In recent years, as remittance flows and funds transfer systems have become increasingly important for international policymakers, the broad concepts of remittance phenomena have become well documented. This essay compares the key features of two remittance corridors, identifying two distinct stages for inducing a comprehensive shift from informal to formal channels. The main source of analytical information is work conducted by the World Bank in support of the Asia-Pacific Economic Cooperation (APEC) Remittance Initiative. Additional research could explore in more detail how the features of a given corridor should be addressed in implementing regulations and how operators in the formal sector can best reach remittance senders.
A research team of the Remittance Initiative applied the analytical framework of APEC’s 2003 report on informal funds transfer systems to the remittance corridors between the United States and Mexico and between Canada and Vietnam. The results, which moved from broad principles to specific lessons in funds transfer systems, revealed two stages—the “mature” and the “nascent”—at which a comprehensive shift from informal to formal channels may be undertaken.
The U.S.-Mexico corridor is a mature market for formal remittances; the Canada-Vietnam corridor is at a nascent stage in the shift to formal systems. The distinction suggests that researchers and policymakers should acknowledge that different remittance corridors face different priorities (based on their stage of development and other factors) and, therefore, should focus on different policies when shifting to formal systems. More research will be needed to better understand the full implications of the degree of development of different remittance corridors.
The two remittance corridors share some of the same challenges. But whereas a mature market has a “paved road” for remittances, one that must be maintained and expanded, policymakers in the nascent market must focus first on setting the conditions for efficient formal remittance mechanisms.
This paper consists of three sections. The first provides a comparison of the economic indicators for remittance flows in the two corridors. The second illustrates the different stages at which a comprehensive shift from informal to formal channels in the two corridors may be induced. The last section offers conclusions and recommendations.
Comparative Indicators of Remittance Flows Through the Two Corridors
In the past few years, the importance of remittances for both Mexico and Vietnam has increased with respect to other sources of foreign income.1 In 2003, according to data from the Mexican central bank, remittances were the second-largest source of external finance after crude oil exports, representing 78 percent of crude oil exports, 124.2 percent of foreign direct investment (FDI), and 138.9 percent of tourism revenues. For Vietnam, remittances in 2003 comprised almost 7.4 percent of GDP, up from 4.4 percent in 1999. Also, in 2003 remittances were approximately 160 percent of FDI, up from 85 percent in 1999. In 2002, Mexico was the largest recipient of formal remittances flows in the world; Vietnam ranked 11th (Figure 3.1). In 1999, the difference between remittance flows into Vietnam and Mexico was more than US$4.7 billion. Mexico’s rate of growth in workers’ remittances outpaced Vietnam’s between 1999 and 2003 (Figure 3.2).
Top 15 Remittance Receiving Countries in 2002
(Millions of U.S. dollars)
Source: World Bank data.Workers’ Remittances to Mexico and Vietnam, 1999–2003
(Millions of U.S. dollars)
Source: Banxico; Ministry of Foreign Affairs in Vietnam.Impact of Remittances in the Recipient Economies
The Mexican economy is 17 times larger than Vietnam’s. Gross national income (GNI) per capita in Mexico is more than 10 times that of Vietnam. Mexico has 20 million more people than Vietnam. In 2002, about 9.5 million people migrated from Mexico, and 2.8 million migrated from Vietnam. It is not surprising, therefore, that Mexico receives much more in remittances than does Vietnam (Table 3.1).
