[Senate Hearing 107-909]
[From the U.S. Government Publishing Office]
S. Hrg. 107-909
ISSUES REGARDING THE
SENDING OF REMITTANCES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
OVERSIGHT HEARING ON ISSUES REGARDING THE SENDING OF REMITTANCES
__________
FEBRUARY 28, 2002
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Aaron Klein, Economist
Linda Lord, Republican Chief Counsel
Madelyn Simmons, Republican Professional Staff
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
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THURSDAY, FEBRUARY 28, 2002
Page
Opening statement of Chairman Sarbanes........................... 1
Prepared statement........................................... 37
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 3
Senator Akaka................................................ 6
Senator Carper............................................... 6
Senator Miller............................................... 7
WITNESSES
Luis V. Gutierrez, a U.S. Representative in Congress from the
State of Illinois.............................................. 3
Prepared statement........................................... 38
Sergio Bendixen, President, Bendixen & Associates................ 10
Prepared statement........................................... 39
Manuel Orozco, PhD, Project Director for Central America, Inter-
American Dialogue.............................................. 14
Prepared statement........................................... 41
Raul Hinojosa-Ojeda, PhD, Professor of International and Regional
Development, UCLA School of Public Policy...................... 17
Susan F. Martin, PhD, Institute for the Study of International
Migration, School of Foreign Service, Georgetown University.... 20
Prepared statement........................................... 60
(iii)
ISSUES REGARDING THE SENDING OF REMITTANCES
----------
THURSDAY, FEBRUARY 28, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:10 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. Let me call this hearing to order.
Today, the Senate Banking, Housing, and Urban Affairs
Committee again picks up a theme that we addressed with 2 days
of hearings earlier this month on the issue of financial
literacy.
We are going to turn our attention this morning to the
question of remittances. Remittances are the payments sent home
from workers, generally immigrants, but not altogether, living
in the United States, to family, friends, and communities in
their country of origin. Those sending remittances are often
subject to exorbitant costs. And we are examining ways in which
we can address this situation.
The particular focus of our discussion today will be the
findings of three recent studies. One conducted by Sergio
Bendixen of Bendixen & Associates, entitled, ``Survey of
Remittances Senders: United States to Latin America,'' was
based on interviews of Latino immigrants, conducted in November
and December of last year. The other two entitled, ``Attracting
Remittances: Market, Money and Reduced Costs'' and ``Enabling
Environments? Facing a Spontaneous or Incubating Stage'' were
commissioned by the Multilateral Investment Fund of the Inter-
American Development Bank and were prepared by Dr. Manuel
Orozco in connection with this week's IDB's Conference Week on
the subject of remittances. These reports are just now being
released, and so we are pleased that
Dr. Orozco is going to be with us this morning.
We will begin by hearing from Congressman Luis Gutierrez,
whose long-standing concerns about the remittance market are
reflected not only in his interest, but also in a bill that he
has introduced requiring full disclosure of all costs to
sending remittances.
We also have with us this morning two distinguished
academics who are experts in the field--Dr. Susan Martin, the
Executive Director of the Institute for the Study of
International Migration at Georgetown University, and Dr. Raul
Hinojosa-Ojeda, the founding Research Director of the North
American Integration and Development Center at UCLA.
I would like to say just a few words about this subject
before I turn to the Congress. Do you have a vote or anything,
Luis?
Representative Gutierrez. No. They will let me know, Mr.
Chairman.
Chairman Sarbanes. Good. Immigrants to the United States
have traditionally sent financial assistance in the form of
remittances to family members who remained in their country of
origin.
As the son of immigrant parents from Greece, I am very much
aware of this because they, in effect, sent remittances to
relatives in Greece.
Until recently, however, the phenomenon has not been
systematically studied and its implications have not been fully
realized.
The 2000 census shows that 30 million people in this
country today are foreign born. That is the largest absolute
number in our Nation's history. More than 40 percent of them
emigrated in the 1990's. The vast majority are citizens or
legal residents.
They make a vital and integral contribution to our Nation's
economic and social structures. Over 15 million immigrants,
accounting for more than half of the immigrant community, come
from Latin American countries. In fact, the 2000 census shows
that the Hispanic population of the United States stood at
something over 32 million, representing 12 percent of our
Nation's population.
As the immigrant population has grown, the volume of
remittances has increased dramatically. It is estimated that
over $20 billion is remitted annually from the United States to
Latin America, and there are substantial remittances to other
areas of the globe as well, most notably, the Philippines,
which, of course, the United States has a long-standing
relationship.
The rapidly expanding market has enormous significance,
both to those sending remittances and to the recipients abroad.
To cite just a few examples: The value of the remittances far
exceeds United States official development assistance to all of
Latin America; and in five countries--El Salvador, Haiti,
Jamaica, Nicaragua, and
Ecuador--it represents more than 10 percent of the Nation's
GDP.
In Mexico, which in 2001 received an estimated $9.2 billion in
re-
mittances, making it by far the largest recipient country, the
dollar value of remittances exceeded both agriculture and
tourism revenues. Indeed, remittances are obviously a major
factor in the economic development of countries to which we
have strong ties
in Latin America.
Our focus today is the domestic aspect of the remittance
market. We will consider the market from the point of view of
those sending the remittances and also an institutional
perspective. People sending remittances tend to be low-wage
earners with modest formal education and relatively little
experience in dealing with this country's complex system of
financial institutions. Like all people who must make important
financial decisions about limited resources, they need
important information and understanding to carry out these
transactions.
This requires that they be fully informed about the options
available to them for sending money home. What fees are
charged, what exchange rate is offered, what alternative
remittance methods are available, and what percentage of the
monies sent will actually be received. The IDB estimates that
in a $20 billion remittance market, that $3 to $4 billion of
the $20 billion is used in fees and other transaction costs.
The reports before us review these various options. They
examine trends in the market and they review transaction fee
structures. There is some recent evidence that fees have
declined somewhat as the market has expanded, and this is
certainly an encouraging development. But much needs to be done
and this is one of the important questions we will be examining
this morning.
We are very pleased to turn now to Congressman Gutierrez
from the 4th Congressional District of Illinois. During his
four terms in the House, he has worked very hard on a number of
issues, and this is one of them. We are very pleased to have
you with us this morning. Before I ask you to give us your
statement, I will yield to Senator Shelby for any comments he
wishes to make.
COMMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman. I would just like
to listen to the witnesses and then comment later.
Chairman Sarbanes. Congressman Gutierrez, we would be happy
to hear from you. Thank you very much for coming over to be
with us this morning.
STATEMENT OF LUIS V. GUTIERREZ
A U.S. REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS
Representative Gutierrez. Good morning, Chairman Sarbanes
and Members of the Committee. It is with great pleasure that I
appear before you today. I would ask that my complete statement
be submitted as part of the record.
Chairman Sarbanes. Your full statement will be included in
the record.
Representative Gutierrez. I appear before this Committee to
share my views on an issue that has been among my top
legislative priorities during my tenure--protecting consumers
from hideous, and often hidden, practices in the international
money transmitting business.
Currently, approximately 28 million foreign-born live in
the United States, the majority of whom are making enormous
contributions to our stability and security, economic and
otherwise. These people came here seeking a better way of life
and, indeed, they are making life better for all of us. At the
same time, they are also working to make life better for people
in their home countries, the relatives who use the money for
basic necessities such as food and shelter, often in times of
crisis.
During the past 20 years, remittances to Latin American
countries has increased not only in volume, but also as a share
of the national income and total imports. This year,
approximately $9 billion will be sent to Mexico via
remittances, representing Mexico's third largest form of
foreign income. However, such transfers are costly due to a
range of fees, many of which are hidden.
Wire transfer companies aggressively target audiences in
immigrant communities with ads promising low rates for
international transfers. However, such promises are grossly
misleading, particularly for those with ties to Mexico or other
Latin American countries, since companies do not always clearly
disclose extra fees charges for converting dollars into the
local currency.
A few years ago, there was a gas explosion in Guatelejara.
You could turn on Univision or Telemundo or the radio and the
wire transfer companies were saying, in this time of need, in
this time of tragedy, we are waiving the fee. Send money,
basically for nothing. What they forgot to tell us is that
there was a 15 percent difference in the conversion fee between
what they bought the pesos for in Mexico and the actual pesos
that people were getting.
If I was a tourist in Acapulco, Mexico, getting a nice tan
on a nice beach and wanted to use my ATM card, I would get 15
percent more pesos for my dollars using that ATM than if I were
an immigrant worker in Chicago making $5.15 an hour trying to
help my family members back in Mexico. I think that is
something that we earnestly should address. These are hard-
working people, doing the hardest jobs, the longest hours, for
the worst pay. And what they are doing is helping their family
members back in their countries of origin, many times in
moments of crisis.
While large wire service companies typically obtain foreign
currency at bulk bargain rates, they charge a significant
conversion fee to their customers. Of course, the companies go
on the futures market and buy the pesos or whatever currency at
the greatest benefit to them and convert, and then later on--so
the whole history of, well, it is going to cost them and the
fluctuations in the market, I think we all know that if we are
converting billions of dollars to pesos, we are going to buy
our pesos when they are very cheap in the market. And we have
the ability to do that because we have the money to do that.
The exchange rate charged to customers sending U.S. dollars
to Mexico routinely varies from the rate set by the Banco de
Mexico by as much as 15 percent. And these profits of
conversion fees are really causing great harm to immigrants.
This is why I introduced H.R. 1306, the Wire Transfer
Fairness and Disclosure Act, a bill that currently has 70
cosponsors in the House. Through the enactment of this bill, we
could ensure that each customer who solicits electronic wire
transfer of money is fully informed of all commissions and fees
charged on all transactions, and has been quoted the exact rate
of exchange available to them.
The bill requires full disclosure of all fees involving in
any transaction of money wiring services. Finally, the bill
would also require companies operating and offering money
wiring services to present each customer with a receipt for
each transaction.
During 2000, Latin American and Caribbean countries
received about $20 billion in remittances from their family
members working abroad. Those $20 billion were sent through 80
million separate transactions, each one charging a fee for each
transaction and conversion fee. In half of these countries,
remittances, as Mr. Sarbanes so eloquently noted, represent
more than 10 percent of the GDP of those countries.
The money sent out to the families abroad was money earned
through hours of hard work. Their efforts are compensated by
seeing that the money they send to their relatives somehow
alleviates some of the immediate financial needs of their
relatives. For those living abroad, this money is a vital help
for food, housing, and education. But a sizable portion of
these savings never make it from the United States to these
countries. Instead, it is claimed in fees--most in the form of
punishing exchange rate fees--that remittance services levy on
immigrants who wire money.
The fees accompanying remittances made through wire
transfer companies can sometimes reach 30 percent--and I want
to underscore, 30 percent--excluding the amount lost through
the exchange rates. Remittances create dependence and deepened
economic inequality. Most customers, though, have no
alternative. Few have bank accounts.
Most remittance companies advertise low service fees for
international transfers--but that cost can double because of
the hidden fee that is charged when dollars are converted to
foreign currency at poor exchange rates. For instance, let's
say that it costs 12 cents to buy a Mexican peso. The wire
transfer companies, however, charge their customers as much as
a penny more for that same peso. The difference, which is
called the foreign exchange spread, is pocketed by the
companies. With enough transactions, Senators, the money adds
up to hundreds of millions of dollars in profits for these
companies.
The two biggest companies who offer wire transfers claim
almost 90 percent of the $41 billion a year in money transfers.
Fueling the profits are hefty fees paid by some of the
country's lowest-paid workers. It truly costs them dearly.
Using one of the two biggest wire transfer services to send
$300 from the United States to Mexico, for example, can cost
$41, which is more than a day's pay at minimum wage to transfer
the money.
Currently, Wells Fargo, First Bank of the Americas, credit
unions, and other financial institutions offer programs to help
more immigrants become part of the banking system. These
institutions, by accepting identification cards issued by the
Mexican consulate, are helping thousands of people around the
Nation who would be forced to turn to payday lenders and check
cashing vendors, who in most cases, charge outrageous fees for
services. At the same time, it protects the unbanked from being
targets of crime, robberies, and other abuses.
Finally, we must not forget that by helping consumers from
being targets of hidden and excessive fees charged by money
transmitting businesses, we are helping them save some cash
that could then be used by them as a source of investment and
future savings in the United States.
I want to say that there are banks and institutions,
Members of the Committee, and we should try to find a way to
help our banking system help those immigrants.
Today, in Chicago, we have Banco Populare. In the United
States, we have Bank of the Americas. We have credit unions
that are accepting the identification card issued by the
consulate offices of Mexico. They come to their Congressman's
office and we get them a tax ID number from the IRS and they
are fully then identified. And I think it is better.
And then what we do is we give them what everyone on this
panel would use. I am sure if we wanted to help our mom or our
dad or our sister, we would say, mom, sister, I am sending you
the ATM card. Here is the number. Go to any ATM in your country
and get the best exchange rate you can get from your brother,
your sister, your family member here in the United States.
