percent in the Philippines, 8.5 percent in
Honduras, and 7.9 percent in Ecuador (Ratha 2003).

Remittance spending also has a multiplier effect. One study found that in 1990 the Mexican
gross national product increased by $2.69 to $3.17 for every dollar received in the country from
migrants (Ratha 2003). Remittances to Latin American countries leverage roughly $100 billion
in economic activity, using a 3 to 1 multiplier effect ratio (MIF 2003).

Remittance amounts are expected to continue increasing with rising immigration levels. An
aging population, slowing population growth, and the need for labor in the more developed
countries, coupled with high poverty rates and surplus, unskilled labor in other countries, likely
will keep immigration levels high in the future. A Pew/MIF study (2002) projected future levels
of remittances from the United States to Mexico and four Central American countries — El
Salvador, Nicaragua, Guatemala, and Honduras — to reach $14 billion to $25 billion by 2010.
By 2030, the study predicted a range of $17 billion to $40 billion. With the remittance level
already at 14.2 billion in 2002, the study projected that $21 billion and $26 billion, the middle
ranges, were the most likely for the two periods (Pew/MIF 2002).

In the receiving countries, remittances are used for many purposes, although the primary use is
support for the senders’ families. The funds are mostly used to pay for their costs of living, such
as rent, food, clothing, and health care. However, remitted funds are also used for charity, local
infrastructure (parks, drainage, community centers/churches, street paving, ambulances, fire
trucks, parks, etc.), human development (scholarships, health equipment, libraries, utilities, etc.),
business investments that may generate jobs for family members at home, and to build homes for
the senders and/or their families (Orozco n.d.2; Pew/MIF 2003). When used for investment,
remittances can be very powerful. One estimate indicated that almost 20 percent of the invested
capital in microenterprises in urban Mexico came from remittances (Ratha 2003). In 1996 in
Mexico, 77.1 percent of remittance funds were spent on current financial needs, with 16.3
percent going to savings, debt, and agricultural expenses, and 4 percent (6.2 percent in rural
areas) spent on housing and land (Orozco n.d.3).

People from other countries settling in the United States often include large numbers from the
same hometown, city, region, or state. They often form social associations in the United States
based on their location of origin that are known as hometown associations (HTAs). Mexican
immigrants have been the most prolific in creating HTAs — they have established roughly 600



                                                  3
HTAs in 30 cities (Bada 2004), although migrants from other countries — Central America and
the Caribbean (El Salvador, Guatemala, Dominican Republic) in particular — also create HTAs.
In 2000 in Chicago alone, Mexican immigrants participated in about 35 clubs representing their
home state of Zacateca and 20 each with ties to Jaliso and Guanajuato (Orozco n.d.2). Many
HTAs have started group efforts to pool resources and send remittances back home for civic
purposes, such as building clinics, roads, and wells and/or buying ambulances or fire trucks.

For example, a Salvadoran HTA in the Washington, D.C., area raised $10,000 to help fund a
farm cooperative in the members’ home country that is trying to establish an ongoing business
that provides steady incomes for its member workers. According to the Washington Post
(Williams 2004), ―The intent is to redirect some of the estimated $2 billion that Salvadorans
abroad send home each year — with less going to such things as clothing, home improvements,
and soccer fields and more going to support businesses that can create jobs.‖ The HTA’s
president was quoted as saying, ―We need to invest this money in a more productive way.‖

Individual Remittance Amounts

Individual remittance amounts vary by receiving country. The amounts sent are fairly low, on
average, with the highest amounts going to Mexico. For South American countries, in 2002 the
average amounts per remittance ranged from $146 sent to Nicaragua to $378 sent to Mexico (see
table 1). These numbers are based on immigrants sending these amounts at least seven times per
year (Orozco n.d.1). One recent study showed that 20 percent of senders transferred less than
$100, 36 percent transferred between $101 and $200, 26 percent transferred between $201 and
$300, and the remaining 18 percent sent more than $301 (Pew/MIF 2002).

          Table 1. Average Amounts Sent per Remittance (from the United States)

                  Receiving Country          Average Amount Sent ($)
                  Nicaragua                           146
                  Haiti                               162
                  Peru                                191
                  Paraguay                            304
                  Costa Rico                          350
                  Brazil                              376
                  Mexico                              378
                  All Central and South               260
                  American countries and the
                  Caribbean (average)
       Source: Orozco n.d.1.

Because the average amount sent to different countries varies, the percentage costs for each
country also vary. Including both fees and foreign exchange charges and considering all types of
remittance companies and methods, Nicaraguan remittance costs from the United States are 10
percent of the amount sent on average, while remittance fees from the United States to Mexico
average about 4.99 percent. Other percentages include Cuba (16.67 percent) (which is the highest
for Central and South America), Haiti (9.57 percent), Peru (7.07 percent), and the Dominican



                                               4
Republic (8.74 percent). El Salvador and Ecuador have the lowest absolute and percentage costs
— 4.39 percent and 4.07 percent, respectively, because they have dollarized economies and pay
very little for conversion of the currency (Orozco 2003d).

The typically small size of remittances is significant. Fees are sometimes based on a flat amount
up to a limit such as $1,000 or $1,500, or on some type of scale that results in fees of a slightly
lower percentage as the remitted amount increases. Both methods are unfavorable for an
immigrant sending a small amount, such as $200 or $300, several times a year. There are few fee
schedule approaches based on a set percentage of the amount remitted that would offer a better
approach for the remitter.

Remitter Characteristics

The characteristics of the Latin American immigrants who remit funds back home were reported
by Bendixen & Associates for Pew/MIF (2002), which interviewed 302 Latin American
immigrants in Miami and Los Angeles in July and August 2002. Their findings included:

   47 percent of Latinos regularly sent money to their home country.
   60 percent were male.
   63 percent were under the age of 40; the average age was 37.
   59 percent were married.
   59 percent did not finish high school.
   57 percent earned less than $30,000 annually.
   47 percent arrived in the United States within the past ten years, although the average length
    of time in the United States was 13 years.
   64 percent of those employed were unskilled laborers.
   45 percent planned to move back to their home countries.
   55 percent had no credit cards.
   43 percent lacked bank accounts.

Other studies report different results in certain categories. For example, the level of the unbanked
immigrant population has been estimated at higher levels. Herrera (2003) estimated the number
of unbanked immigrants in the United States at 9 million, but that figure may be low — the
number of illegal/undocumented immigrants in the United States has been estimated as high as
12 million, and most of them are assumed to be unbanked, as are many legal immigrants. The
unbanked population in the home countries also can be quite high — as much as 65 to 80 percent
in Mexico, and one estimate for Nicaragua was 90 percent (Bartlett 2003).

Although most immigrants are unskilled, their skill levels vary widely by country of origin — a
few are skilled and earn substantial wages. For example, 80 percent of migrants from India to
industrialized countries who are over age 25 have a college degree, making them candidates for
higher paying professional jobs.

The tendency to remit funds back home varies depending on the length of time spent in the
United States. In the first five years, modest amounts are sent as the immigrant has to recoup the
cost of getting to the United States — such costs range from $200 to $400 along the Mexico–Los


                                                 5
Angeles border region in 2001 to $35,000 for getting from China to New York — and generally
has a lower-income job. During the next five years, the amount and steadiness of remittances
tends to increase. After ten years, remittance amounts tend to fall (Orozco 2003d; Pew/MIF
2003).

Recipient Characteristics

Receivers of remitted funds in Central America tend to be poor and live in rural areas. In
Mexico, however, remittances are being received by people of all income levels and living in all
parts of Mexico. According to Pew/MIF (2003), an estimated 18 percent of adult Mexicans
receive regular remittances, while 28 percent of Salvadoran respondents indicated regular
receipts. The majority of recipients are women — 54 percent in Mexico, 63 percent in Central
America, and 66 percent of interviewees in Ecuador (Pew/MIF 2003).

In some countries, including the Philippines, Viet Nam, and Pakistan, households that are
relatively better off receive the larger share of remittances than receivers in their countries who
are less well off.

Remittances have played important roles in helping to rebuild some countries after natural
disasters (Hurricane Mitch and earthquakes in Central America), and help to maintain the
economies of countries with very unstable or inoperative central governments (Kapur and
McHale 2003).

Characteristics of the Remittance Industry

The first U.S. money transmitter business apparently was created in California in the early 1900s
to serve immigrants (Negroni 2003). Otherwise, wire systems were originally set up for large
domestic transactions, mostly performed by banks. They were expensive and were not designed
for smaller, international transfers. Money transfer companies adapted to fill this need. As the
market for small remittances grew, banks and credit unions entered the industry along with
smaller transfer companies and began to create more competition. Now there is a wide variety of
possible ways to send money, including electronic transfers, companion debit cards, money
orders, courier, and friends or relatives.

There also is a wide range of institutions involved in sending money. The most common in the
United States are money transfer operators such as Western Union and MoneyGram, usually
working through agents in check-cashing outlets, grocery stores, travel agencies, and other retail
establishments, typically located in low-income neighborhoods. Recently, some large
commercial banks and some credit unions have entered the field. There are also courier agencies,
money order companies, the U.S. Postal Service and foreign post offices, and some informal
mechanisms.

The transmitters make money from the fees charged for transmitting funds and by marking up
the official foreign exchange rates. Sometimes they earn other fees, such as for delivery. If
transmitted funds are not picked up immediately by the recipient, the transmitting vendor may
earn interest while the funds remain in its accounts. There may also be fees for the use of ATMs



                                                  6
and, in the case of the banks, inquiries into account balances, sending a debit card to a recipient,
and other services. Generally, these fees are small relative to the size of the transmitting
institution. The profits are made with volume — higher volume generates higher profits with
relatively fixed costs.

Technology has played a significant role in changing the industry. The use of ATMs and the
introduction of debit cards have been crucial to banks’ entry into the field. Software
improvements have helped to maintain technology advances, and the ―…growing use of banking
infrastructure for remittances is creating a need for software that can work across multi-country
platforms‖ (Ramos 2003).

The new and deepening reliance on technology, innovation, and new products is demonstrated
by recent shifts in transmitting methods. Banco de Mexico estimates that 92.4 percent of the
more than $10 billion remitted to Mexican households in 2002 was sent via wire transfer, with
5.9 percent in money orders. In 1998, the percentages were 67.3 percent and 29.1 percent,
respectively (Electronic Payments International 2003). In 2001, 72 percent of remittances were
made electronically, 17 percent by money order, 10 percent by cash, and 1 percent by check
(Ramos 2003).

It is worth noting that there appear to be many competing and conflicting numbers in this arena.
Many of the numbers are based on estimates, as the types of activities that are being discussed
can be very difficult to quantify. Also, many of the official numbers may be greatly understated
— International Monetary Fund and World Bank numbers are usually lower than the figures
reported by central banks. Some countries do not report remittance data (Orozco 2003c).

Attempting to quantify market shares suggests another example of the difficulties in obtaining
sound numbers. Companies in the money transmittal business do not release such proprietary
information, leaving estimates as the only source of information (Orozco 2003b). In addition,
there is substantial undercounting of the amount of transfers because some unknown amounts are
transferred in cash personally. Estimates of cash transfers range from 15 percent to 30 percent in
addition to the known market (Ramos 2003).

A look at industry trends may provide better insight into the remittances marketplace.