Workers’ Remittances and Economic Indicators, 2002
Workers’ Remittances and Economic Indicators, 2002
| Mexico | Vietnam | |
|---|---|---|
| GNI per capita (U.S. dollars) | 5,920 | 430 |
| Migration (millions) | 9.5 | 2.8 |
| Population (millions) | 101 | 80.4 |
| Population growth (percent) | 1.50 | 1.16 |
| GNI (billions of U.S. dollars) | 597 | 35 |
| Remittances (billions of U.S. dollars) | 13.4 | 2.6 |
Workers’ Remittances and Economic Indicators, 2002
| Mexico | Vietnam | |
|---|---|---|
| GNI per capita (U.S. dollars) | 5,920 | 430 |
| Migration (millions) | 9.5 | 2.8 |
| Population (millions) | 101 | 80.4 |
| Population growth (percent) | 1.50 | 1.16 |
| GNI (billions of U.S. dollars) | 597 | 35 |
| Remittances (billions of U.S. dollars) | 13.4 | 2.6 |
Although the total value of remittances entering Mexico is much higher than in Vietnam, remittances play a relatively larger role in Vietnam’s economy. In 2003 remittances represented 2.2 percent of Mexico’s GDP but were 7.39 percent of Vietnam’s (Table 3.2).
Remittances to Mexico and Vietnam as a Share of GDP, Exports, and Foreign Direct Investment, 2003
(percent)
Remittances to Mexico and Vietnam as a Share of GDP, Exports, and Foreign Direct Investment, 2003
(percent)
| Mexico | Vietnam | |
|---|---|---|
| GDP | 2.18 | 7.39 |
| Exports | 8.00 | 13.24 |
| Foreign direct investment | 124.20 | 159.45 |
Remittances to Mexico and Vietnam as a Share of GDP, Exports, and Foreign Direct Investment, 2003
(percent)
| Mexico | Vietnam | |
|---|---|---|
| GDP | 2.18 | 7.39 |
| Exports | 8.00 | 13.24 |
| Foreign direct investment | 124.20 | 159.45 |
With respect to other types of income, remittances equaled 13 percent of Vietnam’s exports and approximately 160 percent of FDI, compared with 8 percent of exports and 123 percent of FDI in Mexico (Figure 3.3). Moreover, remittances have played a relatively larger role in the Vietnamese economy over the past five years, compared with FDI (Figure 3.4).
Remittances to Mexico and Vietnam as a Share of GDP, Exports, and Foreign Direct Investment, 2003
(Percent)
Source: Banxico; Vietnam Investment and Trade Promotion Center.Remittances to Mexico and Vietnam as a Share of FDI, 1999–2003
(Percent)
Source: Banxico, Ministry of Foreign Affairs in Vietnam.Both Mexico and Vietnam are committed to facilitating the transfer of remittances through stronger and more accessible formal systems. However, because the qualitative features of remittance flows into the two countries are shaped by different economic, social, and cultural nuances, the effort to shift the remittances market from informal to formal systems calls for different approaches in the two countries.
Estimating Informal Flows in the Two Corridors
The research team used the APEC analytical framework for IFT systems (APEC, 2003) to estimate the magnitude of remittances through both informal and formal channels. The process of applying the framework posed multiple challenges.
In a mature remittance corridor, data are available on the number of migrants sending money to the recipient country and on the frequency and average amount of their remittances. Some information on the channels used may also be available. All this valuable information can be adapted to project the volume of informal flows. However, large discrepancies in values and methods complicate the process (Box 3.1).
In a nascent remittance corridor, there is a lack of data on the number of migrants and their remittance behavior. The absence of data leads to heavy reliance on anecdotal information. Thus, estimates of the total volume of remittances, formal and informal, will not be statistically sound, although they may trigger the interest of the private sector to tap into the corridor.
The research team working on the Canada-Vietnam remittance corridor faced a special challenge in estimating the total remittance volume. On one hand, presenting a figure larger than the US$2.6 billion that is recorded by the central bank for formal transfers would help attract the private sector into the corridor to develop new products. On the other hand, the team felt the need to highlight the need for more reliable tools for collecting data in the corridor and for gaining a better understanding of the remittance sender.
In the end, the team chose not to include in their estimates the market players’ estimates of the total volume of remittances—in part, out of concern over the implications, for both the sender and the recipient remittance country, that a large but unreliable figure could have on developing the regulatory and market incentives.2 Further research on remittance corridors should refrain from estimates that are not based on data and should disclose the methods used to estimate total flows, taking into account that a share of financial flows will always move through informal channels that remain obscure.