We should find ways to help immigrants. They are working
hard, and I know that that is the purpose of this Committee.
Thank you all for allowing me this generous time to speak
before you.
Chairman Sarbanes. Well, thank you, Congressman Gutierrez.
We have been pushing the Treasury to develop this first
accounts program, to bring the unbanked into the banking
system. And the Treasury has now put out requests for proposals
to banks and to community groups to join together in a
partnership to approach the Treasury to receive some of these
grants which would help underpin the program and to get it
launched.
We think that is potentially a very important initiative.
Its end objective, of course, is that people who are now
outside of the banking system and have to function through a
lot of establishments that are not in the center of the
financial maintain will be able to actually like everybody
else, work through established financial institutions. We very
much hope that initiative will take off.
I have no questions. We very much appreciate your
testimony. But I will yield to my colleagues.
Senator Shelby.
Senator Shelby. I appreciate the Congressman appearing
here, Mr. Chairman. I think he is on to something. What we are
looking for is a little sunshine out there where people can
know what is happening to their money, and also competition.
The more competition that is out there, the more they will be
able to send home. I think you are interested in both, aren't
you?
Representative Gutierrez. I think sunshine makes America
great. Let people know, and the competition will arise.
Senator Shelby. Thank you.
Chairman Sarbanes. Senator Akaka.
COMMENTS OF SENATOR DANIEL K. AKAKA
Senator Akaka. Thank you, Mr. Chairman. I certainly want to
thank the Congressman for his statement. He reveals a problem
that we have all over the country, including Hawaii. As you
know, we have a large Filipino population in Hawaii.
Representative Gutierrez. Yes.
Senator Akaka. They send a lot of money back to the Philip-
pines, so we have that problem, too, and that is my interest in
this. I have a statement, Mr. Chairman, to make at the proper
time.
Chairman Sarbanes. When the Congressman leaves, I will
yield to my colleagues for statements. We missed that in the
beginning and I apologize for that.
Senator Carper, do you have any questions?
COMMENTS OF SENATOR THOMAS R. CARPER
Senator Carper. Just a word of welcome, thank you for
joining us this morning.
Representative Gutierrez. Thank you.
Senator Carper. It seems to me in listening to your
testimony, and reading about it beforehand, there are any
number of ways that people who are living in this country can
send money back home, through avenues that are fair to them and
to their loved ones at home.
Most of the people I understand who are sending money back
to their families and relatives actually have banking
relationships that are established here in this country. I
understand that if they were to more frequently use those
existing banking relationships, that they and their families
would be better off ?
Representative Gutierrez. They should, but many of them are
part of the unbanked of America. They do not use banking
facilities, and many of them, needless to say, are undocumented
workers here in this country. The people who pick the apples
that we have for breakfast or the clean dish that we eat it
from, or the clean floor that we walk on--and they are afraid
of the system. So there is a fear.
What I have seen is, as banking institutions come forward,
so do they. There is a part of outreach that has to happen,
both from the banking institutions and the community. Let's
face it, there is a lot of fear many of them are undocumented.
There are between five and eight million undocumented workers
in this country sending money back to their relatives in their
countries of origin.
Senator Carper. Thank you. Thanks for joining us this
morning.
Chairman Sarbanes. Senator Miller.
COMMENTS OF SENATOR ZELL MILLER
Senator Miller. Thank you, Mr. Chairman, for holding this
very timely and important hearing.
Something has to be done about the outrageous costs of
these wire service transfers. I appreciate Representative
Gutierrez for helping us and leading us toward a solution.
My question is, is it true that the families back in Mexico
do not know the original amount that the person in the United
States intended to send?
Representative Gutierrez. Yes, that is true. Let me just
briefly share with you.
There was a resident of Chicago in Mexico who called his
wife and said, honey, send me $300. I need $300. His wife
promptly took the money down and she paid the $18 that was
supposed to be the wire transfer fee. So she gave $318. She
said, my husband is going to get $300. He called her back
furious and said, honey, I did not ask you to send me $250, I
need $300. When he got back home and saw the receipt, he could
see the exchange rate in front of him.
Senator Miller. Right.
Representative Gutierrez. He said, my wife must not have
sent me the $300 that I asked for. He in turn filed, along with
others, a lawsuit which was settled out of court, in which
MoneyGram and Western Union settled. They gave money to the
Mexican-American Legal Defense Fund and they gave money to
numerous organizations. They are promising to pay back millions
of dollars. Their advertising has changed somewhat. And when it
went to court, it was settled and the companies recognize it.
We have to stay on top of them.
I think Senator Shelby's point about sunshine is a very
good point because then, Senator Miller, people would know what
they are getting charged, and then they can move around, as we
get more sophisticated as consumers.
Senator Miller. Thank you.
Chairman Sarbanes. Well, Congressman, thank you very much.
Representative Gutierrez. Thank you.
Chairman Sarbanes. I do want to note for the record, this
initiative you undertook in Chicago with your citizen
workshops, to help prospective citizens really meet all the
various legal requirements. I gather that model is now being
followed or copied by a number of your fellow Congressmen in
other cities across the country. I think that was a terrific
innovation and I did not want you to leave without commending
you for it.
Representative Gutierrez. Thank you, Senator. I think we
all know as public officials how hard it is.
I have a townhall meeting on housing or on Social Security
or on Medicare and I say, come on down. And people do come
down, 40 or 50 of them. Yet, 3 weeks ago, Senator, I had a
townhall meeting on becoming a citizen and 700 people showed
up. Seven hundred people with $250 checks, and another $15 to
take their pictures. When was the last time anybody called a
community forum and people showed up with $265 to attend a
community forum of a politician.
They do. Why? Because they are dying to become citizens of
this country and all you have to do is extend a hand and say
you are ready to help and they come forward. And I think that
is one of the greatest American traditions that we have and one
that obviously you exemplify, Senator Sarbanes, and so many of
us here in the Congress of the United States.
Thank you so much for having me this morning. I look
forward to working with each and every one of you.
Chairman Sarbanes. Thank you very much.
If we could now go to our next witness. I think that we
will take everyone as one panel. There may be votes. And that
way, we can get people's testimony in before that occurs. We
had originally been thinking of doing two separate panels, but
I think this makes more sense.
Senator Akaka, do you have a statement you would like to
make?
Senator Akaka. Yes, Mr. Chairman.
Chairman Sarbanes. We would be happy to hear from you.
Senator Akaka. Mr. Chairman, I want to thank you very much
for conducting this very important hearing.
As we know, we have discovered the importance of financial
literacy and education for people in our country, and
particularly, today for remitters. And so this is a very, very
important hearing.
Today, we will examine remittances and issues raised during
the Committee's initial hearings on financial literacy.
Immigrants nationwide often send a portion of their hard
earned wages to relatives in their communities abroad. In many
cases, the total cost of remittances can be 10 to 20 percent of
the value of the transaction. People who send remittances are
often unaware that the fees and exchange rates used in the
transaction reduce the amount to the recipient.
The State of Hawaii, as I mentioned earlier, is home to
significant numbers of recent immigrants from many nations,
including the Philippines. And in Hawaii today, Filipinos
represent the third largest group. The Philippines is one of
the largest destinations for remittances from the United
States. The gross value of remittances to the Philippines is
presently at $3.7 billion, and a large portion of that amount
comes from the people of Hawaii.
The examination of the issue of remittances is extremely
timely as immigrants have less money to send to their families
during the current economic recession. Consumers cannot afford
to be un-
educated regarding financial service options and fees placed on
their transactions.
Remittances can be used to improve the standard of living
of recipients by increasing access to health care and
education. Funds are also collected by voluntary hometown
associations and used for community development projects, as we
will learn more about during this hearing.
Many immigrants are unbanked, as was mentioned, and lack a
relationship with a mainstream financial services provider. The
unbanked are more likely to use the check cashing services,
which charge an average fee of over 9 percent. They are also
more likely to utilize the services provided by payday and
predatory lenders. The unbanked miss the opportunities for
saving and borrowing at mainstream financial institutions. If
unbanked immigrants use the remittance services offered by
banks and credit unions, they may be more likely to open up an
account.
I thank the witnesses for appearing today and look forward
to hearing their recommendations. Again, Mr. Chairman, thank
you for conducting this hearing.
Chairman Sarbanes. Thank you, Senator Akaka, and it is a
very important perspective you have brought.
Senator Carper, did you have a statement?
Senator Carper. No, thank you, Mr. Chairman. I just want to
thank the witnesses for being with us today.
Chairman Sarbanes. Senator Miller.
Senator Miller. I have no statement, Mr. Chairman, thank
you.
Chairman Sarbanes. All right. We are happy to turn to the
panel. We will hear first from Mr. Sergio Bendixen, President
of Bendixen Associates, a public opinion polling firm.
He has overseen hundreds of studies, many involving the
Latino population. Before he began his career in polling, Mr.
Bendixen was Political Analyst for Telemundo/Univision and for
CNN, the Spanish Services CNN.
Prior to that, he worked here in the Congress as Chief of
Staff and Press Secretary for Congressman Lehman of Florida, a
very dear friend to many of us. And I also want to note that he
was the National Campaign Manager for our colleague, Senator
Alan Cranston, who served with such great distinction on this
Committee for many years and Alan's presidential campaign.
We are very pleased to have you here this morning, sir. The
full statements of our witnesses will be included in the
record, and we very much appreciate the effort that has
obviously gone into that.
If you could summarize in, say, 5 to 10 minutes, then we
can get all of the presentations in. We will have some time for
questioning as well. So please go ahead.
STATEMENT OF SERGIO BENDIXEN
PRESIDENT, BENDIXEN & ASSOCIATES
Mr. Bendixen. Thank you very much, Mr. Chairman, and
Members of the Committee, for the opportunity to testify on an
issue that is so important to millions of immigrants, Latin
American immigrants, that live in this country, and to the
economic future of Latin America.
The poll that I am going to talk about today was
commissioned by the Multilateral Investment Fund of the Inter-
American Development Bank. I want to assure you that the
highest standards of public opinion research were adhered to.
We talked to 1,000 Latin American immigrants during late
November, early December of last year. The margin of error for
the poll was 3 percent and we did everything in our power to
simplify the questions as much as possible. We tested and
retested the questions to make sure that this universe, this
sample, which comes from a low socioeconomic level, understood
every question. The poll, as you can see here, is made up of
100 percent adults 18 years or older. They were all born in
Latin America, now living in the United States, and they all
had family in Latin America.
Let me summarize the major findings. I should also mention
the countries of birth and that 67 percent came from Mexico.
The other third came from almost every country of Central
America, South America, and the Caribbean, very similar to the
census.
We can be pretty certain that this is a very representative
sample of Latin American immigrants living in the United
States. Of course, we did not interview Puerto Ricans, who did
not have this type of a problem in terms of cash remittances.
My first major finding, and this may not be a great
surprise to you, but there is a large percentage of Latin
American immigrants who belong to the lowest socioeconomic
level in our society.
As you can see from this graphic, 41 percent, the largest
group, make less than $20,000 a year. That is about $300 a week
that they have to live on. Another 23 percent make between
$20,000 and $30,000. Only 21 percent we might consider to be
middle class and lower middle class at that, making a little
more than $30,000 a year.
Chairman Sarbanes. What are the dates of this poll? Did you
say at the outset?
Mr. Bendixen. Late November, early December of 2001.
These people work in menial jobs, the least attractive
jobs, as hotel maids, parking attendants, restaurant busboys,
day laborers, agricultural workers. Latin American immigrants
are some of the hardest workers in the country, yet receive
some of the lowest wages.
Point number one, this is a very low socioeconomic group,
and as you can see here, they also have a very low level of
education. Only 10 percent of them have a college degree and 71
percent have a high school diploma or less.
We asked this sample of 1,000 respondents representative of
the Latin American immigrants in the United States whether they
sent money to their family in Latin America. Sixty-nine percent
said yes, 7 out of 10. A little more than 2 out of 3 said, yes,
that they sent it. This represents about 10 million people, 10
million Latin American immigrants that are involved in this
process. And as you can see from this graphic, the people that
send the most money are the youngest--73 percent of those 18 to
34 say they send money to their family--and the poorest. It's
remarkable.
The ones that make less than $20,000 a year send more money
to Latin America than the ones that are now basically middle
class, the ones that make over $40,000. It is the youngest and
the poorest that are sending the most money, and the money most
often.
As you can see from this graphic, they send it pretty
regularly. Our analysis of the results show that the average
Latin American immigrant sends money to their family seven
times a year. And
almost half, 44 percent, send it every month religiously to
their
family. It is very, very impressive.
As you all can imagine, this is not something that just
started recently. Fifty-four percent of those that we
interviewed, a little more than 5 million people, say that they
have been doing this for 5 years or more. So this is something
that has been happening now for quite some of time.
Finally, we asked them, how much do you send every time
that you send money?
The average figure that we came up with was $200 every time
that there is a cash remittance sent. That is how much they
send. That is the average or the mean remittance. And as Dr.
