Remittance Study Proposal

IMPROVING THE COST EFFECTIVENESS of CROSS-BORDER REMITTANCES
A PROPOSED STUDY BY THE MEXICAN STUDY GROUP

GOAL

To enable Mexican’s living in the United States to use the most cost effective means of remitting money to their families and communities in Mexican thus increasing the amount of money provided the recipients.

BACKGROUND

Remittances by Mexicans living in the United States has become one of Mexico ’s largest source of foreign money. The dollar amount of remittance money flowing from the United States to Mexico was estimated to exceed $18 billion in 2005 ( Pew Hispanic Center }. It is likely that in 2005 remittances will exceed petroleum and tourism as the largest source of foreign income into the Mexican Economy.

The means by which Mexican immigrants in the United States send remittances to Mexico has changed significantly over the last 10 years. The first change was from a variety of informal means to Wire Transfers via agencies such as Western Union . In the past five years, an increasing percentage of the money has been remitted electronically using the services of financial institutions. The increasing use of bank transfers, ATM’s and debit or credit cards has made the remittance process significantly more secure, quicker, less cumbersome and less costly. Unfortunately, the remittance process is still characterized by high costs. The cost for the average remittance ($200) is estimated to be $16.32 ( Pew Hispanic Center ). In addition, the charges for the receiving party to access the money increase the total cost to between 10% to 15%. These costs reduce the average remittance of $200 to between $180 and $170. While a cost of between $210 and $330 pesos may not seem significant to some observers, it poses an additional burden on the recipients, many of whom already exist at a poverty level. It is also quite clear that the high costs of these remittances have a significant impact on the Mexican economy, reducing the amount of money remitted by $1.8 to $2.7 billion US dollars. While the case can be made that a significant portion of these remittance costs enter the Mexican economy via local financial institutions, it seems preferable that these remittance costs be used directly by the intended recipients. This reduction in transfer costs would not only benefit the recipients directly, but strengthen the Mexican economy via increased consumer spending.

As a group Mexican immigrants in the United States and the recipients in Mexico , have limited knowledge about and understanding of the use of financial institutions and the costs of their services. Their ability to shop for the least costly services are limited both by their level of knowledge, their marginal status in the United States, language barriers and the demands and time constraints of their work situations. Their situation is far from unique. Numerous studies have shown that the least affluent sectors of the economy pay more for equivalent goods and services than do the more affluent. The consumer movement in the United States has focused on a variety of means to empower all segments of society to make informed choices. Once provided with adequate information, consumers’ at all economic and social levels are more likely to choose the most cost effective option available.

Increasingly financial institutions are finding remittance services to be an expanding revenue source, an attractive business with low risk exposure and, most important, highly profitable. The number of institutions providing these services and the range of options offered has expanded greatly in the last few years. While the costs of these services are quite low, the lack of a truly competitive market has limited the need for them to compete on a basis of competitive pricing. Without competitive pressure to reduce their rates, the financial institutions are able to maintain or increase their volume and/or market share without reducing their margins. In the current marketplace for remittance business, perceived convenience, speed of service, name recognition, ethnic identification and a variety of other marketing techniques seem sufficient to insure continuing or growing profitability.

DELIVERABLE

An easily useable guide, in Spanish, to the various financial institutions providing remittance services for Mexican residents. It would indicate the financial institution, type of remittance services provided, total cost, the speed and ease of fund transfers, the availability of access points on both sides of the border and contact information. This guide would be widely distributed both in the United States to the remitting immigrants and in Mexico to the recipients of remittances.

PROCESS

ANTICIPATED OUTCOMES