Estimating the Volume of Informal Remittances
In 2003, Banxico conducted a survey across the Mexican border to identify general characteristics of remittances in Mexico. The survey concluded that 80 percent of Mexicans living in the United States send money home on a regular basis, with an average remittance of US$254 sent 10.4 times per year.
In that same year, the Multilateral Investment Fund of the Inter-American Development Bank (IADB) and the Pew Hispanic Center conducted similar research across the country and reached different conclusions. According to the IADB–Pew survey, 88 percent of the Mexicans working in the United States send money home, with average remittances of US$190 being sent seven times per year (see table).
Banxico and IADB Surveys on Imigration
Banxico and IADB Surveys on Imigration
| Description | Banxico Survey 2003 | IADB Survey 2003 |
|---|---|---|
| Percentage of Mexican workers who send money to Mexico | 80 | 88 |
| Number of times Mexican workers send money home per year | 10.4 | 7 |
| Average value of remittance to Mexico per transaction | $254 | $190 |
Banxico and IADB Surveys on Imigration
| Description | Banxico Survey 2003 | IADB Survey 2003 |
|---|---|---|
| Percentage of Mexican workers who send money to Mexico | 80 | 88 |
| Number of times Mexican workers send money home per year | 10.4 | 7 |
| Average value of remittance to Mexico per transaction | $254 | $190 |
From information gathered in the two surveys, two models were developed to calculate informal remittances from the amounts declared by the authorities. The methods used for Mexico were based on calculating the percentage of workers sending money to Mexico (80 or 88 percent) as a share of all Mexicans living in the United States (estimated by CONAPO at more than 10 million) and multiplying it by the annual frequency (10.4 or 7) and average value of remittances sent (US$254 or US$190). Finally, we estimated the value of informal remittances by subtracting the official value of remittances declared by Banxico.
Because of a large discrepancy in the values and methods of the two surveys, the results obtained were not considered significant.
To get a better estimate of the informal flow of remittances in Mexico, future research should be conducted to determine the following:
-
the number of Mexican workers in the United States employed in the different sectors of the economy;
-
average Mexican workers’ skills;
-
average income levels for the different sectors;
-
average remittances sent to Mexico, broken down by income levels; and
-
number of times remittances are sent to Mexico, broken down by income level.
Stages for Inducing a Shift from Informal to Formal Channels
Identifying perceived incentives that lead remitters to choose informal funds transfer systems over formal funds transfer systems requires analysis of both the sending and recipient economies. Although many incentives are unique to a particular remittance corridor, some apply to every sender in every remittance corridor at some point in the decision-making process.
Grouping incentives illustrates how remittance senders in the first stage of the remittance process—the “first mile”—perceive the channels available to them and how distribution of remittances at the last stage—the “last mile”—is determined by the channel chosen (the intermediary stage). Our analysis of the perceived incentives that shape the two corridors was based on the APEC Framework’s list (APEC, 2003) of perceived incentives for both the first and the last mile. The relevance of various incentives was different for each corridor (Table 3.3).
