The amount of money being moved across international borders has risen hugely over recent years. In some cases this is as a result of businesses working increasingly with customers and clients overseas. But another huge factor is economic migration. As more and more people live and work abroad, the amount of money sent back home has risen significantly. An astonishing $601 billion was sent by expat workers to their home countries in 2016 alone.
Remittances are big business. If you need to send, or receive money from overseas, for any reason, it pays to understand them. Here’s all you need to know.
Let’s start at the beginning. What exactly is a remittance? The Merriam-Webster dictionary says the following:
To remit - to send (money) to a person or place especially in payment of a demand, account, or draft
In other words, a remittance is the sum of money being sent, generally to someplace abroad. In common usage, the word can refer to moving money by any method - a wire transfer, online transfer, by mail or using a credit or debit card to move the money. The payment could be to settle an invoice from a supplier, to pay an employee, or to support family back home.
If you’re paying for or expecting to receive a remittance, then the time taken for it to be processed is known as a remittance float. For example, if you’re sending a cheque in the mail, then the time it takes to get the cheque to the right person, pay it in, and for the bank to deposit the money in the recipient’s account, is the remittance float.
It’s especially important that businesses and freelance workers understand, and try to limit, the remittance float. Having money tied up while it’s being processed limits cash flow, and means you lose potential interest payments on the money you’re owed. As international money transfers made by post, or placed with some traditional providers can take days or even weeks to arrive, this can cause a massive headache to a business.
You can limit your remittance float by getting whoever is transferring money to you to agree on using the quickest and most efficient service available. And if it’s you needing to remit money abroad, it’s worth understanding how best to pay an international invoice, so you don’t needlessly keep your suppliers waiting.
If you need to pay a remittance, you have a few options.
In most cases, you can choose to make your payment with your regular bank by wire transfer - although not all banks offer this service if you’re moving cash internationally.
Services such as Western Union and Moneygram allow you to move money online, or by visiting one of their outlets across the globe. The recipient can then either have the remittance paid into their account, or collect it in cash at a location close to them.
Depending on the currencies and countries involved, you may also have the option of using PayPal, or you could use a specialist service provider like TransferWise which offers fair exchange rates and low, fair transfer fees.
To remit money to someone overseas, you can choose different services depending on factors like whether getting your money moved quickly - or minimising fees - is more important to you. Depending on where you live, who you bank with, and the exact details of the transaction, you might find that not all options are available, so it pays to do your research in advance.
A common way to pay a remittance is by sending an international transfer through your bank. You can call into your local bank branch and sort it out in person or through your bank’s online banking system or app. If you’re sending money abroad from the US, you might need a little more help on how to make an international wire transfer.
These international transfers usually involve money moving from one bank account to another via something called the SWIFT network. This is a network of banks across the world, who work together to make sure your money goes to the right person in the end. Because several banks can be involved in these transfers, and can all add their own fees, this can be fairly costly.
If you would rather pay your remittance using cash or a cheque, you can also do that. In the case of using a cheque, you can simply send the cheque via snail mail. And wait. However, this comes with obvious downsides. It’s quite slow, and you have the possibility that the cheque could be lost, damaged or stolen on the way. Add to that the fact that cheques are far less frequently accepted, and they’re seldom the best choice. Germany, Austria, the Netherlands, Belgium, and Scandinavian countries have already phased out cheques altogether, with other countries like the UK in the process of doing so.
If you’re hoping to pay your remittance using cash, you can use a company like Western Union or Moneygram. These services do offer online transfers, too, but much of their business is done by individuals taking cash to one of their outlets, to be transferred as cash to their recipient. If either you, or the person you’re sending money to, doesn’t have a bank account, this service can still be used. However, it comes at a cost. Fees are steep, and the exchange rates offered aren’t great. So it’s a good idea to use an online currency converter to help you calculate the real cost before you commit.
PayPal was one of the first services to offer online transfers back in 1998, when the company was founded. Now it has 210 million active accounts and allows online payments in 25 different countries. To make a transfer using PayPal, both you and your recipient need an account with them. You can set your PayPal account up online and link it to your bank account or credit card. The service is convenient - but you’ll likely end up paying for PayPal’s convenience with high fees, especially for moving money abroad and converting between currencies. There are a whole stack of different fees which could be applied, which quickly add up, until, depending on the currencies and countries involved, anywhere from 3% - 13% of the transfer can disappear in charges.
If you want to make an online transfer, you might get a better deal with TransferWise. Some of the fees levied by PayPal are because moving money across borders costs. TransferWise avoids these costs by having their own local bank accounts in the majority of the countries they transfer to. That means that for these currencies no international transfers are actually needed, and the saving can be passed on to the customer. TransferWise uses the real exchange rate - the one you’d find if you Googled it - and just takes a small, upfront flat fee for the service.
In some cases, you’ll find extra fees are added if you choose to fund your remittance with a debit or credit card. This can come as a nasty surprise. A PayPal online transfer, for example, can cost 4% - 7.4% more using a credit card. Western Union also up their fees if you choose to pay with card. Sadly, card payments aren’t free and TransferWise sometimes also charges you a fee when you want to pay by card. But they show you this fee upfront. This way you can decide if you think it's worth it or not, and you can choose to make a bank transfer instead to avoid those additional fees.
If you make regular remittance payments, you might get a better deal - and make life a lot easier - if you open a TransferWise borderless multi-currency account.
With a borderless account you can hold your money in several different currencies, and for some currencies you can even get your own virtual account details so you can receive payments from third parties as well. Because TransferWise uses the real exchange rate, you’ll find that switching between currencies when you need to is simple and cheap, with no hidden fees to worry about.
Whether you need to pay a one off remittance, or you’re an overseas worker regularly sending cash home to your loved ones, it’s worth understanding how remittances work, and what fees might be involved.
With a bit of research, you might find that there’s a way to move your money safely and quickly, and with lower fees. That way, more of your hard earned cash gets to where you want it - and less is eaten up by bank or transfer service fees.