II. Money Transfer Operators

Introduction

The main participants in the money transfer business were not, until recently, banks or other
commercial financial institutions. Rather, the industry was dominated by businesses — called
money transfer operators (MTOs) — established for the primary purpose of transferring funds
from one place to another. The MTOs are solely in the transaction business, while banks are
more interested in transactions that can support their business model: the relationship business.




                                                  7
Banks, in general, make their profits from creating relationships with customers who make
deposits and borrow from the banks. The banks profit from both deposits and loans, as well as
fees in some cases. MTOs earn their money from the transactions, with relatively small fees on
each one. Many of their costs are relatively fixed, so they increase their profits by increasing
volume. The volume transaction business model is used not only by MTOs, but also by related
businesses such as check-cashing outlets, payday lenders, rent-to-own companies, bill payment
services, and other providers of alternative financial services to the unbanked.

Fees are based on many factors, including the actual costs of operation, the exchange rate used
for the transaction (the differential between the official exchange rate of the country’s central
bank and the actual rate charged by the company), the level of competition in a specific market,
the type of transfer mechanism (e.g., electronic transfer, debit card, hand delivery, money order,
Internet, phone, courier, bank to bank), and the business’s profit target (Orozco 2002a).

The money order business appears to be decreasing as senders move toward using electronic
methods and debit cards. Money orders are generally less expensive, but they take much longer
for funds to reach the recipient, sometimes up to three weeks or more. There also may be
additional fees for cashing the money orders in the receiving countries, and theft is a major
problem in some areas (Owens 2000).

The fee also can depend on the split between the MTO and its agent, which varies among
companies. Some companies adjust between the fee and the exchange rate to obtain the desired
profit level, in some cases offering a lower fee but (less transparently) charging more on the
exchange rates. In other cases, the receiving institution is able to charge what it wants with no
restrictions imposed by the MTO. In any case, exchange rate differentials represent a significant,
and often partly hidden, cost of remittances.

Fees vary significantly by remitting company and receiving country. The companies that charge
the most generally have a larger market share, often in countries with a low level of competition.
For example, Gigante Express (El Salvador, Guatemala), Girosol, Jamaica National Overseas,
Vigo (Mexico), and others charged between $15 and $17.50 to send $200 in 2000, while Ria
Finance Service, Caribbean Airmail, Western Union, Grace Kennedy Remittance Service
(Western Union service in Jamaica), and others charged more than $20. Other remittance
companies charged less than $15 for similar services (Orozco 2002b). The total costs in 2002 of
sending $200 from the United States to various Latin American countries were estimated by
Orozco (n.d.2) (table 2).

Mexico has one of the lowest costs, excluding dollarized economies (such as El Salvador), in
Latin America. It has the greatest number of choices and is a very competitive market. Other
countries with competitive markets include El Salvador and Guatemala, while the Dominican
Republic and Jamaica, on the other hand, have less competition and thus higher costs (Orozco
2002b).




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       Table 2. Costs to Send $200 from the United States to Selected Countries, 2002

                                     Fee         Exchange Rate Total
                                                 Differential (industry average)
       Cuba                          $25.58            0         $25.58
       Colombia                      18.71          $6.31         25.02
       Jamaica                       19.25           4.25         23.50
       Dominican Republic            18.16           4.22         22.38
       Haiti                         20.60           1.00         21.60
       Guatemala                     15.17           3.64         18.81
       Nicaragua                     17.56           1.00         18.56
       Mexico                        11.59           6.54         18.13
       El Salvador                   15.06             0          15.06
       Source: Orozco n.d.2

Fees are determined in part by the transfer company’s cost model. Orozco (2002b) describes one
company, charging $10 to remit funds to Mexico and Central America, as allocating 40 percent
of the fee toward the actual cost of transferring money, 50 percent in payment to the cooperating
agent, and 10 percent for its profit. However, the company also profits on the foreign exchange
rate markup. Orozco (2002c) states that the actual cost for a transaction ranges between $3 and
$6, and he notes that some observers think the cost is lower. This cost probably depends, to some
degree, on the volume that a given company can achieve. It is also possible that the costs vary by
the transfer method used and that technology may have lowered costs further since Orozco’s
2002 study. One World Bank economist believes that the transfer cost is substantially lower than
the $3 to $6 range estimated by Orozco, although these estimates apparently do not include
business costs, such as advertising and marketing (Solis 2004). The U.S. Federal Reserve has
initiated a program using an automated clearinghouse system for banks making transfers to
Mexican banks with a cost of $0.67 per transfer (Orozco 2004).

A recent study by the New York City Department of Consumer Affairs demonstrated some of
the possible pricing differences. The department staff surveyed MTOs in three neighborhoods
(Sunset Park, Washington Heights, Jackson Heights) with high concentrations of immigrants and
remittance companies. They asked the same question of all the companies: What is the charge to
remit $500 in Dominican pesos to Santo Domingo, Dominican Republic. The department
compared prices, presentation of prices, other services offered, and signage posted (such as
licenses, identification requirements, and special offers). The prices ranged from $5 to $36
―…for the same transaction. There is no apparent difference in the services provided. Both types
of businesses appear the same and the money is guaranteed to arrive within the same time
frame.‖ Western Union consistently charged $36 and MoneyGram sometimes charged that
amount and sometimes a little bit less. Other companies generally charged much less. (The study
also showed the high concentrations and competitiveness of the business in some locations. The
study concluded that between five and ten remittance businesses can survive on the same block
in some neighborhoods.)

Besides what they make on transmittal fees, funds transmitters can make substantial profit from
exchange rate markups. These charges often are not obvious to customers. Some transmitters



                                                9
exchange funds at rates as much as 6 to 10 percent lower than the officially available rates (Case
1996). Western Union and MoneyGram settled a lawsuit that charged they were not disclosing
the exchange rate differential to their customers. Some banks are charging just a 2 percent
foreign exchange rate differential, a better price than offered by many MTOs.

MTOs generally operate through the use of agents. Agents are other companies — often small
and located in the neighborhoods where people need access to money transfer services and where
banks often do not operate — such as grocery stores, check-cashing outlets, travel agencies,
income tax preparers, insurance agencies, cell phone retailers, music stores, and even beauty
parlors.

Agents rarely handle remittances as their sole business, and usually operate other businesses in
the same office. Western Union and MoneyGram both require their agents to sign contracts
making exclusive agreements with a single MTO. This practice was recently under review by the
Justice Department for anti-trust reasons (Mollenkamp and Wilke 2004). Some of the smaller
MTOs do not require exclusive agreements.

Agents do not have to be licensed, but must be authorized agents of a licensed company. The
licensed company provides training and equipment, as well as branding and advertising. The
agent and the licensing company share fees in some predetermined split. Besides agents in small
stores, in some cases the larger MTOs use banks and other partners, especially in receiving
countries.

The need to have agents to receive funds in the home countries plays a key role in the process.
Banks tend not to have locations in rural areas of many receiving countries, even rural areas with
high populations. Many migrants come from rural areas, and without banks it can be difficult to
send money that can be easily and economically retrieved back home. MTOs and other
transmitters therefore find other outlets in rural locations, such as grocery stores, other retail
businesses, and post offices. Also, there are increasing efforts to bring diverse financial
institutions — many of which are informal and unregulated — into the financial system so they
can be used in areas without other resources. This is occurring in Mexico, in particular. (The
agreement with BANSEFI in Mexico, discussed in the section of this report on banks, is an
example.)

As with many other businesses, brand is very important with money transfers. Many people have
had bad experiences with banks or other institutions in their home countries and/or in the United
States. They may have lost money or had trouble getting deposited funds out of their accounts, or
they might have felt that they were treated disrespectfully, slighted, or ignored. Many people
who have had such experiences were poor, worked very hard for their money, and desperately
needed the funds. Many are immigrants and do not understand the systems used in the United
States. Therefore, a company that can build a brand and strong differentiation from other
competitors and be considered respectful by its patrons will gain customer loyalty and referrals
of new customers.

Western Union, which has strong brand recognition, dominates the remittance industry, but
newer entrants have brought price pressure and innovation to the market, causing Western Union



                                                10
to lower its prices in some markets with substantial competition. In southern California, for
example, there have been many new competitors. Orlandi Valuta was one of the first. Seeing
little competition to the large companies that were increasing prices annually, this small
company began in 1985 by underpricing Western Union. There were some reportedly fierce
battles between the companies, but Valuta understood the market better, hired Spanish-speaking
employees, and built a niche in the market. By 1996, the company had 3,000 agents in four
states. In 1997, First Data Corporation, which also owns Western Union, bought Orlandi Valuta
and it remains a separate division (Romney 2000).

Although competitors are entering the market, there are barriers presented by both startup costs
— estimated at $150,000 to $1 million (Jain 2003) — and the increasing costs of regulatory
compliance and licensing requirements. Startup costs include expenses to: travel and conduct
research on the markets and gain partners in other countries to receive money transfers; complete
regulatory applications and ensure compliance; purchase computers and other equipment;
purchase software in Spanish or other languages, if needed; hire and train staff; and set up office
locations.

Marketing is also important, as new entrants usually need to find ways to differentiate
themselves. One new company, for example, is emphasizing transfers through microfinance
institutions working in rural or hard-to-reach areas. Another is offering free 10- to 30-second
video transmissions to customers’ loved ones along with the money transfers (Jain 2003).

Regulatory compliance is a significant concern. In the United States, banks are already mostly
regulated for money transfers as part of their bank licenses. The key federal regulatory structures
for both banks and MTOs are the Bank Secrecy Act and the Patriot Act, designed to prevent
money laundering and terrorists’ money movement. Enforcement is handled by the U.S.
Treasury Department through its Office of the Comptroller of the Currency, the Financial Crimes
Enforcement Network, and the Office of Foreign Assets Control. Regulations include ―Know
Your Customer‖ requirements (institutions must practice due diligence in requiring identification
and information about senders) and also require reporting suspicious activity and currency
transactions (Sander 2003). Regular reports and audits are required for institutions, as are written
compliance handbooks, staff training, and designation of a compliance officer.

Federal policy does not appear to be aimed at regulating money transfer operators or protecting
consumers, but many states regulate money transfer operators and have adopted some consumer
protections. Twenty-eight states and the District of Columbia have laws requiring licensing by
state banking regulators (National Consumer Law Center 2001; Negroni 2003) and require
MTOs to register with the U.S. Treasury Department’s Financial Crimes Enforcement Network.

State laws typically require licensing, background checks, some minimum net worth (from
$5,000 to $250,000, usually based on the number of agents or offices), a bond in some cases
(ranging from $25,000 to $1 million), an established complaint procedure, and submission of
annual audit results (Jain 2003; National Consumer Law Center 2001; Negroni 2003). They may
require the agents to state clearly in business locations that they are agents of the licensee and to
list the licensee and regulator contact information. There do not appear to be many requirements
for posting transparent information about costs, and many agents do not post their licensee



                                                 11
information (New York City Department of Consumer Affairs [NYDCA] 2003). A recently
enacted law in Texas does require transparency and provision of adequate information on the
costs of remittances.