Perceived Incentives in the Remittance Process in Two Corridors
Perceived Incentives in the Remittance Process in Two Corridors
| U.S.-Mexico | Canada-Vietnam | ||||
|---|---|---|---|---|---|
| APEC Framework Perceived Incentives | First mile | Last mile | First mile | Last mile | |
| Personal incentives | Anonymity/secrecy | * | * | ||
| Cultural familiarity | * | * | |||
| Personal contacts | * | * | * | * | |
| Customer service | Dispute resolution | ||||
| incentives | Accessibility | * | * | * | |
| Class discrimination | |||||
| Versatility/resilience | |||||
| Economic incentives | Speed | * | * | ||
| Cost | * | * | |||
| Secondary benefits | * | ||||
| Legal/regulatory environment | * | * | * | * | |
Perceived Incentives in the Remittance Process in Two Corridors
| U.S.-Mexico | Canada-Vietnam | ||||
|---|---|---|---|---|---|
| APEC Framework Perceived Incentives | First mile | Last mile | First mile | Last mile | |
| Personal incentives | Anonymity/secrecy | * | * | ||
| Cultural familiarity | * | * | |||
| Personal contacts | * | * | * | * | |
| Customer service | Dispute resolution | ||||
| incentives | Accessibility | * | * | * | |
| Class discrimination | |||||
| Versatility/resilience | |||||
| Economic incentives | Speed | * | * | ||
| Cost | * | * | |||
| Secondary benefits | * | ||||
| Legal/regulatory environment | * | * | * | * | |
It is impossible to determine whether any single factor is most important in provoking a shift to formal systems, but several factors, no doubt, work together. In each corridor, the factors and incentives commonly present at the first mile are cultural familiarity, personal contacts, speed, cost, and the regulatory environment. In the last mile, the commonly perceived incentives are personal contacts, accessibility, and the regulatory environment. These incentives have specific features that define each corridor (Table 3.4).
Key Features in the Operational Stages in Two Remittance Corridors
Key Features in the Operational Stages in Two Remittance Corridors
| Operational Stages | U.S.-Mexico | Canada-Vietnam |
|---|---|---|
| First Mile | Increased accessibility to formal channels | Regulated and supervised financial institutions (relatively limited role) |
| Financial awareness among migrants | Viet Kieu (see footnote 4, main text) and sending habits from Canada | |
| Market information | Role of ethnicity | |
| Bilateral initiatives | Need for licensing/registration | |
| Harmonization of regulations | ||
| Intermediary | Greater competition | Widespread use of IFT systems |
| Technology | Development of the Vietnamese market | |
| Innovative services and products | ||
| Decline of IFT services | Technological imperative | |
| Tendency to oligopoly | Potential impediments for regulated financial institutions | |
| Last Mile | More distribution channels | Flow distribution and geography in Vietnam |
| Links between sender and recipient communities | Anonymity as a last mile incentive | |
| Gradual approach of regulators | Data and recording issues | |
| Banks’ approach to recipients | Lack of distribution channels | |
| Negative effects of remittances | Government policy and remittances | |
| Creation of rural distribution networks |
Key Features in the Operational Stages in Two Remittance Corridors
| Operational Stages | U.S.-Mexico | Canada-Vietnam |
|---|---|---|
| First Mile | Increased accessibility to formal channels | Regulated and supervised financial institutions (relatively limited role) |
| Financial awareness among migrants | Viet Kieu (see footnote 4, main text) and sending habits from Canada | |
| Market information | Role of ethnicity | |
| Bilateral initiatives | Need for licensing/registration | |
| Harmonization of regulations | ||
| Intermediary | Greater competition | Widespread use of IFT systems |
| Technology | Development of the Vietnamese market | |
| Innovative services and products | ||
| Decline of IFT services | Technological imperative | |
| Tendency to oligopoly | Potential impediments for regulated financial institutions | |
| Last Mile | More distribution channels | Flow distribution and geography in Vietnam |
| Links between sender and recipient communities | Anonymity as a last mile incentive | |
| Gradual approach of regulators | Data and recording issues | |
| Banks’ approach to recipients | Lack of distribution channels | |
| Negative effects of remittances | Government policy and remittances | |
| Creation of rural distribution networks |
The U.S.-Mexico Remittance Corridor
Migrants have shifted to formal systems in the first mile—or the first stage of the remittance process—because of better access to, and awareness of, formal channels. Competition has been generated by market transparency and information. Furthermore, bilateral initiatives between the United States and Mexico have helped facilitate the shift. From these findings, it appears that certain aspects of the formal remittances market could be strengthened by appropriate regulatory adjustments.
