The advantages of sending digital money

The majority of migrants from Latin America and the Caribbean residing in the United States still prefer to use cash to send remittances to their countries of origin. This is going to change, although experts believe it will be slow

Are the days of bills and coins numbered? For those who live in the United States it seems an irremediable fact. A recent study by the Federal Reserve (U.S. Central Bank) showed that cash represented only 30% of commercial transactions in the country in 2017 and the Nilson Report, focused on the payments industry, estimates that the use of media Electronic payments will increase to 84% in retail businesses by 2022. At the same time, the proportion of households that do not use banking services is at historic lows in industrialized countries. In the US, 93.5% of households have a bank account, a figure that drops to 89.9% among immigrants.

As financial technologies or fintech and online solutions have taken on a more important role in payments and money transfers, it was expected that digitization would also reach remittances, and with it, a positive impact. Remittances, largely coming from North America, Europe and Asia, reached a record $613 billion in 2017, including $70 billion that flowed to Latin America and the Caribbean. Digitization could free up billions of dollars in costs associated with receiving and delivering cash in physical locations. Additionally, there is evidence that receiving money directly into a bank account, rather than in cash, increases the likelihood that the funds will be put to productive uses, such as savings and investments. But how digital are these remittances today?

At the Innovation Laboratory of the Inter-American Development Bank (IDB Lab) we have set out to answer that question. Our strategy has been twofold. On the one hand, we contacted remittance companies as part of our annual remittance study. On the other hand, we applied a survey to a sample of Latin American and Caribbean immigrants residing in the United States.

Both sources suggested that most Latin American and Caribbean migrants residing in the United States prefer to use cash to send money to their countries of origin. Our survey showed that 80% of migrants from Colombia, the Dominican Republic, El Salvador and Mexico surveyed in Miami, Los Angeles and New York initiate their remittances in a physical location and use cash as a means of payment, usually with a remittance agent. a company located in a business. The survey also revealed that only 20% used an electronic payment method to send money and originated their transfers in a digital channel, from their computers or mobile phones. This is going to change, although experts believe that growth in digital remittances will be slow.

Only 20% of Latin migrants use an electronic means of payment to send money and originate their transfers in a digital channel, from their computers or mobile phones

The habits for receiving remittances in Latin American and Caribbean countries largely reflect those used to send them from the United States. In general, they are disbursed in cash at payment points within bank branches or in neighborhood stores that act as agents. Respondents indicated that 83% of remittances were delivered in cash, while only 17% were credited directly to a bank account, with significant variation between migrants' countries of origin. Migrants from Colombia, for example, show a much greater preference for depositing in a bank account than those from other countries.

A conclusion of our report is that the use of physical agents as a channel and the use of cash as a means of payment for shipping and delivery is a rational choice for migrants. What slows the adoption of digital remittances among migrants is not the lack of bank accounts, Internet access or ignorance of online banking. Using cash and physical locations for shipping and delivery is more convenient and, in some cases, less expensive. For migrants who receive their salaries in cash or check, 7 in 10 in our survey, sending cash cuts several steps and saves time. In fact, migrants who receive their salaries through direct deposit into a bank account are three times more likely to use online remittance services than those who receive their income in cash.

To accelerate the digitization of remittances, service providers should focus on making them convenient for those migrants who already receive their salaries in bank accounts or have access to electronic payment methods, such as credit cards. For their part, if banks want to enter this market, we suggest alliances with operators with whom migrants already feel comfortable, and promote the opening of bank accounts and remittance services from web portals and mobile banking applications.

Fermín Vivanco is a senior specialist at the IDB Lab and Lukas Keller is a consultant in the labor markets division of the Inter-American Development Bank.