Orozco will tell you in his report, which analyzed the whole
matter from a more academic point of view, basically, he came
up with the same results in terms of the $200 and in terms of
the seven times a year. I think we can be pretty certain that
these results reflect what is going on in terms of the cash
remittance process.
How do they send this money to Latin America? Forty-one
percent said that they use the international money-transfer
companies--Western Union, MoneyGram, were the companies that
were mentioned the most. Another 29 percent said that they use
international couriers, special delivery systems, and sometimes
even their families or their friends that travel back to Latin
America. But only 20 percent said that they use the more
traditional financial process. In other words, banks and credit
unions.
We have 80 percent of the people sending money to Latin
America through either the money-transfer companies or through
couriers or special delivery companies.
It is fascinating to see that cost is a major factor here.
People that send their money through the international money
transfer companies, when they send $200, most of them know how
much they are paying in fees here in the United States. Forty-
two percent said that they were paying between $10 and $20. The
small group that sends their money through banks and credit
unions, are paying a lot less. They are paying less than $10
every time they send $200. There is a huge cost differential
between the people that use the money-transfer companies and
the banks and the credit unions in terms of the initial fee.
Now, we go to what I think is the most significant finding
of the study. An overwhelming majority of Latin American and
Hispanic
immigrants are unaware, they do not know, as Congressman
Gutierrez was pointing out, that their families in Latin
America receive less money than what they send from the United
States. And when these Latin American immigrants are informed
that their families get a lot less than what they send because
of the exchange rates, because of the surcharges, the fees, the
commissions, when they are told the truth about what is going
on, they feel that the costs are excessive and it is unfair.
Let's look at the numbers quickly. Fifty-eight percent of
the people we interviewed that send money regularly to their
families in Latin America said that they thought that their
families, when they pick up the money, they get the full
amount. And another
9 percent just did not know. Only one third of the people we
interviewed knew that their families got less than what they
sent. But the other two-thirds are ignorant--they just do not
know.
As the Congressman was saying, full disclosure is such an
important issue.
Chairman Sarbanes. This is less after they paid the fee.
They know they are paying the fee.
Mr. Bendixen. Everybody knows about the fee.
Chairman Sarbanes. So the fee is over and above what they
are sending. Correct?
Mr. Bendixen. The specific question was, when your family
picks up the money in Mexico or Peru or Ecuador--we plugged in
the name of the country where they were from--do they pick up
the full amount, the $200 that you sent--we again plugged in
the amount of money that they said that they sent--or do you
think that they get less?
And 58 percent thought they received the same amount. Only
33 percent thought they got less. As you can see, there is a
big difference between the country of origin. Mexicans seem to
be better informed. Almost half knew that their family gets
less money when they pick up the money in Mexico.
But Dominicans, Central Americans, South Americans, 10
percent or less knew that their families, their moms, their
wives, pick up a lot less money when they pick it up in those
countries.
There is a very great difference in terms of the level of
information that exists in terms of the amount of money that is
paid. And here's the question about, when we informed them
about the fact that they not only pay their fee, the initial
fee here in the United States, but that they also, that there
are extra charges and lower exchange rates in Latin America. We
asked, do you think it is fair? Do you think the costs are
excessive? Or do you think the service is worth it because the
money arrives fast and it is safe? While 59 percent said it is
not fair, the costs are excessive. Only 25 percent thought it
was fair.
Finally, the last major finding, only 56 percent of Latin
American immigrants residing in the United States have a bank
account. The other 44 percent do not. This is interesting. It
is high compared to Latin America, where only 20 percent of
people have a bank account. But, as you know, it is much lower
for the general population in the United States, where it is
85, and higher, in terms of people having a bank account.
Let's see who has one and who does not.
It is the noncitizens who do not have it. Fifty-four
percent do not have a bank account. The younger immigrants, 68
percent do not have a bank account. The poorest ones, the ones
that make under $20,000, that do not have a bank account. And
if you remember, those are the people that send the most
remittances.
As you might remember from when we were looking at that
point, it was the young and it was the poor and it was the
noncitizens that send the most money, the most often.
There is a tremendous relationship and an important
relationship or correlation between the people that have bank
accounts and the methods that they use to send money to Latin
America.
The last graphic--``Why do not you have a bank account?''
Most people told us that they did not think they needed one
because they do not have anything to put into it.
Unfortunately, they need more information because there is a
lot of other things that you can do with a bank account. Others
brought up process issues--they did not have proper documents,
the process was too complicated, they do not speak English, and
they do not trust banks.
I think some of the Argentineans we interviewed said they
do not trust banks.
[Laughter.]
To finish up, let me give you very quickly a couple of my
recommendations, having looked at this study.
Latin American immigrants should be informed accurately
about the full cost of transferring money to their home
countries. This should be done in a way that is easy for them
to understand, keeping in mind the low educational level.
Full disclosure should unleash market forces that hopefully
will result in a significant reduction in the cost of sending
money to Latin America.
It is unconscionable to me, and I am giving you my personal
opinion, that the poorest of the working poor in our society,
most of them making less than $300 a week, are paying somewhere
between 10 and 15 percent surcharge every time they send money
to their family in Latin America.
The second one, and I know that your Committee is working
on this, the banking community of the United States should
seriously consider funding a massive PR campaign to inform the
Latino immigrant community of the benefits of opening a bank
account, including the significant savings in the cost of money
transfers to their home countries, if they use the banking
system.
Hopefully, the banking industry can also look at some of
the process issues that make it difficult for immigrants to
open up a bank account in the United States.
Again, thank you so much for the opportunity to present my
testimony, and of course, I will be here for questions later.
Chairman Sarbanes. Well, thank you very much. Those charts
are very useful and helpful.
We will next hear from Dr. Manuel Orozco, who received his
doctorate from the University of Texas, in Austin. He is
currently the Project Director for Central America for the
Inter-American Dialogue, and before he was a Professor of
Political Science at the University of Akron. We are very
pleased to have this author of some very important studies here
with us today. Dr. Orozco, we would be happy to hear from you.
STATEMENT OF MANUEL OROZCO, PhD
PROJECT DIRECTOR FOR CENTRAL AMERICA
INTER-AMERICAN DIALOGUE
Mr. Orozco. Thank you very much, Mr. Chairman. I am very
happy to be here to discuss this particular issue, which is of
relevance to millions of immigrants and relatives.
I guess the way to start this is perhaps starting with what
Senator Akaka mentioned regarding financial literacy. This is
an issue that deals with what I call economic citizenship.
Financial literacy is one component that is very relevant to
this issue.
But, in general, as you mentioned before at the beginning
of this discussion, remittances have signified a significant
value for the recipient countries in many ways. You mentioned
that in some cases, in some countries, the value of remittances
represents about one-tenth of the national income of different
countries. It is not only the issue of the aggregate volume of
remittances that bears significant relevance, but also, what it
signifies in many ways.
In this sense, it is important to realize that remittances
have been a major component of the process that has been taking
place in Latin America, especially in Central America and
Caribbean countries. And it is through that labor migration and
through
remittances that these countries have been able to incorporate
themselves into the global economy in a more sustained manner
sometimes than in cases of foreign trade. And the issues that
the remittances have this relevance at the level of the
national econ-
omies, but also it is a flow that continues growing in a steady
manner.
If we look at the process on a month-by-month basis, we
will find out that it is something that continues significantly
for various countries. This is just a sample of the monthly
flows that have been going from remittances, from 1999 to the
present. And it is something that has been going on for many
years.
But, I guess more importantly is the issue that, on the one
hand, we are talking about, as Sergio mentioned, low-income
people, people who earn $20,000. This is on average. The
average income of Latinos is about $25,000 a year. They are
sending about 10 percent of their income to their home country.
Yet, the money-transfer process, the process of sending money
continues to be costly, but also imperfect. There is a strong
relationship here with the issue that this is an imperfect
market in which cost is penalizing the sender, but it is also
penalizing the recipient.
We did a study basically of about a hundred companies
sending money to Latin American. We dropped a few companies,
about 20 of them, because they were out of the market by the
time we did the study. So we ended up with about 70 or 80
companies.
Some of the findings showed very important issues. One of
them has to do with, definitely, there has been a decline in
the cost of sending money. Three years ago, it used to cost
about $30 to $40 to send the average amount, which is $200.
We paid attention to three amounts to send two remittance
types--$150, $200 and $300--and then we paid attention to the
$200 figure because that is the average that people say that
they send. There we saw that there has been a decline. However,
the range of the cost continues to be high.
First of all, the range goes from $7 to $26 for sending
$200. We have seen that fee charges decrease with competition,
and this varies from country to country. For example, in the
case of Mexico, where competition has been growing
significantly, there has been a decline in charges. We also see
that banks and credit unions are getting involved in the money-
transfer system. However, they are still relatively engaged in
the process, and there are different reasons why this is taking
place.
But it bears paying attention, particularly when we are
talking about that half of the population is unbanked. And in
other cases, we have seen that the percentage of people
unbanked is probably higher than that. Yet, the costs continue
to be high.
If we look at about nine different countries that
immigrants send remittances to, as you can see in the chart,
the cost of sending remittances is significantly high--it is on
average--and this is important to stress, the average amount is
10 percent, the value of the principle.
Yet, if we look at the fact that the companies that have
the largest market share happen to be also the companies that
charge the highest fees, the fees that go above the average, we
are talking about. But, as you can see, the most expensive
country in this case is Cuba. There is a strong relationship
between market and cost here. There is a monopoly over the
money-transfer process on the receiving end. Only the state of
Cuba is the one in charge of distributing the remittances.
But we see in other countries that costs continue to be
high, and this is an important issue. We can ask, in
relationship to what is this high? Because some people can say,
well, sending home $200 for $20 might not be very expensive,
but first, if we think in terms of the sender, who is earning
about $1,500 a month, at the household level, and has to incur
$20, that is a lot of money.
Second, that the real cost, the operating cost of sending
remittances for about a $200 figure ranges from $2 to $5. Then
there is a $15 differential that we do not know where it is
going. In relation to that, we have the exchange rate issue,
which is also of significant importance.
I am an immigrant, too, and I send money to my parents once
a month. We send them remittances. My mother doesn't know that
she is being penalized, not only by the exchange rate, but
sometimes by other fees through the way in which we are sending
her the money. They are middle-class people, and yet, they do
not know, and many Latin Americans do not know how much they
are being penalized by these costs.
There are different kinds of hidden costs that people do
not realize. In the rural areas, for example, you are charged
sometimes an extra fee because it is in the rural sector. The
other issue is that if you are sending money in places, for
example, like Wyoming, the cost of sending remittances is far
higher than sending it from California. So this issue is of
major importance.
The other issue is that, definitely, money-transfer
companies are the ones that charge more money. As you can see
here, 60 percent of banks or credit unions charge under $10.
But yet, they are the least involved in the process.
On the other hand, we see that over 60 percent of money-
transfer companies charge about 10 percent of the value of the
remittance to be sent. So there is a major cost incurred by the
sender.
The question is, what can we do about these issues? I think
there are different ways to approach this problem. I think the
point of departure deals with the banking component.
Definitely, we need to find ways to bank the unbanked. But not
only to deal with the unbanked. The reality is that even the 50
percent group of people who have bank accounts do not know that
they can get better deals through their financial institutions.
And again, this is an issue of financial literacy that applies
not only to the unbanked, but also to the banked.
We do not know as Latinos--actually, not only as Latinos. I
think as minorities--we really know very little about the
benefits of banking. And there are different reasons why.
Sometimes banks really do not care very much about the little
people. But also, there is a lack of education.
The most important institution that could help migrant
communities, credit unions, are still unfamiliar, relatively
speaking, with the process of attracting or reaching out to
migrants to get into the credit union system.
So, we need to focus in ways and with strategies to bank
the unbanked. There are other strategies that we can think of.
One of them that is very important is that we need to oversee
money-transfer companies.
As I say, this is an issue of financial literacy of
economic citizenship, but it is also an issue of corporate
responsibility. Large companies that send money abroad through
their businesses often charge accounts charges that they do not
even report to you about the exchange rate, and this is a very
serious problem.
I think it is about 1 in 10 companies that really reports
the exchange rate that they are applying in the money transfer.
There are other issues that bear importance. One of them
has to do with establishing bank liaisons between U.S. banks
and banks on the receiving side.
Finally, we did some projections about what would be the
impact in terms of the effect in reducing transaction costs.
And just to give you an illustration of that, we want to pay
attention with the first point, which is that if we were to
reduce the charges of sending money by 50 percent or reducing
it to $7, the flow of remittances could increase by 7 to 10
percent. This would amount to about
1 to 3 percent of the GDP of the recipient country. So this is
quite significant. We are talking about hundreds of millions of
dollars.
I am talking here about the receiving side. But the sending
side would also benefit once it would be incorporated. You
would be able to save more money, definitely, from the charges,
but also, you would be able to enjoy the benefits of being
banked.
Thank you very much.
Chairman Sarbanes. Thank you. Very interesting testimony.