The costs of compliance have increased in recent years — especially since September 11, 2001
and the subsequent enactment of laws such as the Patriot Act — and have been estimated at 2 to
4 percent of the net amount the licensee receives after its costs and payment to the agent
(Fredrickson 2003). Bonding and licensing, for example, can be expensive — in Maryland, it has
been estimated to cost between $150,000 and $1 million (Jain 2003). In addition, regulatory
compliance involves costs for staff training, manuals, and procedures. Some banks have dropped
their accounts with licensees and agents because of new regulations.

Despite the costs of start up and regulatory compliance requirements, many companies operate in
the remittances market. In Maryland, for example, there were 55 licensed operators in 2003, an
increase from 40 three years earlier (Jain 2003), and more than 5,000 agents. In New York, there
were 68 licensees working with more than 15,000 agents (NYDCA 2003). Despite barriers to
entering the remittances market, new entrants are joining very rapidly in this time of great
change in the industry. The number of MTOs in Texas apparently doubled between 1997 and late
2000, while the number of licensed operators in California increased by a third in the same
period. In one six-block area in downtown Los Angeles, 20 money transfer companies co-existed
in 2000, fighting for their share of the market. The U.S. Postal Service has started new programs,
and both U.S. and foreign banks have entered the field. Many new market entrants target the
Mexican market, although some are starting there as a demonstration with the goal of expanding
to other countries later.

Market competition has also stimulated creation of new remittance methods. For example,
Mexico Express created a courier service to provide 24-hour delivery of money orders up to
$1,000 for a fee of $15. This company carried 4.5 million letters to Mexico in 2000 compared
with 200,000 in 1994 (Romney 2000).

A closer look at the key industry players provides more insights into the dynamics of the market.

Western Union

Western Union is, by far, the largest single private money transfer operator in the United States
and the world. At the end of 2003, it had more than 182,000 locations in over 190 countries.
These numbers represent very rapid growth — a 21 percent increase over 2002 alone. In 1993,
Western Union had about 21,000 agents and operated in 55 countries, an increase from six
markets in mid-1991.

Western Union, a business pioneer for many years (stock ticker in 1867, electronic money
transfer in 1871, credit card in 1914, singing telegram in 1933 — but also the company that
rejected an option to purchase Alexander Graham Bell’s new telephone in 1876 — it ―…is
inherently of no value to us‖), was on the verge of bankruptcy in the late 1980s and filed for
Chapter 11 reorganization in 1993 as part of a complicated corporate recovery plan. In 1995,
First Data Corporation bought the financially troubled company. Since then, Western Union has



                                                12
grown as U.S. immigration levels and money transfer needs have grown, and reportedly now
controls approximately 80 percent of the U.S. domestic remittances market, and a large share of
the international market.

Western Union has very strong brand recognition. The company states that it focuses on
providing service to the customer — speed, delivery to most locations — and is working to
increase its brand recognition and market share. In 2003, it embarked on a $300 million global
marketing campaign (Steinberg 2003).

Western Union, like the other MTOs, has grown so much, in part, through the use of agents.
Besides agents in small stores, Western Union uses banks in some cases. In Mexico, the
company has partnerships with two of the country’s largest banks, Banamex and Banco Bital,
and with the major appliance retailer Elektra and other stores. Western Union transfers funds
through machines, agent locations, phone, the Internet (using credit/debit cards), and money
orders, and also offers a bill payment service.

Western Union provides Mexican recipients with written notification of the delivery of funds as
well as home delivery in check or cash (for an additional $10). It can provide immediate
transfers (Dinero en Minutos) or next-day service, in addition to home delivery. Western Union
has 5,500 agent locations in Mexico.

Western Union believes that the core remittance transaction is made mostly on a person-to-
person basis through the agents. However, in some cases, customers (and agents) may prefer
technological solutions that offer a wider range of services. Western Union has entered into a
partnership with Infonox and Global Cash to offer machines in retail outlets to dispense cash,
handle bill payments, and cash payroll checks. Western Union also has a partnership with 7-
Eleven stores to handle machine-based money transfers. Both partnerships are relatively small.

Western Union’s charges for remittances vary depending on location and amount, which makes
it difficult to compare its charges to those of other transmitters, many of whom charge fixed
rates. However, Western Union charges tend to be higher than those of most other transmitters.
For example, a 1998 listing in some Oakland, California check-cashing stores indicated that
Western Union’s price for sending $200 was $22; it was $29 for $300, $34 for $301 to $400, and
$75 for sending between $875 and $1,000 (information collected by author). The same amounts
cost less to send from southern California in the same year.

Due to competition and other factors, prices have been falling for the past few years. Western
Union has lowered its fees for sending up to $200 from the United States to Mexico from $30 to
approximately $15; the fee for sending $400 fell to $20. Western Union reportedly reduced its
fees from $9 to $2.60 during a recent price war in parts of Asia. The amount of competition in
both the sending location and the final destination has a significant impact on price, especially
among Latin American and Caribbean nations.

Orozco documented price declines for Western Union. Writing in 2002, he noted ―…three years
ago, the cost of sending remittances to different Latin American countries averaged about 15.0
percent of the amount sent. Those transfer fees have now declined. In 1999, for example,



                                               13
Western Union charged $22.00 for transferring up to $200.00. By 2001, the charge had dropped
to $15.00 (Orozco 2002c). However, the rate of decrease in the fees has slowed considerably
since 2001; although still falling, most of the decrease had occurred between the late 1990s and
2001 (Orozco 2004).

Exchange rate differentials are also documented by Orozco. Although charging nearly the same
rate as the official exchange rate in Guatemala and Honduras, Western Union provided $2,220
on an amount that would have brought $2,317.50 at the official exchange rate in Colombia on
April 25, 2001 (a 5.01 percent difference), $44.29 against $45.45 at the official rate in Jamaica (a
3.6 percent differential), and $8.81 versus $9.19 at the official rate in Mexico (a 4.1 percent
differential). In 1999, when there was less competition, Western Union paid $9.00 when an
exchange at the official rate would bring $10.13 (an 11.2 percent differential) (Orozco 2002d). In
some cases, Western Union has competitive exchange rates, although their fees may still be
relatively high. The exchange rate differentials for various MTOs have been reported to be as
high as 10 to 20 percent.

Western Union’s market share has fallen in some areas, but its volume has continued to grow as
the remittance market has grown (Orozco 2004). Nevertheless, even with falling prices and
lower market share in some markets, the profits in this business can be substantial. According to
the 2003 unaudited financial statements for First Data Corporation, its subsidiary Western Union
had revenue growth of 15 percent and total revenues of $3.249 billion. The profit numbers are
even more telling. Payment Services — a division of First Data Corporation that consists
primarily of Western Union — accounted for $1.232 billion (an 18 percent increase over 2002)
in profit out of a total $2.224 billion for First Data as a whole before adjustments. The profit
margins were significant, ―…improving to 34 percent from 33 percent in 2002‖ (First Data
Corporation’s Web site, www.firstdata.com). Although these profit levels have generated calls to
lower profits and create greater competition, the attractive profit levels appear to have brought
more competitors into the field.

Several lawsuits have been brought against Western Union in connection with its fees. One suit
against both Western Union and MoneyGram charged that they misled customers sending money
to Mexico by not disclosing that the companies were making money by charging a less favorable
exchange rate than the official rate. Western Union settled the case in 2000, agreeing to: make $4
million in charitable contributions to Mexican and Mexican-American causes, offer discounts for
class members for future transfers to Mexico, and disclose the difference between the official
exchange rate and the rate charged (NYDCA 2003; Western Union’s Web site at
www.westernunion.com).

Another case was settled in 2002, without any admittance or denial of wrongdoing, for failing to
file transaction reports on one-day transfers of over $10,000, as required by the Patriot Act. The
case was settled for $8 million with the State of New York and stimulated the interest of other
states (Beckett and Mollenkamp 2002).

Although Western Union has lost market share in Mexico, and to some extent in other countries,
over the past few years, it remains a major presence in the market and holds a strong share in




                                                14
many countries. Because the volume of business has increased, Western Union’s profits continue
to increase very rapidly, while it maintains relatively higher prices than its competitors.

Western Union also has a strong market position with regard to payment resources. Despite some
objections, the federal government recently approved its merger with Concord EFS, which gives
the company control over 70 percent of the payment services market for PIN-based debit cards
used for retail purchases.

MoneyGram

The largest competitor to Western Union among MTOs is MoneyGram. Established in 1988, it
was owned for a time by American Express and later by First Data Corporation. When First Data
bought Western Union, it was forced to sell MoneyGram because of antitrust concerns. Travelers
Express acquired MoneyGram in July 1998 when it took over Thomas Cook’s financial arm.
Travelers Express was a subsidiary of Viad Corporation, but announced plans in late 2003 to
become an independent company and change its name to MoneyGram International, which
occurred in 2004. MoneyGram is the second largest money transfer company in the world,
according to its materials, although the gap between Western Union and MoneyGram is quite
large. MoneyGram had 60,000 agent locations in 155 countries as of 2003.

Like other operators, MoneyGram recently has experienced rapid growth. In 1998, when it was
last acquired, it operated in only 105 countries. But the company keeps widening its outreach
with new partners. MoneyGram has an agreement with BANSEFI, a Mexican government
financial institution that is allied with an association of depository institutions, to provide 1,000
additional wiring locations. The agreement brought MoneyGram’s network of Mexican locations
to 5,800 in 2003.

MoneyGram says it guarantees to complete an international transfer in 10 minutes, and the
company offers senders a free, three-minute phone call to let the recipient know that the funds
are available. A free 19-word message can be sent with the funds, and a discount card is
available, reducing the cost for repeat transfers. MoneyGram recently started e-Money Transfer,
a service that enables people to send money from their accounts via computer.

MoneyGram also uses the STAR ATM network, which allows customers to send money
throughout the United States. Other services include payments for automobile loans, credit cards,
and mortgages through Express Payment, and utility bills can be paid through Travelers Express
Utility Bill Payment. Travelers Express also offers money orders, and is the largest issuer of
money orders in the world. MoneyGram also offers check-cashing services and advance
payments through credit cards for the gaming industry.

MoneyGram’s fees vary, ―based on send and receive cities, country and dollar amount being
sent,‖ according to the company’s Web site, which also states that its service ―…usually costs
less than Western Union.‖ Nevertheless, MoneyGram’s fees appear to be higher than those of
many other MTOs. The New York City study (NYDCA 2003) found MoneyGram’s fees to be
generally comparable to Western Union’s, although occasionally lower.




                                                 15
MoneyGram uses supermarkets, check-cashing outlets, drug stores, mailbox outlets, and other
retail establishments in North America. Recently, MoneyGram began working with banks,
having signed agreements with U.S. Bancorp and Union Bank of California in 2004, and with
others earlier (Breitkopf 2002b, 2004).

Internationally, MoneyGram uses a network of banks, post offices, foreign exchange houses,
travel agencies, transportation centers, and retail establishments. MoneyGram also provides
check-cashing and payment services for Wal-Mart customers in this country, and has
relationships and agreements with Albertson’s, Safeway, and the United Kingdom Post Office.
The company has not yet used stored value cards, as it believes that most immigrants are
unlikely to use them and that the recipients live in locations without ATMs, but is considering
using them in the future because of indications that the market is moving in that direction
(Breitkopf 2002a).

Like the other MTOs, MoneyGram pays a commission to its agents. It also provides equipment
and training, merchandising support (signage, posters, marketing materials, etc.), record tracking
and reporting systems, international marketing and advertising, and cooperative marketing.