In the intermediary stage of the remittance process, prices have been reduced by increased competition spurred by the development and proliferation of technology. New competitors are continuously innovating their services and products. Although IFT systems compete as a market player, they appear to have a declining role in the market.3 On the other hand, because the formal remittances industry may require large investments in technology, marketing, and operations, oligopolies continue in the market among intermediaries.
In the last mile, remittance flows reflect long-established migration patterns between Mexico and the United States. Distribution channels have increased, creating a “paved road” for remittances between the United States and Mexico’s urban and regional centers. Within those distribution channels, the market growth for distribution of remittances has outpaced the application of regulations to the market. The distribution channels and banks also have developed products that familiarize recipients with account holding. Unfortunately, the paved road tends to end at Mexico’s urban and regional centers, since the distribution networks for formal remittances have not yet adequately penetrated rural regions.
The Canada-Vietnam Remittance Corridor
In the first mile, banks and credit unions are regulated financial institutions that have a substantial opportunity to become bigger competitors in the Canada-Vietnam corridor. Formal operators should explore ways to market remittance services to different types of senders, since there are two distinct classes of senders to Vietnam: temporary migrant workers and Viet Kieu.4 The latter are the main senders from Canada. It is apparent that ethnicity plays an important role in the corridor. There is also a need for licensing or registration requirements for money services businesses at the first mile.
At the intermediary stage, IFT systems are widely used. The main incentives for doing so are cost, speed, and cultural familiarity. The growth of the remittances market in Vietnam is evident, although comprehensive data are lacking. Technological advances have yet to substantially affect the Canada-Vietnam corridor. A present challenge for regulated financial institutions at the first mile is to develop banking relationships with counterparts at the last mile.
At the last mile, remittance flows in Vietnam are influenced by geography, given the fact that different types of senders send to different areas. Recipients at the last mile value anonymity and try to avoid interaction with local officials. Because of the lack of technological advances, there is a lack of comprehensive data, and authorities are exploring how to organize records of remittance flows. Also, particularly in rural areas, distribution through formal channels in Vietnam is limited. Finally, the behavior and policies of the Vietnamese government and regulations also play a critical role in influencing whether senders transmit funds formally or informally.
Conclusions and Recommendations
The U.S.-Mexico corridor is a “mature” market for formal remittances, whereas the Canada-Vietnam corridor is at a “nascent” stage in the shift to formal systems. Both face some of the same challenges. Some sequencing of policy actions may be appropriate.
The U.S.-Mexico remittance corridor has changed radically in the past eight years, from one in which IFT systems were prevalent to one dominated by formal mechanisms. Formal mechanisms have created the possibility for users to access new financial services offered by banks and credit unions and allow them to build a credit history in the United States. At the same time, the volume of transactions and the value that they represent have encouraged banks to design new products for these potential customers. Remittances that are conducted through the formal financial sector also are subject to heavier regulation that eventually could protect the integrity of these flows.
The Canada-Vietnam remittance corridor, though at a nascent stage in the shift from informal to formal systems, is poised for tremendous growth.
Policymakers should acknowledge that different remittance corridors face different priorities (based on their stage of development and other factors) and, therefore, should focus on different policies when shifting to formal systems. Whereas a mature market already has a paved road for remittances, one that must be maintained and expanded, the nascent market must focus first on setting the conditions for efficient formal remittance mechanisms. These conditions include providing market players, both in the sending and recipient economy, with more information on the magnitude of the corridor, the potential networks available for origination (first mile) and distribution (last mile), a better understanding of the informal channels used in the corridor, their possible links with illicit proceeds, and, most important, a deeper analysis of the demand for financial services by senders in the first mile. This final condition could facilitate the creation of new products that support the use of multiplatform schemes to conduct remittance transactions.
Recommendations for a Nascent Market
Recommendations for a nascent market are geared toward establishing a competitive market and electronic avenues for remittances between sending and recipient economies.