We will now hear from Dr. Raul Hinojosa-Ojeda, the Founding
Research Director of the North American Integration and
Development Center at UCLA. Previously, he worked with
Representative Esteban Torres to create the North American
Development Bank. Dr. Hinojosa received his Doctorate in
Political Science from the University of Chicago, and he has
worked with many community and immigrant groups focusing on
financial education, particularly on this issue of remittances.
We are very pleased to hear from you, sir.
STATEMENT OF RAUL HINOJOSA-OJEDA, PhD
PROFESSOR OF INTERNATIONAL AND
REGIONAL DEVELOPMENT
UCLA SCHOOL OF PUBLIC POLICY
Mr. Hinojosa-Ojeda. Thank you, Senator. And I really
commend the Committee for this work that they are doing right
now. I think it is extremely important, and I would like to
make three points.
One of them about the importance that I think this issue of
remittances is going to increasingly play on a worldwide scale
as we begin to confront the issues of global poverty. I would
like to say something about that.
The two other questions, one is, while disclosure and cost
reductions I think are important, I think the focus really has
to be on this financial intermediation, the increased banking
and strategies for that. And I would like to point out some
strategies that we are working on in California with Mexico and
Central America that could help us move in that direction.
First of all, in terms of the importance of this issue, we
are now launching a new world trade organization round on trade
liberalization where most of the argument is that it is going
to be able to reduce poverty through increased trade. And that
is true, in fact.
A lot of the work that I have done as a professor at UCLA
is comparing relative impacts of trade liberalization to other
policy approaches, such as movement toward improved immigration
laws and the intermediation of remittances. I can report to you
that our research is showing that we have been seriously
underestimating this important area for policy, especially when
you compare it to perspectives like trade liberalization as an
attack on poverty.
Migration and remittance is a more direct way to attack
poverty worldwide and to improve the conditions in immigrant
sending regions and to reduce the pressures for low-wage
migration.
An example right now is that there are 30 million
immigrants here in the United States. If you do a full
accounting of that, that really turns into close to $1.5
trillion of value-added. That is, in a sense, one of the
largest countries in the world right there. And if you add up
all the immigrants worldwide, this turns into actually one of
the third largest countries in the world collectively.
The policy alternative, and in my testimony, there is much
more detail on that, that I think we have to continue to focus
on, is legalization of status, moving immigrants out of the
shadows is good for both the United States as well as the
immigrant-sending regions. And orderly, legal process of growth
of immigration based on the demand that we have in the United
States and other developed countries is extremely beneficial,
both to us, as well as these developing regions. That right
there produces a much bigger kick in terms of global growth
directly toward poverty than all trade liberalization
discussions.
Finally, the improved intermediation and development
leveraging through remittances, which I think we are only
beginning to scratch the surface on, is much more significant
than the types of financial flows that will come through direct
foreign investments and multilateral institutions directly
helping the poor.
Having said that, I turn to the issues specifically about
remittances and their costs and intermediations. And although I
completely support Congressman Gutierrez's approach, we have
been doing this in California for a number of years, trying to
pass this type of legislation that would increase the
disclosures and lower the costs, the key issue is increased
banking and intermediation.
I commend the Committee and the work that they have done on
first accounts. I think we need to go beyond that. Let me tell
a little bit about what I think.
The real key issue here is that the banking community
itself,
and even the credit union community, I do not think have yet
understood the full extent of the business opportunity that
this
represents.
We are trying to set up an accounting system of the
migration and remittances between the United States and Latin
America. The full savings amounts that would be represented by
remittances is highly under-estimated. Most people think that
remittances are really just a quick pass-through for
consumption. The reality of it is, if you do the accounting
properly and you create institutions to capture this flow, it
actually produces quite a large amount of money available for
securitization that banks on both sides of the border could
very much look at as a business opportunity. The other issue is
in terms of the financial services that are potentially
offered.
Most of the survey instruments that are quoted say that
remittances, only about 1 percent of them are used for
investments.
Well, actually, that is a mischaracterization. Our research
is showing, it depends on how you ask the question. The real
issue is, and we are doing household surveys at community
levels in the immigrant-sending regions in Mexico and Central
America--two issues.
First, if you did not have the remittances, most of them
will say, how do you use it? Yes, I spend it on consumption.
What it does not tell you is that that frees up a lot of other
resources for investment purposes and for other types of
economic activity.
The second is what it does for the community as a whole.
This increases flows of funds into these immigrant-sending
regions, which are very much available for investment. So what
we are seeing now is that in some communities where better
financial intermediation occurs in places like Mexico,
remittances over the last 10 years have significantly reduced
poverty and marginalization. In some they have not. The key
issue is what type of financial intermediation institutions are
available.
Another quick point is insurance. In fact, what we know now
theoretically and on the research is that most migration occurs
primarily for the purposes of gaining some savings and
investment for the future, as well as insurance to reduce
volatility that most people experience in the immigrant-sending
regions. These are avenues and opportunities for financial
institutions. Some banks are finally beginning I think to get
at that.
Let me turn to my third point. And that is, these new
policy alliances out at UCLA that we are trying to develop in
two areas. One is new financial mediations and another is the
leveraging of development funds through the hometown
associations.
On the first issue in terms of new transnational banking
alliances, we are working with California-based credit unions,
as well as California-based banks. The Citicorp just recently
bought Bonamex, for example, and they have a unit called the
California Commerce Bank from which all the research that we
have shown actually has the cheapest mechanism available, which
is you set up an account on the United States side and you set
up an account on the Mexican side. And the transfer from one
account to the other is on the order of about $5.
Wells Fargo just set one up with Bancomo. They are charging
$10. And actually, if you go into the technology of this, there
is still quite a bit of reduction that is still available.
But that model where you create bank accounts on the United
States side and on the Mexican side or on the Central American
side, linked, I think is clearly what meets the objective that
we want to achieve, which is getting people into financial
intermediation on both sides of the border and then really
making this a leverage possibility for savings and investment.
And we are working with hometown association networks in
California to work with the banks and the credit unions. The
credit unions--people like them. They can potentially also
reduce costs. But they are actually not very involved at this
point in this market. There really needs to be a great deal of
interest. I think your Committee pushing light on this could
make a big effort on that.
Finally, something that Manuel mentioned in his excellent
paper, is the increasing role on the organized immigrant
networks in the United States. In fact, history, we even know
that this was very important, back in the last century with the
Italians, and you mentioned the Greeks.
The Spanish networks in Europe, through their credit
unions, was fundamental for why we now in Spain have closed the
income gaps dramatically within Europe. Whereas, in North
America, they have remained exactly as unequal as they were 40
years ago. So this issue of working with the immigrant networks
and helping improve their financial opportunities is
fundamental, both for the rich countries, as well as the
immigrant-sending countries.
The hometown associations are taking the lead and showing
how to do this. They are raising money at unprecedented rates.
In California, we are now estimating that there has been in the
last 5 years over $50 million raised by the hometown
associations directly mobilizing social investments and
increasingly productive investments in their immigrant-sending
regions, in their hometowns, their villages.
Which, actually, if you compare, they outstrip government
support for many of these projects by a 10:1 margin. In fact,
governments are now turning in Latin America to these financial
flows as something that they want to leverage and they want to
match on a 3:1, 2:1 basis, to try to increase these types of
activities.
This is something that the United States should be thinking
about as well. In fact, when Senator Bob Graham was Governor in
Florida, he created something called the Florida Association
for Volunteer Action Corps in Central America and the
Caribbean, a long name. But what they were able to do is
actually match U.S. NGO's that want to work with the immigrant-
sending regions.
I think that this is an interesting model that has been
supported in Republican and Democratic Administrations in
Florida, something that we should look at at a Federal level
that I think would make a lot of sense in terms of putting
light on these types of new initiatives, as well as new
financial institutions.
The IDB I think is doing a phenomenal job in terms of
leading the way in terms of how the Washington international
financial institutions can also play a role.
But I think it is something that is going to be a major
inter-
est of the developed countries in the future if we are going to
deal
with the fundamental challenge of this century, which is the
clos-
ing of these large income gaps between developed and developing
countries.
Chairman Sarbanes. Good. Thank you very much.
Our concluding panelist will be Dr. Susan Martin. She is
the
Executive Director of the Institute for the Study of
International Migration at the School of Foreign Service here
at Georgetown University. Dr. Martin also served as the
Executive Director of the U.S. Commission on Immigration
Reform. She has taught at Brandeis and at the University of
Pennsylvania. She actually is a leader in the subject of global
migration and has had a particular focus as well on the
remittances issue.
Dr. Martin, we are pleased you are here with us this
morning.
STATEMENT OF SUSAN F. MARTIN, PhD
INSTITUTE FOR THE STUDY OF INTERNATIONAL MIGRATION
SCHOOL OF FOREIGN SERVICE, GEORGETOWN UNIVERSITY
Ms. Martin. Thank you. Well, the difficulty of being the
fourth in a line-up of experts is that many of my points have
been taken. But I think part of my role here has been to----
Chairman Sarbanes. We put you there because we figured you
would be the clean-up hitter.
Ms. Martin. I will try.
[Laughter.]
I will also try to place some of what we have been hearing
about Latin America into a global perspective.
Chairman Sarbanes. That would be very helpful, yes.
Ms. Martin. According to the most recent statistics from
the International Monetary Fund, globally, remittances now
exceed $100 billion per year. Remittances flow either in terms
of transfer of funds back to home countries or actual
compensation of foreign workers into home country banking
accounts. Sixty-two percent of that $100 billion now go to
developing countries.
I agree completely with my colleagues about the importance
of remittances as a potential tool for development of those
countries. For many of the countries, it exceeds foreign direct
investment, foreign trade, and clearly exceeds very
significantly foreign development aid that is provided on a
government-to-government basis.
During the course of the last decade or so, I have looked
at the remittance flows and their impact on countries as
diverse as Mexico or the Dominican Republic in this hemisphere;
the Philippines, where it clearly is one of the most important
inputs and financial resources, Yugoslavia, where in the
rebuilding of Serbia after the fall of Milosovich, remittances
are again coming up as a very important issue, and in Africa. I
have looked at it in places like Mali, very recently, just a
few weeks ago, in fact, and Somalia and Somaliland, over the
course of the past decade. So it really has an impact that is
very significant, and not just in this hemisphere, but
globally.
And while we are one of the major sources of remittance
flows, many of these countries are receiving remittances from
the European countries, Canada, Australia. So it is a global
source of transfer, both in terms of where the immigrants are
who are sending money back, as well as their families in
developing countries.
I would argue that this is likely to increase in the
future, this remittance flow, largely because, as I see it,
immigration will increase. International migration will be
increasing in the future.
The International Organization for Migration, in some work
that I have done for them, has estimated that, currently, there
are more than 150 million international migrants in the world
today, again, spread pretty much over the globe. That number
has doubled
in the last 30 years or so, so we have already seen a
significant
increase.
Why I think it will go up is because of the type of
economic integration that we clearly have seen emerging, that
is bringing labor markets together and making it much more
likely that companies will be recruiting from a global labor
market rather than just from a domestic labor market.
This is combined with the transportation and communications
revolution that we have also seen that allows people to move
themselves much more cheaply and easily than ever before.
They know what opportunities exist elsewhere and they now
have greater capacity for acting on that knowledge. Those same
factors also will affect more directly the remittance flows
because with the ease of transportation and communications,
migrants who move to other countries, whether they are thinking
about it as temporary movement or as permanent relocation, are
able to maintain ties with their families and with their
communities for much longer periods of time than was possible
before they were able to communicate as cheaply as they are
able to do today. Those ties are what keeps the remittance
flows coming because migrants have the emotional and social
ties that require them to keep sending funds.
So, as I said, I think that this phenomenon that is now
emerging as an important issue will grow in importance in the
years ahead.
Within the research community, there has been some marked
shift in our thinking about remittances. If you looked at any
of the literature from even 10 years ago, it was mostly
negative. It mostly talked about the problems of remittances,
the heightened dependency in communities that received
remittances on this flow, the need for sustaining migration in
order to be able to keep the flow of funds coming in, the
inequalities that remittances created and the excessive
consumerism that was associated with that, as families that
received remittances were able to buy more and to have
bigger houses, have more opportunities than their neighbors.
The development impact--the possibilities for increased economic
opportunities from remittances--was dismissed as almost
nonexistent.
I agree with my colleague that we are now seeing that the
effects are much more complicated and that there are many more
positive elements. Even when remittances are used for
consumerism, if people are buying products locally, that is
stimulating local markets. It is stimulating local production
of goods, and it is providing multiplier effects that can
stimulate economic development in the receiving communities
that are getting these remittance transfers.
We are also seeing, as Raul mentioned, a lot more communal
transfers of funds through hometown associations. And this is
not just an American, Western Hemisphere phenomenon. When I was
in Mali a few weeks ago, I visited health centers and schools
that had been built by migrant remittances from hometown
associations--in this case, of Malians living in France who
were sending their remittances back in order to support the
infrastructure of their home communities. We are also seeing
increased used of these funds for supporting income-generation
activities--small factories and other types of opportunities.