Other Money Transfer Operators

There are many MTOs besides Western Union and MoneyGram, with many having entered the
market since the dramatic increase in migration and money transfers. In the United States, many
were established to remit funds primarily to Mexico, the Caribbean, and/or Latin America,
although there are many other substantial markets including India, the Philippines, Viet Nam,
China, and several countries in Africa.

One example of a relatively older company that is now growing rapidly is Vigo Remittance
Corporation, which was established in 1985. It began with a focus on Brazilians and Portuguese
living in Newark, New Jersey, sending funds to Brazil. The company became successful and
expanded to other parts of the United States and into other parts of Latin America and the
Caribbean. It now operates in 33 countries.

Based in Sunrise, Florida, Vigo was purchased in 2003 by Great Hill Partners, a private equity
firm located in Boston that started a group specifically to acquire privately held money
transmittal firms. In 2002, Vigo transferred roughly $2.5 billion, mostly from the United States
to Latin America. Vigo calls itself the ―…#3 vendor in the world.‖ It offers transfers to Mexico
for $10 for up to $1,000, and charges up to $15 for any place in Latin America. Vigo has roughly
8,000 agents in Mexico and 7,000 in the United States. Company representatives state that the
foreign exchange rate fee is 1.5 percent, considerably less than most other MTOs.

Vigo is a partner with the World Council of Credit Unions in its international service, IRnet.
Vigo agents earn commissions of $5 on remittances, and payments are available at the end of
each day. Some MTOs send periodic commission checks to their agents, forcing them to wait for
their payments. In the United States, Vigo originally focused on getting its agents through ethnic
businesses, including grocery stores, convenience stores, bodegas, and travel agencies. It is




                                                16
shifting its emphasis to check-cashing outlets, and the recipient network includes banks, post
offices, and retailers.

Like many other MTOs, Vigo has been very profitable. In the three years preceding its
acquisition, Vigo generated a ―…compound annual revenue growth of over 30 percent and
steadily increasing margins‖ (Flanagan 2003).

Vigo is not the only successful company to compete with Western Union and MoneyGram. In
the Mexican market — the largest remittance market and very competitive — just three
companies held at least 60 percent of the market in 1999. By 2003, six companies — Western
Union, Dolex, Vigo, Ria Envia, MoneyGram, and Mexco Express — held up to 60 percent of the
market share (Orozco 2003e). The new entrants have gained a foothold in the market, and many
smaller companies that have entered the field in the past few years are experiencing strong
growth.


III. Banks and Credit Unions

For several years, the United States has experienced a very high level of immigration. There are
now about 21 to 24 million people of Mexican origin living in this country, and 36 to 38 million
total Hispanics. About 7 million of them are Mexican citizens, and there may be a higher number
of undocumented immigrants.

Most immigrants are unbanked — for example, 68 percent of Latino immigrants ages 18 to 24
are unbanked, and 73 percent of them send money home (Grace 2003). Many immigrants simply
do not trust banks, for reasons that include:

   Many banks in Latin America have had problems or failed. Some customers lost money or
    had trouble getting money back. Most other countries do not have deposit insurance to
    protect customers from bank failures or problems.
   In many countries, there are no banks in some large geographic regions, especially rural
    areas.
   Banks typically do not see low-income people as a market; although this has been true in the
    United States, it is an even more common attitude in many developing countries, where
    banks tend to serve only higher-income households.
   Immigrants feel that U.S. banks have not reached out to seek their business or make them
    feel comfortable.

In addition, many undocumented immigrants avoid going to banks for fear of being reported to
immigration authorities. And many understand, or have heard, that there are high fees and costs
at banks, particularly minimum balance fees, which make it costly to hold bank accounts.

Nevertheless, there has been a changing relationship recently between U.S. financial institutions
and Hispanic immigrants. These changes are reflected in a chronology of activities in the past
few years (Freeman, Leal, and Plascencia 2003):



                                                17
   March 2001 — Second Federal Savings in Chicago began a new program, the Amigo Card,
    aimed at the Hispanic market. The institution was the first in the United States to accept as
    identification the IRS-issued Individual Taxpayer Identification Number (ITIN) and the
    Certificado de Matricula Consular (Freeman, Leal, and Plascencia 2003). (The Matricula is
    issued by the Mexican government through consulates in the United States to certify that the
    holder is an immigrant of Mexican nationality. An applicant must present information
    confirming Mexican citizenship. In the first nine months of 2002, consulates issued 740,000
    cards [Pew/MIF 2002]. Banks use the card in combination with a utility bill or other
    identifying materials demonstrating residence in the area.)
   May 2001 — Citibank purchased Grupo Financiero Banamex-Accival, Mexico’s second
    largest bank, and merged it with Citibank’s operations in Mexico that had started in 1929.
   November 2001 — Wells Fargo Bank began accepting the combined ITIN and the Matricula.
   March 2002 — Citibank agreed to accept the Matricula.
   March 22, 2002 — The U.S. Department of State and the Mexican government announced a
    Partnership for Prosperity that included a goal of lowering the cost of remittances.
    Partnership activities include encouraging banks to aggressively market accounts and lower-
    cost remittance programs to immigrants and stimulating increased financial literacy training.
    Also, as part of the Partnership activities, the United States established the First Accounts
    program that provides grants to financial institutions to help get unbanked people into the
    banking system (Partnership for Prosperity 2002). The Partnership reported that, during the
    first nine months of 2002, 170,000 Mexicans living in California opened bank accounts for
    the first time.
   May 2002 — Bank of America announced its new SafeSend program and its acceptance of
    the Matricula.
   October 2002 — The U.S. Treasury issued a report to Congress on Section 326b of the
    Patriot Act discussing the use of various identification documents and the difficulties of
    authenticating them. In a footnote, the report stated that the act’s proposed regulations did not
    discourage bank acceptance of the Matricula Consular. This tacit acceptance of the Matricula
    allowed banks to adopt its use without violating the act.
   November 2002 and December 2002 — The Federal Reserve Bank of New York and the
    Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Small
    Business Administration, and the Federal Reserve Bank of Kansas City sponsored
    conferences on lending and banking with immigrants and Hispanics (Freeman, Leal, and
    Plascencia 2003).
   December 2002 — Bank of America purchased a 24.9 percent interest in Grupo Finciero
    Santander Serfin, Mexico’s third largest bank.
   2003 — U.S. Bank established two pilot programs for creating accounts for Mexican
    immigrants and then made them available throughout its system by the end of the year.
   November 2003 — Citibank announced its Access Account for Mexican immigrants that
    provides an entry point into banking and includes a remittance program.

These steps helped to remove many barriers to banking immigrants, especially Latinos.
Additionally, banks and credit unions took steps to address immigrants’ fears in several key
areas:




                                                 18
   High remittance fees — Banks cut fees for remittances significantly as part of their efforts to
    bring unbanked immigrants into the financial mainstream.
   High cost to maintain a bank account — Many unbanked immigrants viewed their only
    choices as keeping a high balance ($1,000 or more) in a bank account to avoid fees or paying
    the high money transmitting fees charged by the MTOs. Few immigrants had the necessary
    minimum balances, so they paid the MTO fees and did not create bank accounts. Banks
    responded by creating accounts with low or no setup and/or maintenance fees.
   Legal status — To open an account, a customer needed a Social Security Number and other
    identification. So, banks began to accept the Matricula Consular. (More than 150 banks
    reportedly accepted the Matricula in 2004.) In some cases, other identification became
    acceptable too — passports, for example. (It has been reported that Mexican immigrants
    often destroy their identification before leaving for the United States so they will have no
    identification that U.S. authorities can use to prosecute them.) The holders of the Matricula
    are not reported to U.S. immigration or other governmental agencies.
   Distribution to remote markets in Mexico — Many immigrants came from rural areas
    without banks; it was difficult to find locations to send the money to that would be easily
    accessible to the recipients. Banks and credit unions in the United States responded by
    purchasing part or all of some Mexican banks and/or creating partnerships with Mexican
    institutions to enhance distribution of remitted funds.

U.S. banks, having only recently discovered the potential of the remittances market, have
initiated new programs and have already begun the process of learning from experience and
modifying programs to make them more attractive and user-friendly. Banks and credit unions
also have adapted their marketing strategies to meet the needs of immigrants, often departing
significantly from their more traditional marketing approaches (Orozco 2004).

Banks have been able to change their programs and offer these services, in part, due to use of
technology. Their remittance programs typically use debit cards, ATMs, the Internet, and
telephone lines. These technologies have reduced costs and made it feasible to offer a wider
range of services to previously unbanked people. The earnings from servicing such customers in
the traditional manner — through branches and face-to-face service — would have been too
limited to offer adequate service, but the complementary use of technology has offered a cost-
effective approach to providing these services.

Moreover, prices are falling as competition increases. Bank charges for remittances are lower
than charges by most of the traditional money transfer companies. Some reasons for lower prices
include the fact that many banks involved are very large, have access to upfront capital to back
the outflow of capital at a reasonable cost, have an existing or more easily developed distribution
network, may be fairly well-known to the potential customers, and can concentrate their efforts
on attracting customers in areas where immigrants are concentrated (Orozco 2002a).

Aggressive pricing by banks has helped to pressure the MTOs to reduce their prices in many
markets. But the MTOs’ profits are based on volume, and the volume of MTO remittances has
increased dramatically in recent years, particularly in some markets, and is expected to continue
to expand in future years — so reducing prices is not necessarily reducing MTOs’ profits
because lower prices are offset by increasing volume.


                                                19
Banks, on the other hand, are less interested in a volume business and more interested in
relationship business (to generate loans, investments, deposits). They have an incentive to reach
out to the immigrant market if it means establishing relationships with immigrants whose
financial fortunes can be expected to increase in the long run, although they still need to consider
costs in the short term.

The use of technology enables banks to compete cost-effectively with businesses that are more
volume- and transaction-based. Potential remittance customers may not be familiar with
technology-based programs and may even have a disinclination to use them — which may limit
the potential market for the banks, which must depend more on technology than on face-to-face
interactions with customers than MTOs. Or, at least it limits the potential market for customers
in the short run, until immigrants have become more adept in and comfortable with the use of
technology. One recent survey of immigrants, however, found a high acceptance level of new
technologies and programs if they result in lower costs (Pew/MIF 2003).

However, profits have not been the primary issue for banks in implementing remittance
programs. Although they certainly understand the profits to be made from the remittance
business and are clearly interested in making their remittance businesses as profitable as
possible, banks’ long-term goals are to gain new customers who will use a range of financial
services, many of them possibly more profitable than remittances.

For example, a Citibank representative involved in its remittance program stated, ―We want to
hold the hand of the consumers and make the first account they ever have with Banamex the
Tricolor account [an account geared toward remittance customers].‖ The bank’s hope is that ―in
two years’ time, they will have the savings habits and financial resources to open up a different
account that is hopefully better for their needs and more profitable for the bank.‖ After that, a
credit card might be next and then, ―…in three years’ time that family may be a candidate for a
mortgage. That’s the bet we are making on both sides of the border‖ (Lee 2003). Bank of
America reports that about 60 percent of its sales of SafeSend, its program for remittances to
Mexico, are accompanied by opening of a new checking account (Wentz 2004).

