Cross border remittances and financial access issues: topics to understand the market base of MSBs Manuel Orozco October 25th, 2007; Chicago FDIC Committee on Economic Inclusion

2 A. The context: migrants, development, and financial access 1. One key trend in the global context is increasing labor market integration and transnational economic activities resulting from such integration 2. For one, the increased competitive capacity of the U.S. economy depends of an adequate demand for foreign labor to increase the country’s productivity; 3. Our demographic composition will experience faster aging without immigration; 4. Moreover the current transnational context has strengthened ties while already changing U.S. demographic composition; 5. Market supply and access to wealth among migrants is a critical factor to enhance development and competitiveness in our economy; 6. Efforts to expand access remain shy and highlight the need for greater intervention among government, private sector and grass roots civil society. 7. Efforts that work include grassroots marketing, alternative banking products, IT innovation and partnerships. 8. Alternative products such as cards are still a work in progress...

3 The relationship between a declining unemployment rate among Hispanics in the U.S. and the increase of remittances to Mexico is an indicator of the increasigng demand for foreign labor in the U.S. Source: Orozco, Manuel data compiled by the author

4 Transnational ties: Remittances to Latin America and the Caribbean, Countries (% of GDP) Argentina (S.Am) % Belize (C.Am) % Bolivia (And) % Brazil (S.Am) % Colombia (And) % Costa Rica (C.Am) % Cuba D. Republic (Carb) % Ecuador (And) % El Salvador (C.Am) % Guatemala (C.Am) % Guyana (Carb) % Haiti (Carb) % Honduras (C.Am) % Jamaica (Carb) % Mexico % Nicaragua (C.Am) % Panama (C.Am) % Paraguay (S.Am) % Peru (And) % Suriname (Carb) % T.&Tobago (Carb) % Uruguay (S.Am) % Venezuela (And) % LAC %

5 Outbound remittances from the United States RegionTotal East Asia & Pacific $ 23,178,936, Europe & Central Asia $ 6,702,514, Latin America & Caribbean $ 53,131,672, Middle East & North Africa $ 3,611,726, South Asia $ 10,109,629, Sub-Saharan Africa $ 3,257,968,230.42

6 Main countries of destination of remittances from the U.S. Host Countries Mexico 24,242,813,200 India 8,400,000,000 Philippines 8,201,485,776 China 3,807,711,180 Viet Nam 3,788,610,840 Guatemala 3,210,327,839 Germany 3,129,595,560 El Salvador 2,969,952,963 Colombia 2,856,000,000 Dominican Republic 2,081,384,881 Honduras 2,075,889,556 Nigeria 1,790,358,198 Ecuador 1,312,379,841 Poland 1,203,720,840 Jamaica 957,665,520

7 The profile—migrant remitters MexicoDominica n Rep. Jamaic a El Salvado r Guatemal a BoliviaNicaragu a Over 40 years of age 18%15%17%15%26%24%51% Female40%55%43%64%33%52%41% Some college or college degree 14%60%75%19%12%42%35% Income  $35,000 3% 4%3% 18%8% U.S. Citizenship13%43%56%17%12%16%14% Use Internet24%63%76%31%23%36%24% Daily45%40%44%30%57%36%41% Monday - Friday17%18%27%20%9%14%15% Weekends12%19% 25%9%10%15% Rarely26%23%9%25%26%40%29% Source: Orozco, Manuel and Jacob, Katy. “Remittances, prepaid cards,

8 Length of time in the US and average remitted Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

9 Gender and average remitted Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

10 US citizen and average remittance sent Source: Orozco, Manuel. Transnational Engagement, Remittances and their Relationship to Development in Latin America and the Caribbean. Washington, DC: ISIM

11 B. Issues on the marketplace of money transfers 1. Players in the market: type, size, 2. Pricing: operating costs and consumer costs; 3. Market structure and concentration; 4. Regulatory environment; 5. Financial intermediation: demand and supply side dynamics; 6. Technology innovation

12 Changes in the demand side... Account to account transfers to Mexico: 1.00% (2004); 2.55% (2006); 7.28% (2007) Informal networks declined from 20%+ in 2000 to about 10%.

13 Consumer preferences to change …

14 Costs influence decision to switch

15 Nigerian migrants preference to change to a more efficient way and current cost of sending as % of principal sent

16 - Remittances and cost in Latin America and the Caribbean Source: Orozco, Manuel, International Flows... (2006)

17 C. Issues on financial access... Usability: capable of opening accounts affordably and with small balances Openness: capable of reaching everyone without underserving any social sector; Formality: capable of enforcing regulations without compromising use and openness; Functional capacity: capable to serve the four core product needs: (payments, savings, credit and risk mitigation); Migrants are in a space where they often lack financial access, and where it exists, the access is not linked to formal depository institutions

18 Most migrants use businesses that offer none or few financial services...

19... Partly because they have few financial obligations and no banking access...

20 Immigrants without bank accounts

21... Migrants are not a monolithic group that either has no financial access and no obligations or has both….

22 Moreover, at least one third or more saves...

23 And the average amount is significant...

24 And some unbanked migrants are saving...

25 They also believe that the most important reason to have a bank account is to save money...

26 …and would be prepared to use banking services if...

27 Their access to bank accounts is determined partly by... Demand for financial services Number of financial obligations Age Gender Citizenship, and not income (as is almost a constant) Moreover, their interest to switch to account to account transfers is associated to changes among banks

28 Moreover, those owning accounts are more likely to send more money...

29 Recommendations 1. Accelerating financial access 1. Targeted goals and standards to increase access to financial services and access (who would be benefited) 2. Develop methodologies to accelerate banking rates 3. Increase a critical mass of the policy network 4. Underserved vs. marginality 2. Partnerships between MTOs and depository institutions in the U.S. and LAC: Dinero a Mexico, Red de la Gente, and others… 3. Make clear the compatibility between financial access and mitigating methods that reduce security risks of transactions 4. Segment and target appropriate markets 5. Lower the barriers to entry 6. Develop effective distribution channels 7. Educate the target market 8. Consider mobile banking channels

30 Criteria defining consolidation of firms in the industry & stages at which countries are found... MatureConsolidatingUndeveloped Composition of market share, Efficiency of transactions (use of modern technology, extended networks nation wide, safe transfers), Compliance to regulatory environment, Tradition of transferring money, Multiple new and old players (MTOs, banks, MFIs), Costs to customers are lower than average, Information and transparency, Investment accessible Mexico Philippines El Salvador, Dominican Rep., Ecuador, Jamaica Colombia Ghana India Armenia  Nigeria  Tajikistan  Eastern Europe  Vietnam  Honduras Peru Guyana Haiti Cuba Nicaragua Argentina Venezuela Tajikistan Nigeria Somalia Consolidation and maturation Source: Orozco, Manuel. “Markets and Financial Democracy” (2005)

31 Region of destination Migrant ’ s origin Russia Japan/ Sing/ HK/ Australi a USA/ Canada Western Europe Gulf States Intra- Regiona l I Intra- regional II Frequency and % remitting 6 * 85 % 12 * 80 % 12 * 65 % 12 * 80 % 8 * 80 % 5 * 80 % Region Amount remitted per sending frequency East Asia & Pacific Latin America & Caribbean Middle East & North Africa North America200 Russia and Central Asia South Asia Sub-Saharan Africa Western, East and C. Europe Factor estimates of migrant remitting by region

Some determinants of migration

33 Income dependence on remittances

34