What we hope is that people will be able to make the choice
in these communities as to whether they would stay in a good
economic situation or migrate, and they would not be forced
into migration as the only way in which they can sustain their
own family lives. To make remittances a better tool for
development, we need to build on the positive aspects and to
deal with some of the problems that my colleagues have talked
about, particularly in terms of the high transfer costs.
If these remittances are to be a vehicle for development, I
think we have to keep in mind that it is one of the most
regressive ways in which we can promote development because it
means the poorest people here and in other developed countries
are the ones who are providing the support to developing
countries for economic opportunities, and it is coming out of
the pockets of people who, frankly, just do not have that many
resources to spend.
And it is well to ask what they are not spending their
money on here in terms of education, in terms of opportunities
that they might build on here to increase their economic
activities and their economic status.
I think it is very important that we keep this issue in
balance and try to reduce the cost to the migrants. Remittances
transfer is something that they are going to do in any case.
Reducing transfer costs will leave them more money for
investment here, so that it is not just a large outflow of what
might be a quarter or so of their income.
So let me go to some of the recommendations that I would
make for being able to lower transaction costs, but also
increase the reliability of the transfers that are occurring.
Certainly, more competition is an essential ingredient of
this entire process. But there is a danger that some of the
increased competition will be on less-than-reputable companies
entering a market that is growing. These companies may not have
the financial
reserves, the actual ability to transfer the funds. Such
competition will create greater abuse rather than lower costs
if the new companies are not actually reliable in their
transfer. We have to be very careful that our increased
competition does not hurt the consumer rather than help them.
Certainly getting credit unions and banks into the process
is a good step so that we are bringing in the already-
regulated, reputable institutions. These actions can help lower
costs and increase the development potential since they can
invest in the developing countries to which the funds are being
sent. That is not a very easy process, though, and will require not
only getting those institutions here involved in it, but also
strengthening the banking system and credit unions in the developing
countries to be able to be the counterparts in receiving the funds.
A lot of my interviews with migrant communities overseas
have shown that they are not using the banking system because
the banking system either does not exist or is so corrupt in
their home countries, that they are afraid to have their money
enter that system. We have to think about the strengthening of
the banking system on that end, not just getting them involved
on our end.
Financial literacy is clearly also an ingredient that we
need in order to be able to pull more people into the banking
system. There are very good models that have already been
tried. We should be building on those models. And they are
sometimes in very unexpected places. We have been working with
a group in Rogers,
Arkansas, a bank there that has an extremely good financial
literacy program. It has gotten the agreement of corporations
that are hiring migrants in Arkansas to be able to provided the
classes on-site at no cost to the worker.
It has helped the companies to anchor their workers in
these communities in Arkansas. It has helped the bank that has
the financial literacy to have the lion's share of the
immigrant business and increase its profits. And it certainly
has helped the migrants to be able to avoid predatory lenders
to buy homes and to remit at lower costs. So it has a lot of
benefits all around on that.
The truth-in-transfer, the sunshine provisions, again, I
would recommend as well. It is important that people have the
information that they need in order to remit. It is important
that that information is available at the other end of the
line, again, so that you have the circle completed. Not only
will people know what they are sending and what it is costing
to send, but they also know what they have received and can
make the comparison.
In addition to these things, which are to increase
reliability and to reduce costs, I think that there are things
that we could be doing to encourage greater development use of
the remittances.
The hometown associations that we have talked about are a
very good vehicle for using remittance transfers. There is
great need for technical assistance to ensure that the money is
being invested properly in things that have the biggest bang
for the bucks. Often, the hometown associations will provide an
ambulance to their local village. But there are no spare parts
to repair the ambulance once it breaks and, therefore, the
villages are no better off after having had this investment.
The Inter-American Foundation is doing some very good work
in providing that technical assistance. Support of those
programs I think would be an important ingredient.
And finally, I think we could be applying more pressure on
some of the wire transfer companies to invest part of their
profits in the economic development of the communities here
that are sending
remittances and the communities abroad that are receiving the
remittances. As good citizens, they should be contributing much
more to the economic development of the consumers that are
providing their profits.
So, I think there are a variety of things that can be done
to increase reliability, reduce cost on the transfers, and also
to increase the development potential of the use of
remittances.
Thank you.
Chairman Sarbanes. Thank you very much, Dr. Martin.
This has been an extremely helpful panel. I have a couple
of questions to ask, and then I am going to yield to my
colleagues. I want you to lay out for us a clear picture of how
this works. Let me pose this question. Is the enterprise here
that receives the money from the immigrant that is being sent--
I take it usually in cash. Is that correct?--The same
enterprise that then pays out the money in the receiving
country?
Mr. Orozco. Yes. Let me use one institution just for the
sake of an example: Western Union. The agency has a network of
agencies in the United States and then establishes a network of
agents, or what is called a distribution network of agents, in
the recipient side.
For example, you go to Adams Morgan, where there is a cash
checking office and a Western Union office. Western Union
offers you the cash checking and you pay $10 to cash your
paycheck, and then the money that you just cashed, you are
going to send it in remittances and pay $20 to do that. Then
the money arrives in the home country at a Western Union agency
and then the customer usually comes to pick up the money to the
Western Union agency, and that is where they get--for example,
$200, they get $190, $195, because of the exchange rate which
they are not aware of most of the time.
Chairman Sarbanes. Do they get fees charged in the country
to which the remittance has been sent as well, or is there just
the fee charged--as you say, I am the immigrant. First of all,
I get hit by cashing my paycheck. I have to pay a fee to cash
my check, and that is combined in the same office, I take it.
Mr. Orozco. Yes.
Chairman Sarbanes. Then I say, all right, I want to send
$200 to Mexico. And they say, well, that will be $20 fee to
send that. So, I give them $20 and the $200. Now my relative
goes to pick this money up at the office in Mexico. Is there
another fee taken out at that point to do that?
Mr. Orozco. No. The only fee is the exchange rate. The only
penalty that you get is the exchange rate. However, for
example, in
El Salvador, with the disorganization of the economy, a bank
was charging a $1 commission fee because in lieu of the
exchange rate. In other places, if you are in a remote area,
you are likely to pay as a customer another extra amount of
money in addition to whatever fee you pay here.
Chairman Sarbanes. Now suppose I have a bank account. I am
an immigrant. I have a bank account and I am going to work
through the banking system. How does that work?
Mr. Orozco. Well, in theory, the way it works is, say, I
want to transfer $200 on a monthly basis to my mother's bank.
Chairman Sarbanes. Well, first of all, I go to the bank, I
deposit my check. So that goes into my account. I do not pay a
fee to get the money reflected by the check moving through the
system.
Mr. Orozco. Yes.
Chairman Sarbanes. So, I do not do that. Okay. Then say I
want to send $200 out of my account to such and such a person
at such and such a place. What happens?
Mr. Orozco. Well, that is when it gets tricky. The way
things stand right now, if you go to a bank, you might be
charged about $30 to $40, because banks generally do not do
these kinds of small money transfers.
First, they are going to ask you what is the identification
number of the bank in relation to the bank account of the
recipient side. An immigrant will be overwhelmed by the whole
thing.
So, instead, that is why the immigrant goes to a money
transfer because they think it is more convenient. However, if
the bank has a relationship with a recipient bank--for example,
Harris Bank in Chicago has a relationship with BancoAmer
Mexico. You go to any two branches in Chicago. The branches are
bilingual and you have an account there and you want to send
$200. You only pay about $10 to send it. That is half of the
average amount, and it goes straight into BancoAmer. The person
receives the money in their account or they can cash the money
immediately.
Mr. Hinojosa-Ojeda. The key thing here, and I agree with
Manuel, is that the possibility of how these bank-to-bank
transfers can work are very rarely being taken advantage of
right now. Most of it is from one bank account to another. If
you do it individually, the banks, it is a hassle for them.
They do not want to do it. They will charge you a lot of money.
A couple of these instances are occurring where they are
making you create an account on the United States side and then
they will create an account on the Mexican side, which is a
very cheap transaction for the banks. They will on average
charge you $10 from one account to another.
Like I am saying, the review that I have done, Bank X
charges $10, which is the cheapest one that you can get. What
can also happen if you have an ATM card attached to that bank
account in the United States, you can directly withdraw from
that account, which is what Representative Gutierrez was
talking about, being on the beach in Acapulco. You and I, we
would only be charged $1.50 for taking money directly out of
our bank account in the United States. Some people are
beginning to provide that type of direct service through ATM,
but then they do not have an account on the Mexican side.
That architecture, however, is potentially there for these
linked accounts. There is new technology that is available to
make that occur, as was at the point of purchase. But rarely
are we seeing banking institutions at this point competing for
providing that service.
Chairman Sarbanes. I want to ask about that, but I will
come back to that.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman. Again, I
want to thank the witnesses for the information. It will be
valuable to this particular Committee.
The charts shown were interesting. In Mr. Bendixen's
survey, it showed that 56 percent of immigrants have bank
accounts, and yet, only 20 percent of remittances are sent
through banks or credit unions. This is my interest.
Further, Dr. Orozco's study shows that this is forwarded by
evidence that you have and that it is cheaper to send
remittances through banks and credit unions. Again, why do
immigrants with access to banking systems not rely more heavily
on banks to send their remittances? That is my question.
Mr. Bendixen. Let me try to answer quickly. First,
remember, the youngest of the immigrants and the poorest of the
immigrants who send the most money most often are the ones that
are in the 44 percent who do not have bank accounts. So that is
part of the answer.
The other answer, I think Dr. Orozco alluded to it and
spoke about it. Many of the banks, and correct me if I am
wrong, are not really ready, do not offer the cash transfer
process to customers for smaller amounts.
So it is a combination of the two. The people that send the
most do not have the bank accounts, and the ones that do have
the bank accounts, their banks, many of them, are not really in
the business.
Senator Akaka. Is that possibly due to traditional ways of
handling money? I mean, it appears that the older people do not
send as much, and possibly, it is because they do not bank
their money. They keep it at home and use what is called a
cash-and-carry way of handling their money.
Mr. Bendixen. I think a lot of the older people and the
people that actually make more money are people that have been
here a longer period of time. And even though I think Latin
Americans tend to be concerned about their families back home
on an ongoing basis, definitely it is the more recent arrivals,
the younger and the poorer that send more. That is part of it.
Senator, if I may, I wanted to add one piece of information
to what was said by my colleagues to your question. It is a
very interesting fact that I learned at the IDB conference on
Tuesday.
In Spain, there are tens of thousands of Ecuadorans who
send money back to their country, basically through a
relationship between credit unions in Spain and in Ecuador. The
cost of sending $200 from Spain to Ecuador is $3. The cost of
sending $200 from the United States to Ecuador is about $25.
So without being an expert on the process itself, there
must be a way to do better.
Ms. Martin. Could I add one element to it?
Senator Akaka. Dr. Martin, please.
Ms. Martin. Part of the problem in terms of the banking
system is the weaknesses on the other end.
If you go to almost any village, almost any place in the
world, the chances are that you will see a Western Union sign.
They are all over the place. The most remote town in Mali has a
Western Union outlet. And it is reliable and people can go to
an agent here and then their families can pick up the funds
where they live very readily and with a great deal of
reliability. The funds will be there very quickly. On the other
hand, if you go through a bank, you won't find an ATM in most
of these communities. And there won't likely be a banking
outlet there, either.
It becomes much more difficult for the receiver of the
remittances who are more likely to be the parents, the wife who
has been left behind, the children, to actually get physical
control of the funds. So until the banking system becomes much
more vibrant in these countries, it is going to be very
difficult to be able to use banking universally as the
mechanism for the transfer. It will grow, and I think the
technology is going to be seen increasingly, and we probably
would not be having this same conversation 10 years from now. I
think it will be markedly different.
There is a transition period that we are going to have to
go through. Migrants say all the time that if they have a
regular transfer, they will often use informal channels because
they know that those can get there. If they have an emergency,
they use Western Union. And even the banks in many developing
countries say, we cannot compete at this point with either the
informal mechanisms or with the Western Unions or MoneyGrams.
They just do not have the reach.
Senator Akaka. Dr. Orozco.
Mr. Orozco. Thanks. Actually, let me get back a little bit
to your question.
Although the service shows 20 percent, which I think is a
very representative sample, what the respondent is saying
actually is not specifically that they are using their banks to
transfer money. In many cases, they are referring to foreign
banks operating as money-transfer agencies that charge less
money, but still, you are not using your credit union or
whatever. So the actual percentage of people who are using
their banks to transfer money might be
estimated at 5 percent, much lower, significantly lower.
But then, again, you get back to the issue that Susan was
talking about, that the banking issue has to do with financial
literacy on both sides.
We do not use the service here. First, because we do not
know, for lack of better knowledge. If we knew that there were
better ways to do it, we would be using banks. Second, the
banking institutions are generally not migrant-friendly and it
is very intimidating for an immigrant who speaks with broken
English and says, I would like to send an remissa, and the bank
teller gets annoyed. The forms that they ask you to fill out
might be extremely intimidating, and there is another reason.
And that has to do, unfortunately, with culture.