This approach and goal are common among the banks involved in the remittance business. They
want to create bankable customers and cross-sell their financial products, and they can afford to
take a somewhat longer time line to achieve their goal. In the long run, they are particularly
interested in the fast-growing Hispanic and immigrant markets, which have more growth
potential than many of the saturated, higher-end markets.

This approach makes a great deal of sense for other reasons as well. Although the remittance
market is huge — perhaps reaching $14 billion for Mexico alone — the overall purchasing
power of Latinos in the United States has been estimated at well over $500 billion. Other
immigrant groups also may command attention as immigration growth continues.

Banks in countries that receive high levels of remittances also are starting to take notice and
establish programs for immigrants as well as recipients. One recent study found that 33 percent
of Mexican recipient respondents had bank accounts (Pew/MIF 2003), a higher percentage than
the Mexican population as a whole.



                                                20
The most typical methods that banks use to transmit funds are debit cards for the sender and
receiver; transferring money through banks in the receiving country by crediting the recipient’s
account in the same bank or a different bank through a system that is cheaper than traditional
wire transfers; transferring money in alliance with MTOs; and use of SWIFT, the traditional
method of transfer. SWIFT requires special software and a dedicated computer. This method also
requires fees to be paid by the participating banks. It was designed for larger transfers, usually by
corporations or wealthier individuals, and is therefore, much more expensive and less widely
used. For smaller, individual money transfers, debit cards and account transfers are now in
widespread use (Hundahl 2003; Orozco 2003b, 2003c).

The following sections describe several bank remittance programs: Bank of America, Citibank,
U.S. Bank, and Wells Fargo Bank. Many other banks now are involved in remittances — well
over 100 offer the service, including Banco Popular, Elgin State Bank, Harris Bank, and Second
Federal (Chicago).

Some MTOs also provide transfer services through bank offices. For example, Cofia and
Uniteller offer money transfer services inside some Chicago-area banks in addition to their
independent offices (Orozco 2003b).

Bank of America

In May 2002, Bank of America (B of A) announced its entry into the remittance market with its
new SafeSend program. Later in the year, B of A purchased a 24.9 percent interest in Banco
Santander Serfin, a major Mexican bank (which is part of a Spanish-owned bank). At the time of
the purchase, Banco Santander was the third largest Mexican bank with $25 billion in assets, 924
branches, 1,669 ATMs, and 2 million customers.

TheBanco Santander purchase was part of B of A’s growth strategy that included, in part, a
desire to enter the remittance market, which had grown rapidly and offered extensive future
growth possibilities. The bank purchase helped B of A to enter the cross-border trade between
Mexico and the United States, learn more about banking for Hispanics, and attract previously
unbanked customers to B of A in the United States. But the strategy also was part of an effort to
gain a larger share of the growing U.S. Hispanic banking market.

The remittance program is based on the use of stored value cards. The sender is required to set
up two or three accounts that include one or two ―funding accounts.‖ Money is placed in this
account and drawn from it to another one (SafeSend Card account) for transferring money. The
funding account can be either a credit or debit account and must be established with a financial
institution that is licensed by either Visa USA or Mastercard International. The account does not
have to be with Santander Serfin/B of A, although there is a charge for the use of other ATMs —
about 10 pesos, or a little less than $1, depending on the exchange rate (Orozco 2004).

Funds in the card account are merged with all transferring funds for customers. The holder does
not receive interest and the account is not federally insured. The holder receives a prepaid card.
The holder can have another sent to the recipient (for $12) by DHL, eliminating problems that



                                                 21
sometimes are encountered with mail service, or the sender can mail the card to the holder
directly.

Each recipient must have an account at a bank at the receiving end to withdraw funds from any
ATM that is part of the PLUS network. The recipient can also obtain account balance
information through the ATM. (This information, as well as recent transaction information, is
also available by telephone or through the Web site.) Besides being able to get cash at an ATM
or a bank, the recipient can use the card as a debit card at stores (Talcott 2004).

Recipients can withdraw funds in pesos or dollars. ―A Foreign Exchange Adjustment equal to 2
percent of the transfer‖ is charged to the card account at the time of transfer. There is a $10 flat
fee for the transfer; $15 if the funding account is not a B of A account. Others fees, generally
charged to the funding account, include a $3 charge for each ATM withdrawal (waived once for
each transfer to the card account), fees for more than four calls each year to get assistance from a
representative, and fees for more than two balance inquiries after each transfer.

The remittance program operates only in Mexico at this time. Sending money to other locations
presumably requires use of B of A’s regular wire transfer service.

So far, customers and banks seem to be satisfied with Bank of America’s remittance service. B
of A reports a 90 percent satisfaction rate among its SafeSend customers, and is itself satisfied
with the opportunity for cross-selling its products (Kuykendall 2003). B of A reports that about
one-third of its remittance customers have opened separate accounts at a rate of about 5,000 per
month. Hispanics accounted for roughly 20 percent of new 2003 accounts. B of A is now
opening ―banking centers‖ — 50 in Texas in 2003, and a projected 30 to 40 more in Hispanic
communities in 2004 (Orozco 2004).

Citibank

Citibank has been in the remittance business longer than B of A. The bank tried a stand-alone
remittance program in 1986, using $10 million to launch it. The concept was based on trying to
undercut the existing companies’ pricing by 20 percent. This program ended in 1998. During that
same time period, Western Union increased its agents and got more business by using check
cashers, grocery stores, K Marts, 7-Elevens, and other agents (Timmons 2001). Citibank’s
program, called Citicorp Express, also was agent-based, but was unable to grow fast enough to
compete (Solis 2004).

In November 2003, Citibank announced its new Access Account program, designed for
customers who have never had a bank account. The Matricula card is accepted as identification.
The account is intended to be easy to manage, has no minimum or opening balance requirement,
and includes free use of Citibank ATMs. The monthly maintenance fee, as low as $3, may be
waived if the holder uses direct deposit. No checks are involved, eliminating the possibility of
overdrafts. Other features include: free unlimited bill payment services, Internet access,
statements in English or Spanish, and an available line of credit.




                                                22
Citibank found that its new accounts generated by acceptance of the Matricula Consular
averaged over $1,000 in the initial deposit and that their average balances increased by 20 to 30
percent within six months. The bank made more than 1,000 fund transfers in the program’s first
four months (September through December 2003).

The account also offers remittances, with these features:

   Account holders can transfer money from the Access Account to a Banamex account using a
    Banamex card (Tarjeta Tricolor). The cost is $5 plus a 2 percent foreign exchange
    commission.
   Any Citi ATM or Citi Online can be used. Funds can be transferred immediately into a peso
    account.
   If the recipient has no Banamex account, funds can be picked up at any Banamex branch for
    $8 and a 2 percent foreign exchange commission.
   Recipients can withdraw through teller, ATM, or satellite Banamex branches located in
    grocery stores and gas stations. There is no additional cost other than foreign ATM fees or
    charges by satellite locations.
   The service is available in Mexico, India, and ten European countries.

The program’s stated goal is to create long-term Citibank customers, not necessarily to make
money from the remittance market. The bank expects previously unbanked customers to
eventually become full banking participants through this account, eventually increasing their
deposits and savings, taking out car loans, and purchasing homes with bank mortgage loans.

When Citibank bought Banamex in August 2001, Banamex had 1,300 branches. When
Citibank’s other Mexican assets were combined with Banamex assets, Citibank had 26.4 percent
of total commercial bank assets. In addition to its banking activities, Banamex was involved in
other financial services areas, including a brokerage house, insurance company, pension fund,
and a long-distance telephone company. Citibank also bought Cal Federal Savings Bank, which
operates in California and Nevada, as part of its effort to serve the Hispanic market.

In 2004, Citibank announced another program — a credit card account that is opened by a U.S.
cardholder in a U.S. Citibank branch and who is responsible for the payments. The cardholder
designates users in Mexico. Each designated person has a spending limit, but can use the card for
purchases and cash withdrawals from Citibank/Banamex ATMs. The card costs $29 per year and
withdrawals at Mexican ATMs cost $5 each. This approach is complicated and can only be used
where Citibank/Banamex ATMs are available, but it further lowers the cost for transfers and can
be used for purchases (Palmeri 2004).

U.S. Bank

U.S. Bank recently created two remittance programs. The first is known as the U.S. Bank Secure
Money Transfer. Designed to be used mostly in urban areas, the program uses the Visa/PLUS
ATM network, and there are no monthly fees. The sender does not need a U.S. Bank account.
Key elements of the program include:



                                                23
   The sender brings funds to a bank branch and an ATM card is sent to the recipient. The
    recipient can use 364,000 ATMs in the United States and about 20,000 ATMs in Mexico to
    withdraw funds.
   With a U.S. Bank account, the cost is $8 to send, and without an account the cost is $10. An
    ―extremely competitive foreign exchange rate‖ is charged. Each money transfer provides the
    Recipient with one free withdrawal, one free balance inquiry at an ATM, and two free
    customer service calls.
   The sender receives a bilingual packet. The recipient receives a packet in Spanish with a
    personalized ATM card. The sender can reload the card at any bank branch. Reloads may
    also be made automatically through a U.S. Bank account with a debit/credit card to enable
    recurring transfers from the account.

The second U.S. Bank program was developed to work with L@Red de la Gente (The People’s
Network) alliance of financial institutions in Mexico. Its main features are the following:

   The network consists mostly of informal financial services institutions, such as credit unions
    and some banks. They are mostly smaller and mostly rural. The network was created by the
    National Savings and Financial Services Bank (known as BANSEFI) that is trying to
    formalize much of the informal sector and offer better services and increased consumer
    protection (Mohar 2003).
   There are presently 750 branches, with 3,000 anticipated by the end of 2006.
   Funds can be picked up at any branch without the recipient’s having an account for $8. If the
    recipient has an account, the cost is $6 if the funds are sent directly to the account.

Both programs began with service to Mexico. U.S. Bank expected to extend the program to other
Latin American countries as well as Japan, India, and Africa at a later date. U.S. Bank reports
that about 56 percent of remittance senders who began without accounts have since opened one
(Orozco 2004).

Wells Fargo

Like Citibank, Wells Fargo has been involved in remittance programs for some time. Wells
Fargo began InterCuenta Express in 1995, starting with Banamex as its partner. At that time, the
customer needed a social security number or proof of legal residency in the United States. The
customer called an 800 number and received assistance in opening Wells Fargo and Banamex
accounts. Then the customer deposited funds in the Wells Fargo account through a branch,
ATM, phone, or computer. The transfers cost $10 to send up to $1,000.

In 2002, Wells Fargo joined with Grupo Financiero BBVA Bancomer, S.A. (Bancomer) to
expand its service. Bancomer is the largest commercial bank in Mexico and is part of a much
larger international banking holding company operating throughout Latin America and parts of
Europe. (Bancomer also has an agreement with the U.S. Postal Service and others for accepting
remittances.)




                                                24
The key elements of Wells Fargo’s remittance program are:

   There is a $10 fee to send up to $1,000.
   The sender must have an account, which costs $10 fee to open with a $10 annual
    maintenance fee after the first year.
   No minimum account balance or initial deposit is required.
   A ―competitive exchange rate‖ is available.

