Enhancing competition and reducing costs in the remittance markets: A Matter of Principles

1. Enhancing competition and reducing costs in the remittance markets: A Matter of Principles Massimo Cirasino Head Payment Systems Development Group The World Bank Ottawa, November 19, 2008

2. Overcoming Shortfalls: The World Bank Role in the Transformation Process in Payment, Remittances and Securities Settlement Systems 2

4. Help develop sound and efficient payment, remittance and SS systems, to: 1. Strenghten Financial Stability 2. Support Access to Finance PSDG Role Stocktaking & Policy Advice Implementation Support Vision & Strategy Legal Framework Large-Value Systems Retail Payment Systems Government Payments Remittances Securities Settlement Oversight & Cooperation Financing: WB loans-grants, fee-based and other TA, Regional Initiatives, FSAPs, support to FIRST-funded Initiatives, Others 4

5. PSDG: Strategic Focus Keep role at center of international network Leverage resources and capacity Assist in all areas of payment systemdevelopment 110 countries supported Growing focus on retail payment system issues Pivotal role in efforts to reduce cost of remittances CPSS-WB GPs Remittance price database Continue working with all WBG Regions Demand-based Other prioritization (e.g. crises)

6. Appropriate Infrastructure helps reduce transaction costs $160,000 2006 Emerging Market GDP = $11,527 BN $25 $154,196 $155,000 $20 $15 $89,351 75% Billions $10 Cost per $100 sent $5 90% $462 $500 $0 $64,845 $222 Remittances Domestic Payments $240 $- Least efficient system Most efficient system Remittances Payment Systems Total potential reduction in costs Total Payment Volume Total Potential Payment Volume Notes: “Total potential reduction in costs” is indicative of the broad range of potential cost reduction. Actual cost savings realized is contingent ultimately on the efficiency of the system. For remittances, costs are of sending remittances to remitter’s home country. For domestic payments, costs are sending payments within a country. Notes: (i) Preliminary Figures. (ii) Estimates for Remittances based on IDB figures. (iii) Preliminary estimates on Payments Systems based on 2007 World Bank Global Payments Systems Survey. Estimates for retail payments systems only. Does not include value of Real Time Gross Settlements transactions. Payment volumes and cost savings for Remittances & Payment Systems

7. Implementing the BIS-World Bank General Principles on International Remittance Services 7

8. The General Principles are a multilateral effort to address a global challenge Chairs: World Bank PSDG and CPSS Members: AMF, ADB, Central Banks of Brazil, Europe, Germany, Italy, Mexico, Philippines, Sri Lanka, Turkey, EBRD, HKMA, IADB, IMF, Fed Board of Governors, Fed of New York, World Bank Secretariat: World Bank PSDG, CPSS, DFID The World Bank PSDG and the Bank for International Settlements CPSS chaired the Task Force that developed the Principles.

9. An international remittance is a cross-border, person-to-person payment of relatively low value • Typically by migrant workers to their families. Especially from developed to developing countries • Person-to person, low value - ie not commercial or wholesale payments • Domestic remittances also exist • Recurrent - but typically made by individual transfers (eg not by standing order) • Typically credit transfers • For remittance service providers (RSPs), often indistinguishable from any other retail cross-border transfers

10. Issues with remittances: • Usually expensive • Sometimes slow • Sometimes inconvenient • Occasionally unreliable Focus here is on payment system aspects (not developmental, immigration, balance-of-payments or other aspects)

11. GP1: The market for remittances should be transparent and have adequate consumer protection GP2: Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged GP3: Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework GP4: Competitive market conditions, including appropriate access to domestic payments infrastructures, should be fostered in the remittance service industry GP5: Remittance services should be supported by appropriate governance and risk management practices

12. Many people may need to take action. But Remittance Service Providers and the authorities have particularly important roles: Who should take action? Remittance Service Providers should participate actively in the application of the general principles should evaluate what action to take to achieve the public policy objectives through implementation of the general principles Public Authorities Form of action by authorities? Monitoring and outreach? Direct provision? Catalyst/ facilitator? Monitoring? Dialogue? Regulation? More interventionist Less interventionist

13. The General Principles have been formally endorsed by the G-8, G-20 and the Financial Stability Forum • Both Sending and Receiving Countries have been urged to adopt them!!!