The banking industry in Central America, the Caribbean, and
Mexico is an oligarchic banking industry. It doesn't care about
the little people. So, they never cared to educate in financial
literacy those people.
Now that they have migrated, they come with that baggage
and the relatives, as well as the people here do not really get
to trust much in the banking. So it is a very cumbersome
problem and that is why banks do not get involved. They really
don't care. But yet, for example, in El Salvador, Western Union
is not the largest. It doesn't have the largest market share.
It is the banks, operating here as money-transfer agencies.
Yet, over there, they do not offer any incentive to the
recipient to use the banking industry. So that is a major
problem. They are profiting, yet El Salvador transfers $2
billion. The banking industry in El Salvador is transferring
about 60 percent of that. Western Union is only getting 20
percent of the pie.
Yet, they do not create any incentives for people to bank.
And it is true that there are difficulties in getting into the
rural areas to get into a banking institution. There are many
institutions like credit unions in the developing countries
that do offer some access to it. We need to create the network
basically here and there.
Senator Akaka. Mr. Chairman, my time is up. I have another
question, but I will wait for the second round.
Chairman Sarbanes. All right. I will go to Senator Miller.
Senator Miller. I want to thank you again for your
testimony. It has been both enlightening and disturbing. There
is no doubt that we have a problem of major proportions here. I
want to talk about what we do exactly, where do we head?
I want to talk about financial literacy in general. I think
there is strong general agreement that we have to have more
financial literacy programs for newcomers to the United States.
My first question is, is there already a system or entity
in place that could run such a financial literacy program? Is
this something that should be run by a private entity? Or a
public entity? Where do these programs come from? You mentioned
the one that is working so well in Arkansas, Dr. Martin. But
what is the role of the Government in this?
Mr. Orozco. Excellent question.
Mr. Hinojosa-Ojeda. Well, do you want to tell us about
Arkansas? I will tell you about California.
Ms. Martin. Right. Let me start with the curricula that are
available. And there is enough experience now that we do not
have to reinvent the wheel in terms of what the components are.
The particular Arkansas situation was an interesting one.
The background is that, if you looked at the 1990 census,
Rogers had very few foreign-born. By 2000, it is I think maybe
15 or 20 percent foreign-born. And if you looked at the school-
age kids, it is even higher. There has been a major influx of
immigrants into that particular area, largely following
employment and in the poultry processing, meat processing
areas.
It was a very transient community, lots of backlash within
the native community about these young men who had no ties, no
roots in the community. Some of the community leaders got
together and they tried to figure out how to deal with the new
population and how to get it more anchored and reduce some of
the transients.
It happened, and this is the circumstance. Sometimes things
are very unplanned. But one of the few Spanish-speaking people
who were already in the community had come from Cuba many years
ago and was a bank officer. His concept was that if more of the
workers could buy houses and bring their families, they would
anchor. And it was really a homeownership project, initially.
And they decided to support his interest and a number of
corporations agreed to have him come in and provide financial
literacy classes. So this was a totally private-sector.
The Federal Reserve has actually become very interested in
the concept, as has the regulators for the savings and loans
and other banking institutions. And they are now talking about
ways that they can support a similar curriculum in other
communities.
So, I think that this is an area where a public/private
partnership would be extremely useful. I was interested in
hearing about the Treasury Department having grants because I
think that if more of the grants were ones that involved
community-based organizations, financial institutions, and
businesses, so that you get the three partners into this, then
you are more likely to have greater effect than if any one
component tried taking it on because there is a lot of
complexity to the issues.
I think you need the expertise of the financial
institutions, but you need the contacts that the community
groups and the businesses have with the actual recipients of
the training.
Senator Miller. Let me ask my other question before my time
runs out. I thank you for that response. It is along the same
line.
Dr. Orozco recommended an oversight board to guarantee this
corporate transparency and accountability that we need to have
on a nationwide basis. And Dr. Martin, you talked about a
regulatory framework that would better insure wire-transfer
companies. They have adequate resources and better procedures
and that thing for conducting business.
Again, are we talking about something like a self-
regulating organization, an SRO, private companies, or are we
talking about some kind of Federal entity on this? What is your
thinking on that, anyone that wants to address that?
Ms. Martin. Do you want to start it, or shall I?
Mr. Orozco. Well, I am a strong believer in free markets
and I think we need to start by allowing the institutions to
self-regulate themselves. But more importantly, to make, for
example, the Better Business Bureau, more aware of this
process, of the money transfer. They are very unaware of what
is happening.
So, we need watchdogs from both sides, from civil society,
NGO's working on these issues. There are many NGO's working on
financial literacy, by the way.
You do that, but you also encourage the money transfer
companies to self-regulate themselves. If there is no
compliance to the rules and the standards that will ensure an
accountable process, then we should move to the next stage,
which is getting the Government involved in some kind of
regulation, enforced regulation.
Senator Miller. We nudge, not legislate.
Mr. Orozco. I beg your pardon?
Senator Miller. We push or nudge instead of legislating.
Mr. Orozco. Yes, I think so.
Ms. Martin. I would agree that that is probably the stage
we are at now, to see whether self-regulation will help. I am
frankly skeptical that if the trend toward greater competition
were of companies entering continues, that it will be very easy
to deal with some of the potential abuses.
I refrained from raising this very directly, but given the
activities in terms of some of the money-transfer companies
also transferring funds for terrorists and the connection to
drug laundering as well, the Congress may want to develop a
regulatory framework to address all these issues. There is a
major crisis in Somalia now because remittances are not coming
in. And they are not coming in because the companies that were
used by just normal migrants were also the ones that were being
used by al Quaeda.
We have a problem in that respect and that might be a
vehicle for ensuring the integrity of the companies that are
established, some of which we frankly just do not know very
much about.
Mr. Hinojosa-Ojeda. I would like to say, Senator, the
nudging, it is a very relative term. I actually think that the
threat of legislation in California has clearly focused their
attention a great deal. I think that the threat or the
formulating of clear guidelines of what is being articulated
through the legislature and the demands should definitely go
forward. And I think that we do not necessarily want to create
huge bureaucracies, but I think that the pressure has to be
kept on.
The lawsuits that were raised have done a great deal, and
there are a couple of different ways. I think it has attracted
a great deal of new players into the field, that they recognize
that while they are making that much money, maybe I can.
Hopefully, that is a temporary process. So, I would not give up
on a strong Government role during this transition period.
Senator Miller. So a strong nudge.
Mr. Hinojosa-Ojeda. Yes.
Mr. Bendixen. From another point of view, the Latin
American immigrant to the United States may be the easiest
constituency in the country to communicate with. According to
the IDB study, they get 90 percent of their information from
television, and we are talking about two networks--Univision
and Telemundo.
So depending on what you all decide to do, I think a public
information campaign through Spanish-language television would
be a way to get to these 10 to 15 million people in a fairly
efficient way.
Senator Miller. Excellent idea. Thank you very much.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Akaka, would you like to ask
other questions.
Senator Akaka. Mr. Chairman, I am glad my colleague brought
up financial literacy. I was going to ask Dr. Martin further
about that since that is one of the reasons for our hearing
today. As we look at how to reach, maybe through television,
these folks out there that need to learn more about how to do
these things, we should look at ways where they do not have to
pay out so much money.
A recent symposium, the Chicago Federal Reserve Bank on the
subject of remittances, concluded that: ``Significant marketing
and financial literacy efforts are needed to introduce emerging
remittance vehicles to low-income immigrants.'' I think that is
very, very significant. So let me just throw out a question. Do
you agree with that statement? And if so, do you have any ideas
as to how we can approach and even achieve that? And I am
talking about emerging remittance vehicles that can be
introduced.
Mr. Hinojosa-Ojeda. Well, I wanted to say one thing,
Senator. I think that part of what is happening right now is,
we need financial literacy on both sides of the equation, if
you will, both among the immigrant communities and, frankly,
among the banking communities. So, I think that part of the
issue right now, we are in a very interesting period where new
initiatives are just emerging, new products are in the process
of being developed every day.
That is why I like the first account's approach. And maybe
in the next round would be more focused on remittances, it
could be a very useful thing where you would encourage the
bringing together of particularly like the type of thing that
we are trying to do--bring hometown associations who are very
committed to this, who study this as much as I do, where we are
putting together focus groups with the credit unions and
teaching the credit union management as to what are the needs
of the immigrant community.
This type of cross-fertilization to develop new products is
I think the type of thing that right now is really needed and
could be very useful. And then we have some really good
products that could then distribute through Telemundo and
Univision. They could be very useful in getting this type of
word out.
But, frankly, we still do not have the products out. We
need to get the banking community sitting with the clients and
even beginning to understand that much more than we have, and
take advantage of a lot of new technologies which are now
available. All of this I think is really still uncovered
territory.
Senator Akaka. I am glad you are talking because I was
going to ask you a question about globalization and public
goods from below. Particularly, I was interested in the
leadership of hometown associations. I do not know whether we
will have time for comments on that, but I think that certainly
leads into these new vehicles that can be for the future.
Mr. Hinojosa-Ojeda. Very briefly, I would agree entirely
with what Susan said, that the critical issue at this point is
to bring in technical assistance to help this, what we are
calling social capital, transnational social capital, to really
become much more effective. And they are ready to do that.
We have set up what you are referring to as a grant from
the MacArthur Foundation where we work with institutions in
Mexico and Central America and in the United States to work
with the networks on both sides of the border and provide them
the technical assistance from local institutions. They can be
an incredible vehicle and we have a lot to learn from them.
They can be much more efficient.
Yes, I think that has to be part of the strategy. It is
much more difficult to pull off. The biggest issue is the
Inter-American Development Bank, for example, can lend or
provide grants, but only on the Latin American side.
The U.S. Treasury has first accounts, but it can only do it
on the United States side. Whereas, these are transnational
networks. So the governments have to catch up in terms of how
to provide this type of support in a collaborative fashion.
Maybe something Treasury-IDB jointly in terms of making these
types of transnational grants available for these partnerships,
would make sense.
Senator Akaka. Dr. Martin, do you have a thought?
Ms. Martin. Yes, on both points. I agree completely on the
point on the training of financial institutions. We have had a
grant over the last few years to develop best practices in
financial institutions in dealing with immigrant homeownership
issues because immigrants tend not to have credit ratings. They
cannot afford the normal mortgage packages that are available.
We have been looking at ways to overcome some of those
barriers so that immigrants can buy homes at a much higher
rate. And that largely is a project that the Fannie Mae
Foundation is funding that is aimed at the financial
institutions themselves.
We are developing a training curriculum right now for them
as to what are these best practices that other banks have been
using in order to be able to interact. And almost all of the
things that are in it are things that would also apply in terms
of remittances.
It is the relationship with the immigrant community. Simple
things like having some bilingual staff that can communicate
with the new population. But it is also creating new, more
affordable packages and creating the relationship with the
consumers.
I think that is an extremely important component and
something that this Committee could really be very helpful in
terms of encouraging the financial institutions to be the
recipient of this type of information because they do not even
know often enough to know that they need it.
In terms again of the hometown associations, this is an
extremely exciting area because it is a way that you actually
have people-to-people development rather than imposing ideas
from on top that this is the best strategy for building this
dam or this major infrastructure development kind of thing.
Rather than having an imposed concept, this is really
letting the people in these communities figure out what it is
that they need for their economic development with assistance
that you are both talking about.
I think it is a much more lively vehicle for making foreign
aid actually work. I would love to see more matching from our
end of these resources as a way to actually stimulate economic
development. I think the money goes a lot further. It has a lot
more community-level impact, much less likelihood of it being
diverted into unnecessary purposes because the communities are
actually taking control of it.
And I think what the IDB is doing right now is extremely
valuable. As I mentioned, the Inter-American Foundation is also
trying to support some of these activities.
The more that we can do as a Government to stimulate it, to
support this type of development activity, I think that we can
sell it to the American public that this is matching people's
resources and it is not likely to be wasted and can really have
a lot of bang for the bucks.
Senator Akaka. Thank you very much, Mr. Chairman.
Chairman Sarbanes. Let me ask just a couple of questions
and then we will wind up.
Why doesn't some financial institution look at all of this
and say, there is a lot of money involved here? The way it is
all being done now, there is a considerable spread. We could
come in there and we could do all of this at a lesser cost and
still make a lot of money for ourselves. Why doesn't one of
them pick up on that and say to the immigrant community in
California, Chicago, wherever, where there is a sizable
community, come to our institution. This is how we do it. We
are going to benefit out of this. Why doesn't that
happen?
Mr. Orozco. I get at least one phone call a week from a
bank, and like three phone calls from money-transfer agencies.
They are all interested in it. Citibank is going to come up
with something very powerful, apparently. VISA is also very
interested, et cetera.
The issue is that it comes to the know-how. How are we
going to market the product to this population group? We have
the means, but we do not know how to do it.
I think this is what they are talking about, hometown
associations can provide the linkage. Also, assistance
organizations like immigrant rights groups that are the ones
that definitely offer this kind of financial literacy programs,
can link up with the private sector, with banks, in order to
channel and educate them that that is the way they should go.