Remittance funds are deposited into an InterCuenta account at any Wells Fargo location, and
then transferred to a Bancomer account. Funds are available in pesos. The recipient may
withdraw funds at any Bancomer branch or ATM, or may leave funds in a Bancomer account to
accumulate interest. The recipient must have a special type of Bancomer account. The recipient
is not charged for the transfers by Bancomer, although there may be account fees. Wells Fargo
also offers the Dinero al Instante program that allows people without accounts to send cash.
Started in 2002 and available in California, Texas, and Arizona, the program charges $10 to wire
funds to Mexico (Orozco 2004).

Wells Fargo Bank reported 20,000 new accounts totaling $50 million in the first seven months of
its remittance program with Bancomer (Freeman, Leal, and Plascencia 2003), and a total of
250,000 new accounts since the program began (Orozco 2004).

Small Banks

Some smaller banks around the country are also entering the remittances field. They range from
mid-sized to very small banks. One of the latter and one that has been an innovator in the field is
the First Bank of the Americas (FBA) in Chicago.

FBA is a small community commercial bank in a low-income, distressed neighborhood with a
large influx of immigrants on the southwest side of Chicago. Begun in 1997 as a state-chartered
bank, it now has three branches after opening the main office in January 1998. The founders
purchased a savings bank branch serving mostly Polish immigrants with roughly $30 million in
deposits that was no longer responsive to the needs of many in the community. FBA focuses on
the immigrant community, particularly those from Mexico, in the immediate neighborhood. By
the end of 2001, FBA’s assets had grown to $66 million.

For money wiring, FBA issues two ATM cards — one stores the value of the deposits and the
other is sent to someone in the United States or another country who can access the funds
through an ATM in that location (usually for a fee of $1.50 if the ATM uses the CIRRUS
system) without losing any funds due to exchange rate differences. The bank does not charge for
the issuance of the two ATM cards, and there is no charge for wiring money. The recipient ATM
or institution charges $1.50 to the person receiving the funds.

Many other smaller institutions have recently created remittance programs as well. For example,
Banco Popular (a large Puerto Rican bank with U.S. operations) has a program called Acceso
Popular that costs $1.00 per withdrawal and uses a card sent to the recipient who picks up the
money at an ATM. Mitchell Bank charges $2.50 and $3 to open an account using cards and


                                                25
ATMs. Elgin State Bank charges $1.50 for its companion card program. Other banks send funds
that can be picked up at banks or other agencies. Cofia’s program, operated through Second
Federal Savings, for example, charges a $15 transaction fee, while Uniteller’s program, offered
through the same institution, charges $10 (Orozco 2003b, n.d.1).

Smaller banks probably face greater challenges in creating remittance programs than larger
institutions. Nevertheless, smaller institutions have developed mechanisms to transfer funds at
competitive costs, especially in areas with high concentrations of immigrants and a competitive
market for immigrant banking business.

Foreign Banks

Like U.S. commercial banks, many foreign banks are entering the remittance market. They have
similar goals: obtaining some share of the lucrative remittance fee market, gaining bankable
customers in their home countries who can establish savings accounts and eventually take out
loans, and gaining some share of the bank activities of their countrymen in the United States.

El Salvador banks have set up money transfer subsidiaries in the United States to help capture
some of the lucrative remittance business. For a foreign company to operate a full bank in the
United States, the home country must have an agency that provides oversight for U.S. operations
of a bank from that country, which has prevented many foreign banks from locating here.
Salvadorans remitted more than $2.2 billion from the United States in 2002. Salvadoran banks
have established operations in Washington, D.C., New York, Texas, and California, which now
have 15 percent of the remittances market from the United States to El Salvador. They include
the country’s largest bank ($2.9 billion in assets), Banco Agricola (and its money transfer
subsidiary, Banagricola); Banco de Comercio ($1.13 billion in assets), the fourth largest bank
(and its subsidiary, Bancomerico with five centers in the Washington metropolitan area); Banco
Salvadoreo; and Banco Cuscatlan.

Bancomerico charges $11 to send up to $1,499; over that amount, it charges 1 percent of the
total. Banagricola charges $10 to send any amount — much less than Western Union’s fee of
$27 (Williams 2003).

Foreign banks from several other countries — Gautemala, Honduras, and the Dominican
Republic — also have set up branches in the United States with remittance capacity (Orozco
2002a). Some banks based in countries with a long history of migration — for example,
Portugal, India, Pakistan, and Morocco — have had relatively inexpensive remittance programs
for a long time. The remittance fees in countries where they have been in the marketplace are
lower than the fees in places where MTOs play a larger role (Orozco 2003c).

The experience of the Mexican banking industry has been different, but also instructive. Between
1980 and the mid-1990s, Mexican banks and the financial system underwent a series of shocks
and crises. In 1994, the North American Free Trade Agreement opened up the Mexican banking
system to foreign ownership. In addition to the U.S. banks’ acquisitions previously described,
banks from Spain, the United Kingdom, and Canada bought part of all of the largest Mexican
banks. Close to 90 percent of Mexican banking assets now are owned by foreign corporations.



                                               26
Many of those banks are seeking ways to enter the remittance business as well as looking for
ways to obtain more of the business of remittance receivers in Mexico and senders in the United
States (Krebsbach 2003). One Mexican bank, Bancomer, recently purchased a small southern
California bank, Valley Bank, for $16.7 million. The purchase was made by the remittance unit,
Bancomer Transfer Services, and helps to further open this channel for Mexican banks.
However, this purchase also offers a banking license and opens up the market for higher-income
Mexican and other households (Business News Americas 2004).

Credit Unions

Credit unions began remittance programs in 1999 and have been steadily increasing their
interest, programmatic innovations, and capacity. The primary force behind credit unions’
remittance activity is the World Council of Credit Unions (WOCCU). The WOCCU — which
describes itself as the ―…world’s leading advocate, platform for knowledge exchange and
development agency for credit unions‖ — represents about 40,000 credit unions in 80 countries,
serving about 118 million members.

In 1999, WOCCU established the International Remittance Network (IRnet), which enables
remittances at much lower costs than through most other methods and institutions in the United
States. Funds can be sent through IRnet to more than 40 countries, including all the countries of
Latin America. In the United States, funds can be sent from more than 3,000 locations in 36
states. IRnet participants include almost 200 credit unions with 850 points of service in 37 states.

IRnet charges $10 to send up to $1,000 to Mexico and $10 to send up to $1,500 to Guatemala, El
Salvador, Honduras, and Nicaragua. In all of these countries, funds can be picked up at credit
unions and the recipient does not have to be a credit union member. There is no cost to the
recipient to pick up the funds. If the transfer can be made from credit union to credit union, the
fee is $6.50.

Funds also can be picked up at many banks — including Banamex, Bancomer, and Bancrecer —
in all, 5,600 locations in Mexico. The foreign exchange costs are about 1.35 percent below
interbank rates, according to WOCCU. The sender is informed at the time of the transaction of
all the costs, thus achieving the transparency that is generally considered favorable for
consumers.

Seventy percent of IRnet transfers to Central America are made for nonmembers of the sending
credit union. Up to 28 percent of the transfers to Central America result in new credit union
members. The transfers are concentrated, with 65 percent going through 25 percent of the credit
unions in the United States. The average transfer is $450 to $550, which is higher than the
overall average to any Latin American country when other transfer operators are used (Grace
2003). It appears, therefore, that credit unions are attracting customers either with more income
to send or who send less frequently but in larger amounts than MTO or bank customers.

The IRnet program has exceeded expectations. In 2001 — the first full year of operations
following earlier demonstrations and startup activities — a total of $4.2 million was transferred.




                                                27
There was a large leap in 2002, when more than $50 million was transferred, exceeding
projections by 65 percent.

The Latino Community Credit Union headquartered in Durham, North Carolina, is using IRnet
to transfer $1.8 million per year. The credit union also used federal First Account grants to help
provide financial education, a key support for getting unbanked people into the financial system
(Herrera 2003). The Government Employees Credit Union in El Paso, Texas, averages 68
remittances per month of $300 to $500 each, going mostly to Mexico (May 2004).

A major development in serving the remittance recipients in Mexico occurred in September
2003. Mexico’s largest credit union, Caja Popular Mexicana, received a $500,000 grant from the
U.S. Agency for International Development, allowing it to distribute remittances from its
network of offices. With 562,575 members and $516,538,000 in assets, the credit union was able
to connect its 330 offices to the IRnet. The credit union has locations in 80 smaller cities that are
mostly surrounded by rural areas, including 15 places that had no other commercial banking
operations (Herrera 2003). This development was made possible in part because the Mexican
government enacted a legal change in 2001 allowing credit unions to participate in the wire
transfer business.

Mexico is typical of many countries that receive a high level of remittances in rural areas with
limited financial services. According to Herrera (2003), approximately 42 percent of remittances
to Mexico are sent to towns of 2,500 people, locations that rarely have a bank. Credit unions are
the main financial institutions in those areas, if any exist at all.

Credit unions operate remittance programs following the Seven Principles for Conducting Wire
Transfers.

1. Provide current exchange rate information on both the sending and receiving ends before
   conducting a transaction.
2. Disclose any fees associated with the transaction before it occurs.
3. Verify and disclose the exact amount of foreign currency that the recipient will receive.
4. Disclose at the time of the transaction when the recipient will receive the funds.
5. Provide examples of the fees charged with money transfers to specific countries, either in the
   form of an advertising campaign or flyers available on site at the credit union.
6. Encourage consumers to compare rates, fees, and practices with those of other money
   transfer operators.
7. Provide consumers a brochure outlining the process, average fees to certain countries, and a
   list of countries served.

To use IRnet, credit unions sign up with WOCCU and pay a modest setup fee. WOCCU provides
training, technical assistance, marketing and public relations assistance, operational planning,
and promotion and development of the IRnet brand. Depending on the credit union’s remittance
volume, there may be a small charge for WOCCU’s support. IRnet’s transfers are handled by
Vigo Remittance Corporation.




                                                 28
Like banks, credit unions are interested in remittances not only for the revenue they can generate
but also for the potential of bringing in new customers for deposits and loans. As Herrera (2003)
noted, ―…credit unions are able to offer remittance services as a relationship product with the
expectation that income will be generated from such members on newly formed relationships
that encompass savings, credit, and/or insurance products.‖ Affordable remittance programs
create benefits for credit unions and banks and offer a gateway into the banking system and
access to credit for previously unbanked populations.
Credit unions also commonly offer financial literacy education for immigrants and others who
are unbanked or underbanked. Some of the support for these programs has come from the U.S.
government, including in the form of First Account grants.

Establishment of the IRnet has strengthened competition in the remittances market and helped to
lower prices. In late 2003, the president of Latino Community Credit Union stated that ―…prices
have dropped approximately 37 percent for transfers to Mexico‖ since IRnet began (Herrera
2003). It is unclear, however, how much of the price decrease can be attributed to credit unions
alone, or to credit unions in combination with banks, new MTO entrants, and other new entrants.

Besides helping to lower prices, credit unions have had an important impact on the remittances
industry for several other reasons:

   They emphasize excellent operating principles and transparency.
   They often reach geographic areas that others transmitters, especially banks, have difficulty
    reaching.
   Credit unions operating in many developing countries are considered ―informal‖ and are
    often unregulated. However, they can be incorporated into the financial services system, as
    BANSEFI is demonstrating.