Authorities should promote the use of economies of scale among private financial institutions and work closely with the sending economies to develop bilateral initiatives that widen access to the formal financial sector in the sending country and that promote financial literacy among migrant senders. Continuous research on the characteristics and potential of the remittances corridor, which would bring market transparency and information on critical features and challenges of the corridor, could be the beginning of the shift to the formal sector. Coordination among different government agencies, in both the sending and recipient countries, will be needed.
In a nascent market, an initial description of the corridor should include the following:
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information on the size and location of remitting communities;
-
the sending habits of potential customers;
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the degree of financial intermediation (such as the number of banking networks, postal offices, and other potential points of distribution for the remittances in the last mile);
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the degree of access to financial services in the sending and receiving countries (including the framework for microfinance institutions in the last mile).
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the remittance mechanisms in use and the incentives that make them popular;
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the regulations that apply to the industry and their impact on the market; and
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data on general levels and frequency of remittances and the associated costs of those services.
In addition, regulations in both jurisdictions (sending and recipient) should be applied transparently and consistently to create a level playing field for market competitors, predictable government behavior, and clarity in the market.
Recommendations for a Mature Market
With the ultimate goal of moving remittances to the formal financial sector, policymakers should strive to create transparency that can produce market information and trigger incentives for private sector investment in the market. In a mature market, many of the issues addressed in a nascent market remain relevant. However, where a “paved road” for remittances has been laid, a greater focus can be given to the details of maintaining, fine-tuning, and leveraging the benefits of a mature market.
Authorities should institute detailed and well-organized mechanisms and standards for systematic information gathering. Providing information to a market can help it expand, as consumers become better educated and businesses develop new strategies and services. As the remittances market becomes established, it will have greater implications for capital flows and the overall financial sector. Authorities can stay apprised of market events and be better prepared to respond to shocks if detailed information is collected and organized regularly and efficiently. Information may also be shared with other countries. Regulations can be issued in a nonthreatening manner to collect and organize data.
Cost and speed are critical factors for a remittance system. But once competitive prices and efficient channels are in place, competitors should explore other factors, such as cultural factors and accessibility, that may also prevent remitters from choosing formal channels. Formal channels should recognize that informal systems develop and stay popular for social as well as economic reasons. Tailoring remittance products and services to migrants’ specific needs can take competition to another level.
Bibliography
APEC (Asia-Pacific Economic Cooperation), 2003, Informal Fund Transfer Systems in the APEC Region: Initial Findings and a Framework for Further Analysis, Alternative Remittance Systems Working Group Report (Washington: World Bank).
APEC (Asia-Pacific Economic Cooperation), 2004a, Informal Funds Transfer Systems: Lessons from the Policy Dialogue and Bilateral Case Studies on Shifting to the Formal Sector, Remittances Initiative Report to Finance Ministers and Deputies (Washington: World Bank).
APEC (Asia-Pacific Economic Cooperation), 2004b, Shaping the Remittances Market by Shifting to Formal Systems, Symposium on Alternative Remittance Systems, Tokyo, Japan, June 3–4.
G—8 Action Plan: Applying the Power of Entrepreneurship to the Eradication of Poverty, 2004, G8 Summit, Sea Island, Georgia.
Second International Conference on Hawala, 2004, “Conference Statement,” Abu Dhabi, April 5.
RaÚl Hernández-Coss is a financial sector specialist in the World Bank’s Financial Market Integrity (FSEFI) unit. The author wishes to express his gratitude for research conducted by Juan Galarza and Paolo Ugolini for the preparation of this contribution.
This section analyzes remittance flows through formal and informal financial channels (including legal channels that are not part of the formal financial sector) using official data provided by the countries involved in this research.
Interviews suggested an additional 40 percent of the total formal flows go to Vietnam by informal channels.
According to field interviews with the public and private sector and some World Bank estimates, IFT systems could be in a range of 3 percent to 5 percent of the recorded flows.
Viet Kieu, a term used by the Vietnamese to refer generally to overseas Vietnamese, originally referred to refugees who fled Vietnam during the socioeconomic transformation of the 1970s.