Definitely the potential is there and banks are interested.
They just have not reached that second stage of getting
involved in a
liaison with an institution that can explain to them how to do
it.
Chairman Sarbanes. I was interested in the Spanish-Ecuador
example. I wonder if any of you could submit to the Committee
some models of how it is done elsewhere and how a system works
that results in a higher percentage of the remittance passing
through to the recipients, because I think Dr. Martin in
particular pointed out that this is a worldwide phenomenon and
a lot of other countries have significant immigrant populations
that are engaged in sending remittances. And for all I know,
they may do it somewhat differently and perhaps more
successfully.
Mr. Hinojosa-Ojeda. Well, this Ecuadoran situation is
actually something that is being supported by the Inter-
American Development Bank. They are actually doing another very
interesting support for a Japanese-to-Brazil transfer. There
are a couple of these.
The issue is not that the technology is not available or
even that the techniques are not available. I think what is
really significant here is that, from the U.S. banking point of
view, I think that the problem that you mentioned, Senator, is
one that these financial flows are only beginning to appear on
their radar scope, and you would be surprised--I am surprised,
anyway--at how slowly the bureaucracies have been in these
institutions to figure out how to approach this problem.
We still have a long way to go because I think that if we
see this as a quick-buck market opportunity that says, well,
let's set up our own Western Union type operation, which, by
the way, I agree with Susan Martin, is not an easy thing to do.
They have spent a lot of money on the infrastructure to do
that.
Chairman Sarbanes. Yes, I think that is important, and I am
glad that you mentioned that because it adds to the situation.
It is a very complicated situation and I think your point is
well taken,
that they have all these outlets out there that provide for
easy
accessibility.
Mr. Hinojosa-Ojeda. The key issue that the banks have to
focus on, and actually, some of the small banks in Central
America, because it is a much bigger business of theirs, have
actually thought about this, is what we are really talking
about here is life-cycle
financing for the migrant stream that starts with remittances,
but people then eventually have a great deal of other financial
services needs that they are going to be evolving into over
time.
It is that broader perspective which is the market where
banks come in. They do not set up banking institutions in the
United States just to do check cashing. They want to be
providing a whole range of financial services.
What I think that people are only now beginning to
understand is that there is a demand for this broader range of
financial services, as I was trying to suggest, for investment,
for insurance, and that we are only scratching the surface when
we are saying money wire transfer. That is only one part of
this business of what is going to be growing into the future.
And to the extent that the banks get interested in that, then
that is where the investment comes in, which I think, frankly,
we in North America set up a very poor path of the development
of remittances through this check cashing operation and wire
transfers.
A lot of money was spent on that infrastructure. But if you
look at how other countries did it, they went directly to some
type of credit unions or some types of banking institutions
directly investing for the long term in those populations, and
we ended up with much more efficient institutions in other
parts of the world than in North America, which I think we
ended up with a very expensive, bloated and, in the end,
something that is not really very efficient for the long term
needs of either the sending or receiving communities.
Chairman Sarbanes. I have one question on the hometown
associations and that type of investment. It is a complicating
factor. Suppose someone said to AID, well, you should gear your
aid programs to these hometown associations because you will
get a match. You will get some leverage. You will have
community interest. Presumably, they best judge what the local
community needs, although I guess that could be argued.
But what does it do to an overall development strategy? And
to what extent does it skew where the development goes? So if
you have a good hometown association who has some people over
here in this country who want to put it together, they want to
send money back and everything. Then your government policy
moves in the direction of matching that. What happens to all
those communities that do not have hometown associations which
may, in fact, be in greater need of the development program?
Ms. Martin. I was by no means suggesting that it is a
substitute for other forms of development aid. I think it can
be a complement to that aid.
In giving other countries as examples, the French
government has established a new agency that they refer to as
the codevelopment agency, the agency for codevelopment. And
what they mean by it is that it is French funds matching
migrant resources to help in development.
It is one component of development. It is not a substitute
for other ways in which they interact. But there are annual
consultations between the French government and, for example,
the Malian government, to talk about what are the various
development needs in the particular regions that have produced
large-scale immigration to France.
Then they have discussions with the hometown associations
in Paris and elsewhere with regard to their interests. And they
try to combine their support in a way that addresses the needs
that the government has identified, but also works with the
local communities in France to do it.
It is an evolving model. There are some weaknesses to it.
It is not something that you would just apply. But I think that
there is a lot of thinking going on now as to how international
development agencies can work with the remittance streams to
promote devel-
opment, again, not as a substitute, but as a complement to
other
development activities. Overall, we spend so little money on
foreign aid and economic development, that I think we should be
adding on, certainly not substituting.
Mr. Hinojosa-Ojeda. The hometown associations understand
exactly your point, Senator, so now the real term is going
beyond the specific hometown associations. We have created
federations in California and nationally that are now
federations of hometown associations for the State of Ohaka.
They are now beginning to look at the regional issue and,
in fact, pooling resources precisely for these types of things
where the decision of where the money goes is becoming more
sophisticated. It is not only tied to make sure that my family
benefits, but also there is a need that people are recognizing
that there is a regional issue.
But the key thing here is keeping it very close to the
ground, people who understand the problematic and who have come
out of that problematic, getting them involved. That is what
everybody says is crucial in the development aid game. Here we
have them living, our constituents, in the United States. It is
an incredible resource to be able to work with them.
Chairman Sarbanes. Does anyone want to add anything?
Mr. Bendixen. Very quickly, one of the fascinating things
about the Latin American immigrant in the United States, for
good or for bad, they do not believe in the melting pot theory.
They are hanging onto their language, to their culture, to
their sports. And because of that, you would be amazed at the
breadth and the reach of these community organizations, these
municipal organizations. Almost every community from Latin
America is represented by one of them. So your question about
whether some people would be left out, not a lot would be left
out. They are tremendously well organized. It is one of the
ways that they hang onto their culture.
Chairman Sarbanes. Well, this has been a very helpful
panel. I think it is important to get some appreciation of the
dimensions of this issue. Some of those figures that have been
produced here are absolutely staggering, the total amount, how
much it represents in the GNP of particular countries. The
amount of flows are really quite large, indeed. And as Dr.
Martin points out, when you compare it with our aid flows, the
aid flows----
Mr. Orozco. There is no comparison.
Chairman Sarbanes. Yes. They just pale into insignificance.
Thank you very much. You have been a very good panel.
Mr. Orozco. Thank you.
Mr. Bendixen. Thank you.
Ms. Martin. Thank you.
Chairman Sarbanes. The hearing stands adjourned.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
[Prepared statements for the record follow:]
PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
Today the Committee returns to the question of financial literacy,
which was the focus of 2 days of hearings earlier this month, and takes
up the issue of remittances. Remittances are the payments sent home
from workers, generally immigrants, living in the United States to
family, friends, and communities in their country of origin. Those
sending remittances, remittors, are often subject to exorbitant costs;
if remittors had more financial education they would be able to send
remittances at a fraction of the costs they currently pay.
The particular focus of our discussion today will be the findings
of three recent studies. One, conducted by Sergio Bendixen of Bendixen
and Associates, entitled ``Survey of Remittances Senders: United States
to Latin America,'' was based on interviews of Latino immigrants,
conducted in November-December of last year. The other, entitled
``Attracting Remittances: Market, Money and Reduced Costs'' and
``Enabling Environments? Facing a Spontaneous or Incubating Stage''
were commissioned by the Multilateral Investment Fund of the Inter-
American Development Bank (IDB) and were prepared by Dr. Manuel Orozco
in connection with this weeks IDB's conference week on the subject of
remittances. These reports are just now being released, and we are very
pleased to have Dr. Orozco among our witnesses.
We will begin by hearing from Representative Luis Gutierrez, whose
long-standing concerns about the remittance market are reflected in his
bill requiring full disclosure of all costs to sending a remittance,
and we will conclude our discussion with two distinguished academics
who are experts in the field: Dr. Susan Martin, Executive Director of
the Institute for the Study of International Migration at Georgetown
University, and Dr. Raul Hinojosa-Ojeda, the founding research director
of the North American Integration and Development Center at UCLA.
Immigrants to the United States have traditionally sent financial
assistance in the form of remittances to family members who remained in
their country of origin. Until recently, however, the phenomenon has
not been systematically studied and its implications have not been
fully realized.
The 2000 census shows that 30 million people in this country are
foreign born, the most in our Nation's history. More than 40 percent
immigrated in the 1990's. The vast majority--22 million--are citizens
or legal residents.
They make a vital and integral contribution to the Nation's
economic and social structures. Some 15.4 million immigrants,
accounting for more than half of the immigrant community, come from
Latin American countries. The 2000 census shows that the Hispanic
population of the United States stood at something over 32 million,
representing 12 percent of the U.S. population.
As the population has grown, the volume of remittances has
increased dramatically. It is estimated that over $20 billion is
remitted annually from the United States to Latin America, and there
are substantial remittances to other areas of the globe as well,
notably the Philippines. The rapidly expanding market has enormous
significance, both to remittors in the United States and recipients
abroad. To cite just a few examples: the value of remittances far
exceeds United States official development assistance to all of Latin
America; and in five countries--El Salvador, Haiti, Jamaica, Nicaragua
and Ecuador--it represents more than 10 percent of GDP. In Mexico,
which in 2001 received an estimated $9.2 billion in remittances--making
it by far the largest recipient country--the dollar value of
remittances exceeded both agriculture and tourism revenues.
Our focus today, however, is the domestic aspect of the remittance
market. We will consider the market from a remittor's and also an
institutional perspective, and we will do so against the background of
the testimony presented at our earlier hearings on financial literacy.
Remittors tend to be low wage earners, with modest formal education and
relatively little experience in dealing with this country's complex
system of financial institutions. Like all people who must make
important financial decisions about limited resources, remittors must
have the financial literacy that enables them to grasp the crucial
details of their transactions. But that requires that they be fully
informed about the options available to them for sending money home--
what fees are charged, what exchange rate is offered, what alternative
remittance methods are available, and what percentage of the money sent
will actually be received. In a $20 billion market, the IDB estimated
between $3 to $4 billion was lost in fees and other transaction costs.
The reports before us review those options, examine trends in the
market and review transaction fee structures. There is recent evidence
showing that fees have declined somewhat as the market has expanded,
and this is certainly an encouraging development. But there is clearly
much to be done. This is one of the important questions we look forward
to reviewing with our witnesses, to whom we now turn.
PREPARED STATEMENT OF LUIS V. GUTIERREZ
A U.S. Representative in Congress
From the State of Illinois
February 28, 2002
Good morning, Chairman Sarbanes and Members of the Committee. It is
with great pleasure that I appear before this Committee today to share
my views on an issue that has been among my top legislative priorities
during my tenure in the Congress: Protecting consumers from hideous--
and often hidden--practices in the international money transmitting
business.
Currently, approximately 28 million foreign-born live in the United
States, the majority of whom are making enormous contributions to
America's stability and security, economic and otherwise. These people
came here seeking a better life and--through their hard work, their
wages and, I should add, their taxes--these people are making better
lives for all of us in America. At the same time, they are also working
to make life better for people in their home countries, for relatives
who use that money for basic necessities such as food and shelter--
often in times of crisis.
During the past 20 years, remittances to Latin American countries
have increased not only in volume, but also as a share of national
income and total imports. This year, approximately $9 billion will be
sent to Mexico via remittances, representing Mexico's third largest
form of foreign income. However, such transfers are costly due to a
range of fees, many of which are hidden.
Wire transfer companies aggressively target audiences in immigrant
communities with ads promising low rates for international transfers.
However, such promises are grossly misleading, particularly for those
with ties to Mexico or other Latin American countries, since companies
do not always clearly disclose extra fees charges for converting
dollars into local currency.
While large wire service companies typically obtain foreign
currency at bulk bargain rates, they charge a significant conversion
fee to their customers in the United States. The exchange rate charged
to customers sending United States dollars to Mexico routinely varies
from the rate set by the Banco de Mexico by as much as 15 percent. The
profits from these ``currency conversion fees'' are staggering,
allowing companies to reap millions of dollars more than they make from
service fees.
This is why I introduced H.R. 1306, the Wire Transfer Fairness and
Disclosure Act, a bill that currently has the support of 70 members.
Through the enactment of this bill, we could ensure that each customer
who solicits an electronic wire transmission of money is fully informed
of all commissions and fees charged on all transactions, and has
clearly been quoted the exact rate of exchange available to them.
This bill requires full disclosure of all fees involved in any
transaction of money wiring services, including the exchange rate being
offered by the company wiring the money. The disclosure shall be made
public and posted in all windows and exterior and interior signs, as
well as in all advertising. Finally, the bill will also require
companies operating and offering money wiring services to present each
customer with a receipt for each transaction, clearly stating the rate
of exchange rate being offered by the company.
During 2000, Latin American and Caribbean countries received about
$20 billion in remittances from their family members working abroad.
Those $20 billion were sent through 80 million separate transactions,
each one charging exorbitant amounts in transaction and conversion
fees. In half of these countries, remittances represent more than 10
percent of the GDP.