Credit unions are proving that it is possible to effectively and profitably provide financial
services to low-income households. Nevertheless, there are some substantial drawbacks. Credit
unions often are much smaller and have fewer points of service than other types of financial
institutions and, as a result, have more limited penetration of the potential market. There are
infrastructure barriers, such as lack of bilingual staff, limited operating hours, and branches
located away from the target population. In addition, for credit unions to reach immigrant
populations, financial literacy training is needed to convince them of the benefits of entering the
banking system.

There also are regulatory issues, such as restrictions on credit unions offering remittance services
to non-members. Recently, the U.S. House Committee on Financial Services proposed allowing
credit unions to serve unbanked households by offering check-cashing and remittance services to
non-members. Some states already allow credit unions to serve non-members.




                                                29
IV. Other Institutions and Remittance Methods


There are many other methods, often less formal, of transferring funds. Some of these
approaches are described briefly.

Post Offices

In Europe, Japan, and other countries, the post offices have played more important roles than in
the United States in providing services to low-income people and those without bank accounts.
They have offered money orders for a long time, and there have been proposals for offering
financial services. In Great Britain, the post office has proposed offering bill payments,
withdrawals of funds through ATMs, and receipt of electronic payments.

The U.S. Postal Service has been involved in remittances since the Civil War, when soldiers
needed to send money home to their families and has offered money orders for a long time. In
recent years, however, there has been a shift away from the use of money orders.

In 2002, the Postal Service created Dinero Seguro, a way to wire funds to Mexico in 15 minutes
through the post office without taking a few days for a money order to be delivered by mail.
Started as a demonstration, the program now has 2,000 locations (and ultimately may have as
many as 10,000), making the service available in 35 states. Customers can send up to $2,000.
The Postal Service partners with Bancomer, which has 1,300 branches in Mexico. The bank sets
the exchange rates, which are disclosed to the sender at the time of purchase. The sender receives
a three-minute prepaid phone call to inform the recipient. The fee to send up to $700 to Mexico
is $10 (phone call to the U.S. Postal Service in December 2004).

Microfinance Institutions

Some nongovernmental organizations (NGOs; generally referred to as nonprofits in the United
States) and regulated microfinance institutions (organizations that make small loans to
entrepreneurs who typically lack access to the banking system) are becoming active in the
remittances industry or looking for ways to become involved.

Fonkoze, a Haitian microfinance NGO, for example, became involved with remittances in 2002
(although it had plans to later become a commercial bank focused on microfinance). It created a
partnership with the City National Bank of New Jersey and targeted individuals and community
organizations (churches, parishes, associations, and small charitable organizations) sending funds
to Haiti, the total of which is roughly $1 billion per year. The partnership resulted in a service
with very affordable fees, in part because Fonkoze keeps a significant account balance at the
bank. In 2002, Fonkoze received about $2.5 million in remittances at a cost of about $15,000 to
the senders, mostly community organizations.

Banco Solidario in Ecuador created a program with several Spanish banks to send funds back to
Ecuador from Spain. The program offers other financial services products to remittance senders
and receivers, including short-term credit to cover needs in Spain, long-term credit for mortgages



                                               30
and other needs, and savings accounts. Banco Solidario is a commercial, regulated institution,
allowing it easier entry into the market than unregulated NGOs, which face regulatory and
market acceptance issues.

Other microfinance organizations, such as Women’s World Banking, are exploring ways to work
in other countries, including India, Indonesia, and other South American countries. Such
organizations want to lower fees, offer savings and credit opportunities, and obtain a new source
of capital for their small loan programs, many of which are searching for new funding to replace
reduced support from donors (Sander 2003; Women’s World Banking n.d.).

Informal Funds Transfer (IFT) Systems

Informal systems for transferring funds have been around for centuries. They were used for trade
financing — merchants traveling with goods did not want to carry gold for fear of robberies —
and for paying taxes without traveling with money that could be stolen. Informal systems
included Fei-Ch’ien in China, Padala in the Philippines, Hundi in India, Hui Kuan in Hong
Kong, and Phei Kwan in Thailand. Although developed long ago, many are still in use. The main
users are expatriated workers distrustful of (and often unwelcome in) banks. Because they
incorporate secrecy and anonymity, IFT systems are sometimes used for illegal activities such as
money laundering, terrorism, and drug smuggling, but they also attract legal users simply
looking for inexpensive methods of transferring funds back home.

The most commonly used informal method today is the hawala system. Although illegal in
countries such as Pakistan, hawala practitioners flourish in that country and many others.
Someone who wants to send funds delivers money to the hawaladar, who then faxes, e-mails, or
phones a correspondent in the receiving country with instructions. The sender is given a code,
which is then sent to the recipient (although a familiar voice or face is sometimes acceptable).
The recipient uses the code to pick up the funds (or they can be delivered to the recipient’s
house, if desired). The identities of participants in the transaction are protected — when the
transfer is complete, the records are torn from the initial notebook and no record remains. The
hawaladar and the correspondent settle up later, sometimes after multiple transactions going both
ways, with cash, jewelry, adjustments to trade invoices, or through traditional banks (some
transfers are very large and require the use of banks).

Fees for IFT systems including the hawala generally are less than charged by banks and other
transmitters — about 1 to 2 percent for the transfer or a flat rate of $5 to $10. There also may be
an exchange rate fee, although the rate may be better than the official rate. The amounts sent
through such systems, while unknown, are thought to be in the billions of dollars each year. IFT
systems tend to flourish most where formal banking systems do not exist or exclude the lower-
income population (Frantz 2001; El-Qorchi 2002; Daniszewski and Watson 2001).

Other Mechanisms

There appears to be a great deal of experimentation occurring in the remittances field. For
example, a Dutch supermarket chain active in several South American countries, Ahold, has
created alliances with other chains in Central America. Together, they allow customers to



                                                31
―…arrange for their relatives in the U.S. to pre-pay coupons that can be used for supermarket
purchases.‖

Residents of the United States can even pay for their relatives’ lay-away purchases through the
Mexican retailer Elektra or their telephone service in rural Mexico. A Venezuelan television
station is planning to offer remittance services in public Internet and telephone centers in
association with Western Union (Ramos 2003).

National retail chains provide another venue for remittances. 7-Eleven has a demonstration to
place kiosks in some of its stores to let users transmit funds, cash checks, get money orders, and
pay bills (Chandler 2003). Wal-Mart entered the remittance business in 2002. It has 3,109 stores
in the United States and 623 in Mexico. Wal-Mart uses MoneyGram as its remittance carrier, and
recently reduced its charges to $9.46 from several higher rates for sending amounts under $500.
Before the price reduction, the service had received unfavorable evaluations from some
observers and was poorly utilized (Kuykendall 2004).


V. Comparison of Remittance Costs Across Major Providers

The fees for money transfers depend on the type of remitting service: bank, MTO, credit union,
post office; the remittance method: debit cards, ATMs, money orders, electronic transfers to
stores; and the sending and receiving locations. Table 3 summarizes the costs for sending $200
from the United States to Mexico as described in this report.

The remittance industry has evolved considerably over the past few years. With increased
competition and technological advances, prices have fallen considerably in recent years. Fees
now generally range from $7 to $26; credit unions have the lowest charges, followed by banks,
and MTOs’ are the highest (Orozco 2002b). The costs of sending money also varies by sending
location; for example, the charges for sending $400 to Mexico were $23.63 from Los Angeles,
$23.39 from New York, and $20.62 from Chicago (Orozco n.d.1). Use of a debit card to
withdraw cash from an ATM is less expensive than arranging for a cash pickup from a staffed
location. Strong competition for sending money to Mexico has developed in recent years in
addition to the use of new technological advances that can lower costs, and the fees for sending
money there have fallen from about 15 percent of the amount remitted to about 5 percent.

Banks’ share of the remittance market has been variously estimated at between 1 and 2 percent
up to 5 percent or higher. One report found that banks were used 11 percent of the time for
remittances (Pew/MIF 2003); another reported that ―…15 percent of U.S. migrants already send
their money through banks, and the number is rising monthly‖ (Oppenheimer 2004). The four
banks with the largest remittance programs — Citibank, Wells Fargo, Harris Bank, and Bank of
America — handled an estimated 100,000 transactions per month in 2003, with the large
majority going to Mexico, but still had only about 3 percent of the huge Mexican market of 40
million transactions annually (Orozco 2004).




                                               32
              Table 3. Comparison of Remittance Costs to Send $200 to Mexico

          Service                                   Fee to send $200 to Mexico
          Western Union                                          $15
          MoneyGram                                              $15
          Vigo                                                   $10
          Bank of America SafeSend                               $10
          Citibank Access Account                 $5 + 2% to recipient’s Banamex
                                                  account; $8 + 2% if recipient has
                                                        no Banamex account
          U.S. Bank Secure Money Transfer           $8 ($10 without a U.S. Bank
                                                              account)
          Wells Fargo InterCuenta                  $10 (both sender and recipient
                                                           need account)
          Wells Fargo Dinero al Instante          $10 (available only in California,
          (people without accounts can send             Texas, and Arizona)
          cash)
          Credit union (through IRnet)               $6.50 to another credit union;
                                                             otherwise $10
          U.S. Postal Service Dinero Seguro                       $10

The future growth of banks’ market share is unpredictable, as it is not clear how many people
will utilize bank programs that are still much less convenient than the MTOs. One estimate of
growth reported a possible rate of increase of 1 percent per year until an 8 percent level is
reached over the next four or five years (Reckard and Dickerson 2003).

Bank programs clearly appeal to some people, possibly those who are at the margin of being
bankable, have some knowledge of banks, and have an interest in reducing their financial
services costs and entering the banking system. Banks appear to be targeting their efforts to that
population — those established enough to need bank services in the present or relatively near
future.

About 400,000 new bank accounts have been opened as a result of remittance programs (Orozco
2004), indicating the value of remittance programs to banks even if they do not result in a large
share of the remittance market. Banks do not need to make large profits from remittance
programs because they are building their customer base for the longer term, but their success will
be measured in both areas. This approach represents both a strength and weakness, in that it
allows for rapid growth in the beginning but may result in slower growth later on as the number
of newly eligible customers slows due to the banks’ market segmentation.

The role of banks in receiving countries is another important element of the industry’s evolution.
Authers and Silverman (2003) argued, ―The flow of remittances has offered an introduction for
the big U.S. banks to the huge Hispanic market. But in the longer term, they may gain a greater
pay-off by broadening and strengthening the retail banking system in Mexico.‖




                                                33
Non-Mexican banks, including U.S. banks, now control almost 90 percent of Mexico’s bank
assets, but less than 20 percent of Mexicans have bank accounts. Banks and their branches have
not reached many large, rural areas, the origin of many migrants who depend on remittance
programs. The new U.S. bank remittance programs require immigrants to link with banks in
ways they never have before. With more acquaintance with banks when they arrive in the United
States, immigrants may be easier to reach with new remittance and banking programs.

