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Understanding The Hidden Costs And Overlooked Expenses Of Remittances

Learn about the overlooked expenses and hidden costs associated with remittances. Get insights into how to reduce transaction fees and optimize transfers.

A remittance is a sum of money paid by a person from one country to a person in another country. There are many ways of transferring money overseas, and with the evolution of the Fintech industry, we are working on better solutions every day.

At a macro level, international remittances have several positive effects on economic and poverty alleviation indicators, which can be leveraged further by promoting financial inclusion.



Understanding the Cost of Remittance

Globally, over 200 million migrant workers send money home to over 800 million family members – mostly in developing nations. Out of the total $212 billion remittance outflows from 12 G20 sending countries, $12 Billion are paid in remittance fees. For every remittance transaction, there is a cost that includes a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country.

Recent independent research indicated that only 55% of remittance customers in the United States genuinely understand the cost of sending money abroad, while only 18% of them identified exchange rates as an element of the cost of remittance. The first step in minimizing remittance costs is understanding them.



Understanding Wire Transfers

Wire transfers use high-end cross-border payment software to send money overseas safely and quickly. Wire transfers work similarly to local money transfers. The money is sent and received via messages across different banking networks like SWIFT or PEACH. Remittance requires a delivery intermediary to make the transfer. Remittance services like Western Union Money Transfer, MoneyGram, TransferWise, Remitly etc., do the job of intermediaries. They make it possible for person A to deposit cash in country A and send it to person B in country B.



Elements of Remittance Fees

Here are the different elements of remittance fees that add up to the total charges you pay when making a remittance.

  1. Transfer fees/Vendor fees/Margins – Banks that offer the remittance service charge a fee. The amount covers operating costs and helps the bank profit from the service. Some banks may use third-party infrastructure or expertise to make the remittance. In that case, a part of this fee is paid to the third party.

  2. Money Transfer Operators – Money transfer operators, often known as MTOs, are businesses that conduct international transactions. They act as intermediaries for the remittance and charge a fee that could be 5% to 7% of the amount transferred.

  3. Conversion Fees – If you send money using a different currency than your own, the vendor frequently benefits from the exchange rate. The money transfer operators charge a fee to convert the amount to the receiver’s currency. For example, 100€ is approximately equal to Rs.8,800. But if someone remits 100€, MTOs may deduct 5-7% fees for conversion (approximately Rs.500), and the person in India may receive only Rs.8300. In a small amount, it may not make much difference. But for a more considerable amount, it may be a significant loss.

  4. Network Fees – There are several secure remittance banking networks or zones worldwide. Some examples are SWIFT, SEPA, and ACH. Banks use these secure networks to communicate and transact with each other. All banks have a preferred transaction pathway depending on their network. It is because inward remittance to banks in the same network is faster and safer than other methods. The network fees are negligible if your bank and the receiver’s bank are on the same network. If not, the network fees can be as high as $40 per transaction.



Remittance and the Hidden Cost

The lack of transparency also prevents us from drawing definite conclusions about the most economical option for remittance. Even after understanding the elements of the remittance cost, it is possible that you are charged higher than the estimated cost quoted by your bank or service that sends money. The provider often lists market volatility and the factors that affect the final FX rate.

The majority of remittance service providers' income comes from "the spread" on wire transfers.



What is the spread?

The gap between the sell rate and the buy rate when exchanging or trading currencies is known as the forex spread. Depending on the currency being transferred, the time of day, and the state of the economy, spreads can be either narrower or broader. The spread and its impact on remittance costs are best understood with an example.

A foreign worker in the UK wishes to send 10,000 GBP to a nation in the Eurozone.

  • The day's mid-market rate was 1.433. (GBP to EUR)

  • Offered rate: 1.389 (GBP to EUR)

  • Spread expenses: £316.70 (3.1678%)

  • Remittance Fees: £15

  • Total Cost: £316.70 + £15 = £331.70 (95.48% of total fees comes from the spread, 4.52% comes from the fees)

The spread is where most of the money that remittance companies make their money. The fixed fees decrease in importance as the amount transferred increases and the cost % increases. 



How to Reduce Remittance and Wire Charge Hidden Costs?

One should evaluate the costs of several service providers before sending money. They will provide all the information you seek, even if it is not immediately available. Here are some additional methods for sending money abroad without incurring additional fees.

  • Physical Compensation – Giving the other person cash in person is the easiest way to give or receive money internationally. Naturally, this approach might not work for everyone since international travel is extremely expensive.
  • Transfer money to a Local Bank Account- You can transfer funds from a local bank account in the same nation as the recipient to that person's account. Perhaps they might just take money out of your local account.
  • Make a Direct Payment - You can transfer funds straight to the account of the final recipient if your family member needs them for a particular necessity. You can order something online and pay in your local currency if your loved one needs the money to buy something.



We will undoubtedly discover new technology and ways to reduce the cost and simplify the process of remittance as the world's financial infrastructure develops. Remittance seekers have a more open and affordable option with independent suppliers. Possessing the right information can help you avoid paying remittance fees that are not necessary.

Fable provides remittance services with tools, functionality, and utility since it is aware of what customers require. Before making a payment, our customers can view the total and the rate, allowing them to choose the precise amount that will be sent to the recipient. To learn more about the right cross-border remittance solutions for your bank or business, get in touch with a Fable Fintech cross-border payment solutions team now!


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