14. The General Principles are a multilateral effort to address a global challenge Membership: ADB, AMF, CEMLA, CGAP, DFID, EBRD, IADB, IMF, UNDP, US Treasury, USAID, World Bank The World Bank PSDG is chairing a Coordination Group that developed Guidelines for the application of the General Principles and stocktaking methodology

15. Remittances: the BIS-WB General Principles for International remittance service are a multilateral effort to address a global challenge Assessments: El Salvador (September 2006)Morocco (November 2006) Honduras (April 2007) Haiti (September 2007) Nigeria (February, 2008) Uganda (April 2008) Guatemala (April 2008) Czech Republic (May 2008) U.A.E (January 2009) 15

16. Improvements in the remittance market are achievable, when international and national authorities work with the private sector to achieve the goals of the Principles. • The pilots undertaken so far have led to remittance market improvements, and the assessments developed are a good tool to provide recommendations and promote cooperation between authorities. • The World Bank will continue to lead teams in implementing the principles (with an increased focus on Africa and South Asia within regional initiatives going forward)

17. Remittances: the BIS-WB General Principles for International remittance service are a multilateral effort to address a global challenge Remittances Partnership: • Launched during Global Payments Week 2008 in Vienna • Focus is on regional and thematic issues • Pragmatic approach 17

18. The G8 Global Remittances Working Group Secretariat: FPDPR Chair: WB (Michael Klein) G8 Advisory Commitee TG3 Payment & Market Infrastructure TG 2 Developmental issues TG 1 Data TG4 A2F Private/Public Partnership

19. World Bank Remittance Price Database LAUNCHED SEPTEMBER 2008!Remittanceprices.worldbank.org • To design a refined methodology to gather comparable remittance price data and measure the economic gains from lower costs to consumers • Increase transparency • Increase competition • Inform consumers • The project will assist with the delivery of General Principle 1 19

20. World Bank Remittance Price Database Remittanceprices.worldbank.org • Benchmark to measure improvements in transparency, efficiency, and competition within remittance corridors • Comparisons of markets across countries and regions • Price reductions through a “name and shame” approach. An example of this has been the case of LAC, where publication of remittance fees was a factor in their reduction from 15%, on average, in the region in 2000, to 5.6% in 2006 • Provides a uniform methodology worldwide • Does not replace national databases that are being encouraged for more frequent updates and a tailored outreach

21. World Bank Remittance Price Database Remittanceprices.worldbank.org Project Methodology • Country Sampling methodology • A matrix has been constructed that selects 14 important remittance sending countries and identifies the volumes of remittances in the most important corridors for each country • Company Sampling Methodology • The population of remittance firms in sending countries was identified using information from regulators where registration/licensing/oversight mechanisms exist. The sample is split between the most important non-bank RSPs and the most important banks/credit unions/MFIs in each corridor. The sample didl not include transfer mechanisms such as hawala and couriers • Amount and Speed • The project collected data on two different price levels: the local currency equivalent of US$250, and the average amount (US$) for each corridor. The speed of the service was also recorded

22. World Bank Remittance Price Database Remittanceprices.worldbank.org Project Methodology • Data acquisition • Firms were contacted to obtain the sending fees and exchange rates charged to transfer the local currency equivalent of US$250, and the average transaction amount (funds to be received in the currency of the recipient country). The day and time of the request was recorded, as was the interbank exchange rate at that day/time. The researcher also asked if there are any known fees for the recipient • Data Verification • In some cases, actual transactions were undertaken through a random selection of firms in the corridor, including firms that cannot or did not give customers price information before a transaction has taken place. (“mystery shopping”) • Publication • Published on world bank website • It is intended that the website be updated at least twice a year • The project team is working proactively to raiseawareness on the existence of the database

23. The Country Pairs The Country Pairs (“The corridors”) 23

24. Remittance Price Database: Main Findings • Transparency still insufficient in some corridors • In general, banks are more costly and slower • Corridors from Spain, Singapore, US, and UK less expensive than average (i.e. 10.5 % for US$200 and 6.5% for US$500) • Corridors from Germany, Japan and the Netherlands among the most expensive • Reforms to National Payments Systems crucial 24

25. The World Bank estimates that in 2007 global remittances reached $355 billion, of which $265 billion went to developing countries, involving some 190 million migrants or 3.0% of world population

26. The global crisis could impact remittances flows worldwide and the main Canada remittance recipients countries in 2008

27. The global average cost to consumers to send money from Canada is 14% for the local currency equivalent of USD200... Corridor averages are unweighted and do not reflect the market shares of the different firms that compose the average.

28. ..but banks are significantly more costly and slower than Money Transfer Operators In Canada banks charge on average USD40 for a remittance of USD200 !!!!!

29. The cost to consumers of theseremittance transactions is expensive relative to the often low incomes of migrant workers, the amounts sent, and the income of remittance recipients • Until banks are able to reduce costs to offer lower pricing, consumers will have little incentive to transfer remittances through banking channels, and get access to financial services • Any reduction in remittance transfer price would result in more money reaching remittance recipients and would have a significant effect on the income levels of remittance families • Indeed, if the cost of sending remittances could be reduced by just 5%, remittance recipients in developing countries would receive $13.8 billion dollars more each year than they do now – the equivalent of more than one IDA, each year, straight to the people • This added income could then provide remittance recipients more opportunity for consumption, savings, and investment in local economies

30. Coming Up: The World Bank Global Conference: “Redefining the Landscape of Payment Systems”, Cape Town, April 7-10, 2009

31. PPP Goals Thank you Payment Systems Development Group The World Bank mcirasino@worldbank.org 31