While the banks’ and credit unions’ programs are clearly promising, comparing them with the
major MTOs highlights the edge enjoyed by MTOs:

   Brand loyalty is very important. The MTOs, especially the large ones, have developed an
    excellent brand, and many MTOs are highly trusted, which can be more important than price.
    Western Union, for example, has a brand that is well recognized, and many immigrants are
    willing to pay the higher price for its services. Convincing people to change brands can be
    expensive; Bank of America and other banks are increasing their budgets for advertising
    targeted to Hispanics, but Western Union is countering by spending $300 million in
    advertising to immigrants.
   Banks must overcome custom and fear to reach more immigrants. In Mexico, customers
    commonly stand in line to cash their checks, then go to each utility and stand in line to pay
    each bill. The postal service sometimes is not considered dependable. If a payment does not
    arrive on time, the utility service is disconnected without notice; reconnecting is a time-
    consuming and expensive process. Many utilities do not accept checks, so the need for a
    bank account is minimized. Many immigrants, accustomed to this behavior, continue it when
    they arrive in the United States even though it may be unnecessary (Cawley 1998). Many
    immigrants also fear banks; this is especially true for undocumented immigrants, who fear
    deportation.
   Remittance senders tend to lack knowledge as consumers, and often are not very motivated
    to find lower-cost remittance services, relying more on a referral from a friend or relative
    than on cost (Pew/MIF 2002). Because the MTOs have been in the marketplace for so long
    and have many locations, they have the edge in referrals.
   Some bank programs are relatively complicated, and a lack of transparency often prevents
    customers from understanding the total costs (Canto 2002; NYDCA 2003). MTOs offer less
    complicated procedures. Some bank programs have improved, but credit unions appear to
    have the best policies regarding transparency.
   In the United States, there are many bank branches and ATMs, but they tend not to be
    located in low-income neighborhoods. Banks thus pose access and convenience issues
    compared with check-cashing stores and other community-based establishments. Robert
    Suro, director of the Pew Hispanic Center, argues that the most successful institutions are
    located in immigrants’ neighborhoods (Solis 2004).
   In receiving countries, there may not be any banks nearby or any ATMs in the region. This
    can be especially true in rural areas. MTOs, on the other hand, typically have widely known
    locations in the receiving countries, often with better coverage in rural areas and other areas
    without bank participation.
   Recipients of MTO remittances do not need a bank account or ATM account to pick up their
    money, nor must they wait to receive a card for the first transfer. (If the card can be reloaded,
    this is only an issue for the initial transfer.)


                                                 34
   Some bank programs do not allow remittances to two or more recipients from the same
    account, while some check cashers can send to several at the same time, if they have the
    proper software.
   Despite programmatic and technological advances, many senders simply choose to utilize the
    traditional methods: money orders and couriers.


VI. Conclusion

The remittance marketplace has become competitive and prices have fallen in many markets.
The expected continued increase in migration, fueled by poverty and other problems in many
developing countries, will likely stimulate ongoing growth in the industry. There will be many
new entrants, despite substantial barriers to entry — startup costs, regulatory barriers, existing
strong brands, and the need for volume. Larger, better-funded operators may be more likely to
enter than smaller startups that had more opportunities in the past. And there likely will be
consolidation in the industry through mergers, acquisitions, and bankruptcies.

Moreover, extensive growth in remittances is expected. For example, the number of transactions
is expected to increase by 460 percent by the end of the decade, and the value of transactions is
expected to increase by 610 percent (Krebsbach 2002). Orozco (2004) projects a marked increase
in the amount of remittances, and Celent (2002) predicts international growth in remittances
from $143 billion in 2003 to $177 billion by 2006.

Banks have begun securitizing remittances, a clear indicator of the steadiness of these flows
regardless of economic conditions. Wall Street firms and other major investment banks
worldwide have helped banks sell securities tied to expected remittance flows. Banks, in effect,
sell some portion of their anticipated money transfers to investors before the remittances are
received. The securities backed by future remittance flows may be rated more highly than some
countries’ sovereign currencies. Banco do Brasil, for example, issued $300 million of bonds
(with a five-year maturity) using future remittances from Brazilian workers in Japan, and they
were rated more highly than the country’s currency at the time (Case 1996; Druckerman 1998;
Ratha 2003). The Inter-American Development Bank has announced a new guarantee program
for immigrants’ mortgages in their home countries, also based on the steadiness of the
remittances.

In recent years, advocates and customers became dissatisfied with the high costs of remittances,
and their actions focused attention on the issues. Lawsuits that were brought against, and
ultimately settled by, Western Union and MoneyGram also brought attention to the remittances
market and resulted in increased pressure from nonprofits and recipient country governments to
correct issues (viewed as consumer exploitation). The settlements also required greater
transparency on the part of the operators (Ramos 2003).

Remittance fees may fall to as low as $5, according to some observers, thanks in part to
technology — debit cards, the Internet, transactions over telephone lines. The use of electronic
transfers has increased and use of money orders has decreased. Future possibilities include




                                                 35
connecting Wi-Fi technology (connecting computers to each other, the Internet, and wired
networks) to remittances and microfinance institutions (Orozco 2003e).

By 2006, Celent (2002) expects ATMs to ―…grab 11 percent market share in global remittances.
ATM-based remittances should reach $19.5 billion by 2006, up from $0.3 billion in 2002.‖
Celent expects these remittances to generate $2.34 billion in fees, and further forecasts ―…that
ATMs will clear the path to a new breed of players, competing with card-based products at a
global level.‖

The creation of a binational automated clearinghouse also is expected to help lower costs by
allowing U.S. banks to send money to Mexican banks for about $.60 or $.70 per transaction
(Rawe 2003).

Institutional and organizational changes also have been important in the evolution of the
remittances market. When banks in the United States began accepting the Matricula Consular
card — apparently with the tacit acceptance of the U.S. government — their actions significantly
broadened opportunities for creating bank remittance and bank account programs for Mexican
immigrants.

The BANSEFI program is an example of institutional changes. It is a national bank and, among
other steps, is helping the informal sector to become more incorporated into the banking system,
which in turn, is helping immigrants create bank accounts and find better remittance services.

Policy Issues and Recommendations

Governments — U.S. and foreign, federal and local — have begun to take an active interest in
the remittances market and to influence it through both policy and programs. A partnership
between the Mexican and U.S. governments — Partnership for Prosperity — had the following
short-term results: first-time bank accounts were opened in many U. S. banks; government grants
were made to help banks create first accounts for those who never had an account; a
demonstration mobile banking system was created in Chicago; the BANSEFI program was
initiated; grants were made to explore connections between microfinance institutions and
remittances and between hometown associations and remittances; and steps were taken to link
the U.S. and Mexican automated clearinghouse payment systems (Partnership for Prosperity
2002).

Some governments have gotten very creative in their efforts to support remittances back to their
countries. Pakistan offers some interesting incentives to its emigrant population: overseas
Pakistanis who send back more than $10,000 annually receive higher than the standard duty-free
allowance and access to VIP customs counters in airports. India offers higher interest rates for
nonresident Indians who keep their funds in Indian bank accounts; there also is a tax exemption
on portions of the interest earned. Portuguese law offers special incentives for overseas
Portuguese who have been abroad for specified time periods: reduced tax rates, low-interest-rate
loans, programs that encourage emigrants to buy or build homes in Portugal, special investment
opportunities, and special bank accounts with different currencies. Philippines banks offer direct
deposit at a cost less than charged by many remitting agencies (Orozco 2003c; Sander 2003;
Zarate-Hoyos 2001).


                                                36
Governments also are recognizing the potential of remittances from hometown associations to
assist towns or regions. For example, one Salvadoran HTA sent home $5,000 for a school, then
$10,000 for a septic tank, $43,000 for a Red Cross clinic, and $32,000 for an ambulance (Martin
2001). Some governments have taken steps to cultivate such support.

Mexican federal officials and state governors have met with HTAs in the United States (Levoy
2001), and special programs have been created, such as matching HTA remittances with local,
state, or federal funds. For example, the Mexican State of Zacatecas offers $2 for every $1
invested by citizens abroad in infrastructure projects. The state also has offered technical
assistance to help create small businesses run by one-time emigrants who have been deported
back to Mexico. The State of Guanajuato created a program that matches contributions by
migrants to create ten maquiladora enterprises (factories built along the U.S./Mexican border to
manufacture goods under special trading provisions) (Zarate-Hoyos 2001).

Much has already occurred in the remittances industry to lower costs and improve service for
both remitters and receivers, but there is much more that can be done, with roles for several
stakeholders — MTOs, financial institutions, governments, nongovernmental organizations, the
private sector, and advocates. Best practices in remittances relate to achieving the lowest level of
transfer fee and the lowest markup on the exchange rate, providing services that add value to
remittances on both the sending and receiving ends, and achieving transparency in reporting
costs and services (Orozco 2002a).

Banks and credit unions generally offer the best pricing, and they offer many additional services,
because one of their main goals in remittance programs is to bring the targeted immigrant
population into the formal banking system. Credit unions tend to offer the greatest transparency
(Orozco 2002a).

But for immigrants to benefit from expanded participation in the remittances market, they need
information about fees, remittance service alternatives, the benefits of entering the banking
system, and the safety of the U.S. banking system. They need to understand that they will benefit
financially by sending larger remittance amounts less often, navigating the sometimes-confusing
fee system for some bank programs and staying within their parameters, and using interest-
earning accounts. Thus a key area of focus for policy-makers and governments as well as other
stakeholders is financial literacy training. The federal government, foundations, nonprofit
organizations, and banks all have supported financial literacy efforts, but they need to be greatly
expanded. Availability of price information is also key; the Mexican government is addressing
that need by publishing a newsletter comparing services and fees.

Issues relating to remittances are attracting some high-level attention. In June 2004, the
prestigious Group of 8 (G8) expressed support for ―…encouraging the reduction of the cost of
remittance transfers…‖ (G8 Sea Island Summit 2004). At the Special Summit of the Americas in
January 2004, leaders of the Western Hemisphere called for the cost of remittances to be cut in
half by 2008 (Orozco 2004).




                                                 37
With policy-makers becoming increasingly engaged, some potential action items for
governments, banking institutions, nonprofit organizations, foundations, advocates, and faith-
based organizations include:

   Development of policies and demonstration programs that continue to move the industry
    toward better pricing and greater transparency. The State of Texas requires funds transmitters
    to give remitters a receipt listing the fees, exchange rates, and the amount paid in the foreign
    currency (Solis 2004), and has authority to levy fines for noncompliance.
   Creation of public- and private-sector incentive programs to help low-income households
    increase savings and build wealth, especially by helping them manage remittance costs.
   Adoption of policies and practices that enhance oversight and ensure customer opportunities
    to resolve grievances.
   Continued development of new technological solutions.
   Support for programs that improve access, such as adding to the number of available ATMs
    in rural areas in receiving countries.
   Improvement of the regulatory environment for credit unions to enhance their participation.

A number of political, market, and technological forces can be expected to shape the remittances
industry of the future. Enactment of many recommended changes could further decrease fees
while still offering excellent returns for many companies (MTOs) and other benefits for banks
and credit unions. Future players may change, with many smaller companies getting out of the
business or being purchased. Consolidation likely will occur — larger banks, and the
international, specialized money transfer corporations likely will increasingly control the
industry.

The continued evolution of the remittance industry to decrease costs, increase transparency, and
enhance remittance options can only benefit the stakeholders. Senders would have more money
to maintain a better life in their new country and receivers would have more funds to enhance
their lives in their home countries, helping the local economies there and reducing the pressures
for immigration. There also would be improved infrastructure and better opportunities for
economic advancement without leaving home.




                                                38
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