Cross-Border Payments

Remittance Payments: 3 Cross-Border Corridors to Know

As the Federal Reserve continues engaging with the industry on the cross-border payments landscape, there is also an opportunity to dive further into how the complex international payments process works. Laws, local customs, infrastructure, accessibility and competition all play a role in cost, speed and efficiency of cross-border money movement. This is particularly evident when it comes to remittance payments.

A remittance payment is commonly thought of as money sent back home by someone staying in a foreign country. These payments account for less than 10 percent of international transactions overall, 1 yet are imperative to millions of households around the world who depend on financial support from family members in other countries.

In the past, workers have sent more money home during times of hardship, but this trend is unlikely to continue during the COVID-19 pandemic, as both host and home countries are financially impacted. According to the World Bank, remittance flows are expected to decline by 23.1 percent in 2020, largely due to a fall in the wages and employment of migrant workers. Despite this decline, remittance flows are expected to become more important as a source of external financial support for low-income and middle-income countries.2

The largest remittance corridors, measured in terms of payment outflows from the United States, offer insight on the variations within the cross-border infrastructure.

1. Mexico

The transfer of money from the United States to Mexico is the single largest remittance corridor in the world, and roughly 1.6 million households rely on payments from family members in the United States as their most important source of income.3 According to the World Bank, remittances sent to Mexico from the U.S. totaled $36B in 2019.

Compared to other corridors, fees for sending money to Mexico were relatively low – the average transaction cost was $5.03 during the second quarter of 2020.4 The Federal Reserve’s assessment of the cross-border payments landscape found cash pickup is a common payout method in Mexico. Other methods, such as mobile wallets and prepaid cards, can offer convenience and efficiency, particularly for those unable to access retail locations for pickups.

2. China

Remittances sent to China from the United States totaled $14.3B in 2019, making it the second largest country for remittance outflow. In addition to reliance on legacy providers in this segment, mobile wallets are also gaining popularity in China and function as banks by allowing users to earn interest on balances.

In recent years, use of digital payment infrastructures have allowed users to bypass some costs associated with remittance payments, but transaction fees remain higher compared to some of the other large corridors. During the second quarter of 2020, the average transaction cost was $9.06.5

3. India

In 2019, $12.74B was sent from the United States to India, making it the third largest corridor for remittance payment outflows. Integration with India’s Unified Payments Interface (UPI), a payment method that allows for instant money transfer to a bank account, has accelerated delivery times of payments to India. In the second quarter of 2020, the average transaction fee was $4.09.6

Over half of remittances sent to India are for the purpose of “family maintenance,” and migrants sending money home reflect a diverse range of income levels.7

Looking Ahead

Like the broader payments ecosystem, cross-border payments are poised for change. Initiatives like the Consumer Financial Protection Bureau (CFPB) Remittance Rule (Off-Site), as well as ongoing innovation and partnerships among industry stakeholders, continue to address challenges surrounding transparency, cost and speed of these complex payments.