The money sent out to the families abroad was money earned through
hours upon hours of hard work. It was saved with a great deal of
sacrifice by mostly low-income taxpayers of the United States. Their
efforts are compensated by seeing that the money they send to their
relatives somehow alleviates some of the immediate financial needs of
their relatives.
On average, Latin American migrants wire home around $250 a month.
Depending on the cost of the service they use, their relatives may
receive as little as $200. For those living abroad, this money is vital
to help pay for food, housing, education, to start new businesses, and
save for the future. This will enrich communities in other countries,
creating a steady income and jobs for people who might otherwise
migrate to the United States to find work.
But a sizable portion of these savings never make it from the
United States to these countries. Instead, it is claimed as fees--most
in the form of punishing exchange rates--that remittance services levy
on immigrants who wire money. Mexico, for instance, which receives more
than a third of the remittances from the United States, or many other
developing countries rely on wire transfers from abroad as a key source
of domestic income.
These remittance's fees made through wire transfer companies can
sometimes reach 30 percent, excluding the amount loss through the
exchange rates. Remittances create dependence and deepened income
inequality. Most customers, though, have no alternative. Few have bank
accounts. Immigrants that use banks or credit unions to transfer their
money benefit from lower wages.
One's inability to enter the banking system results in a higher
cost of borrowing, a lack of access to home mortgages and other basic
services, and a range of problems. Without access to banking services,
the unbanked are forced to turn to payday lenders and check cashing
vendors, who in most cases, charge outrageous fees for services.
Most remittance companies advertise low service fees for
international transfers--but that cost can double because of hidden
fees, charged when dollars are converted to foreign currency at poor
exchange rates. For instance, let's say it costs about 12 cents to buy
a Mexican peso. The wire transfer companies, however, charge their
customers as much as a penny more for that same peso. The difference,
called the foreign exchange spread, is pocketed by the companies. With
enough transactions, the money starts adding up.
The two biggest companies who offer wire transfers claim almost 90
percent of the $41 billion a year in money transfer business. Fueling
the profits are hefty fees paid by some of the country's lowest-paid
workers. The vast majority are immigrants who send money back home to
families they have left behind. And it truly costs them dearly. Using
one of the two biggest wire transfer services to send $300 from the
United States to Mexico, for example costs $41--which is more than a
day's pay at minimum wage. It is important to note that the same
transaction done through the International Remittance Network (Irnet),
which is an electronic funds transfer service for credit union members,
costs only $14.
Currently, Wells Fargo, First Bank of the Americas, credit unions,
and other
financial institutions offer programs to help more immigrants become
part of the banking system. By accepting identification cards issued by
the Mexican consulate, these institutions are helping thousands of
people around the Nation who would be forced to turn to payday lenders
and check-cashing vendors, who in most cases, charge outrageous fees
for services. At the same time, it protects the unbanked from being
targets of crime, robberies, and other abuses.
Finally, we must not forget that by helping consumers from being
targets of hidden and excessive fees charged by money transmitting
businesses, we are helping them save some cash that could then be used
by them as a source for investment and future savings.
Thank you, again, Mr. Chairman, for giving me this great
opportunity to be here today. I welcome any questions you and the other
Members may have.
----------
PREPARED STATEMENT OF SERGIO BENDIXEN
President, Bendixen & Associates
February 28, 2002
Thank you, Mr. Chairman, for the opportunity to testify this
morning on an issue that is of great importance not only to millions of
Hispanic immigrants in the United States but also to the economies of
most Latin American nations.
My name is Sergio Bendixen. I own a public opinion research company
based in Miami, Florida that specializes in polling Latinos in the
United States. I have 20 years of experience in the field. I was
retained last year by the Multilateral Investment Fund of the Inter-
American Development Bank to conduct a national survey of Latin
American immigrants residing in the United States on the subject of
cash remittances to their home countries.
Poll Methodology
One thousand respondents were interviewed by telephone during
November and December 2001. They were all Latin American immigrant
adults residing in the United States with family in their home
countries. Even though a large majority of the poll respondents were
from Mexico, immigrants from 17 other countries in South America,
Central America, and the Caribbean also participated in the study. The
margin of error for the full sample of the study is approximately 3
percentage points. It should also be emphasized that a special effort
was made to simplify and pretest the polling instrument so that
immigrants with little formal education clearly understood each
question. More than 90 percent of the interviews were conducted in
Spanish.
Major Findings
1. A large plurality of Latin American immigrants belong to the
lowest socioeco-
nomic group in our society. Our poll indicates that 41 percent of our
representative sample has a pretax annual family income of less than
$20,000. Another 23 percent has an annual income between $20,000 and
$30,000. Only 21 percent can be considered to belong to the middle
class with an annual income above $30,000. The remaining 15 percent did
not answer the poll's income question. The educational level of Latin
American immigrants is also low. Forty percent have not completed high
school and only 10 percent are college graduates. These immigrants work
mostly in minimum wage jobs and receive few benefits from their
employers. They work in the least attractive and most menial jobs as
hotel maids, parking attendants, restaurant busboys, agricultural
workers, etc. Latin American immigrants are some of the hardest workers
in our society; yet receive some of the lowest wages.
2. Sixty-nine percent of all Hispanic immigrants send money to
their family in Latin America according to our study. Even though
census numbers are somewhat inaccurate for this population, we
calculate that there are 10 million Hispanic immigrants in the United
States that are involved in the cash remittance process. It is
important to note that the younger immigrants (18 to 34 years of age)
and those from the lowest socioeconomic group (annual income below
$20,000) are much more likely to send cash remittances than older
immigrants or those that have achieved middle-class status. The study
also reveals that the average Latin American immigrant sends cash
remittances to his family seven times a year. Moreover, 44 percent told
our interviewers that they send money to Latin America every month. And
as we all know, this is not a new economic phenomenon. Fifty-four
percent of our sample reported that they had been sending money to
their home countries for more than 5 years. Finally, our poll indicates
that the average cash remittance is approximately $200. Our study's
estimate of the total annual amount of cash sent by Latin American
immigrants to their families is $15 billion.
3. The largest segment of the Latino immigrant community-- 41
percent utilizes the best-known international money transfer
companies--Western Union and Money-
Gram--to send cash remittances to their countries of origin. Another 29
percent use the smaller money transfer companies or couriers that
specialize in deliveries to Latin America. Many also send their cash
with friends or family members traveling back home. Only 20 percent
utilize the more traditional financial institutions--banks and credit
unions--to send money to Latin America. Ten percent of our sample did
not answer this poll question. It is also important to note that most
of the poll respondents accurately answered that the transfer fee paid
in the United States to Western Union or MoneyGram to send $200 to
Latin America is between $15 and $20. The study also reveals that
immigrants that use banks or credit unions for their money transfers
benefit from lower fees. This group reports spending less than $10 to
send $200 to Latin America through their bank or credit union.
4. An overwhelming majority of Hispanic immigrants are unaware that
their families in Latin America receive less money than what they send
from the United States. About two-thirds of them are ignorant of the
additional commissions and fees charged and of the lower exchange rates
used in Latin America that result in their family's receiving a lesser
amount of money than what they send to them. Fifty-eight percent told
our interviewers that their family receives the full amount sent from
the United States. Another 9 percent said that they do not know whether
their family receives the full amount or less. Only 33 percent of
Latino immigrants seem to be aware of the extra charges that are
discounted from their cash remittances to Latin America. Mexican
immigrants are the only group that is somewhat well informed on this
issue. Forty-eight percent are aware that their family receives a
lesser amount. But more than 90 percent of South Americans, Central
Americans, and Dominicans are ignorant about the ``exit charges.'' When
these immigrants were informed that besides a fee paid in the United
States, international money transfer companies often provide
unfavorable exchange rates or discount additional commissions or
charges in Latin America, a large majority of them felt that the fees
paid for the service are excessive and unfair.
5. Only 56 percent of all Latin American immigrants in the United
States have a bank account. Even though this rate compares favorably to
rates in Latin American countries (about 20 percent have bank
accounts), it is considerably smaller than the rate for the general
population of the United States (over 80 percent). The percentage with
bank accounts shrinks to 46 percent for immigrants that are not U.S.
citizens, to 38 percent for those with annual incomes below $20,000 and
to 32 percent for Latino immigrants between the ages of 18 to 24. It is
important to remember that these are the immigrant demographic groups
that are most heavily involved in the cash remittance process. Latino
immigrants mention that the main reasons they do not have a bank
account are: ``Do not have proper documents.'' ``The process is too
complicated.'' and ``Do not speak English.''
Recommendations
1. Full disclosure. Latin American immigrants should be informed
accurately about the full cost of transferring money and of the
services provided by the international money transfer companies. This
should be done in a way that is easy to understand for a population
that does not have a high educational level. Full disclosure should
unleash market forces that, hopefully, will result in a significant
reduction in the cost of sending cash remittances to Latin America
through international money transfer companies. It is unconscionable
that the poorest of the working poor in our society--most of them
making less than $300 per week--are paying approximately a 12.5 percent
surcharge every time the send money to their family in Latin America.
2. The banking community of the United States should seriously
consider funding a massive public relations campaign to inform the
Latino immigrant community of the benefits of opening a bank account--
including the significant savings in the cost of money transfers to
their home countries. The banking industry should also study and
consider reforming some of the ``process'' issues that make Latino
immigrants reluctant to open a bank account in the United States.
Mr. Chairman, that concludes my testimony and I would be happy to
respond to any of the Committee's questions.
Thank you very much.
----------
PREPARED STATEMENT OF MANUEL OROZCO, PhD
Project Director For Central America
Inter-American Dialogue
February 28, 2002
Introduction
Like other people, Latin American immigrants have and fulfill
family obligations. One important duty is provide a financial
assistance to their relatives in their country of origin. Therefore,
using a money transfer mechanism is vital to immigrants. However, for
these immigrants and for the Latin American remittance recipient
relatives, money transfer charges as well as exchange rate
differentials generally continue to be very high, seriously
constraining how much support immigrants can offer their families.
Fees charged and exchange rates incurred to send and receive
remittances can add up to 15 percent of the amount sent. It is in the
interest of nations and families receiving remittances to increase the
quantity and flow of remittance monies. Increases can be achieved in
part by reducing the share lost to transaction costs, and in part by
increasing the gross flow of migrant remittances and investments.
Competition among both existing financial service companies and
potential new remittance transfer entrepreneurs needs stimulating.
Greater competition lowers prices and increases services offered to
actual and potential customers who send remittances abroad. The private
sector transferring remittances can contribute to increased remittance
flows by lowering transaction costs and offering development
alternatives to individuals and groups through their services. More
importantly, remittances can serve as an instrument to incorporate
migrants into the financial and banking system.
Background
The majority of Latin American immigrants residing in the United
States, honor a commitment to their families and communities by sending
them remittances. Latino immigrants who earn less than $25,000 a year
tend to send somewhere around $200 a month, that is, nearly 10 percent
of their income. Thus, the cost of remitting money is of great
significance to migrants. Moreover, money recipients, who are generally
families earning below average incomes, also value the remittance they
receive and are affected by any cost incurred through unfavorable
exchange rates.
Today's total remittances from the United States to Mexico, Central
America, and the Caribbean are estimated to be at least $15 billion
annually. In comparative terms, remittances tend to be more than 10
times greater than United States foreign aid to these countries; they
are equivalent to 5 percent of Mexico's exports, 70 percent of El
Salvador's exports and nearly one quarter of Nicaragua's national
income. El Salvador, the Dominican Republic, Jamaica, and Guatemala are
among the major remittance recipients in the Caribbean Basin. In 2001,
the combined amounts remitted to these four nations added up to over $5
billion, which is equivalent to 50 percent of those countries' trade
through the Caribbean Basin Initiative.
Table 1. Remittances to Latin America, 2001
----------------------------------------------------------------------------------------------------------------
Remittances (in As percent As percent
Country dollars) of GDP of exports
----------------------------------------------------------------------------------------------------------------
Colombia........................................................... 600,000,000
Cuba............................................................... 800,000,000* 5 40
Dominican Republic................................................. 1,807,000,000 10 27
El Salvador........................................................ 1,972,000,000 17 60
Guatemala.......................................................... 584,000,000 5 16
Honduras........................................................... 400,000,000 7.5 17
Mexico............................................................. 9,273,747,000 1.7 6.5
Nicaragua.......................................................... 600,000,000 22 80
Jamaica............................................................ 959,200,000 15 30
Ecuador............................................................ 1,400,000,000 9 20
Total........................................................ 18,295,947,000
----------------------------------------------------------------------------------------------------------------
Source: Central Banks of each country except for Cuba (ECLAC), Colombia (World Bank) Ecuador (The Economist,
January 2002), Nicaragua (author's estimates). * Data for 1999.
Remittances continue to flow to Latin America without showing signs
of decline. As Figure 1 shows, monthly flows of remittances in selected
countries have continued an escalating trend in the past 3 years.
Within this context, governments and businesses are important agents in
stimulating the flow of remittances. Businesses sell services
facilitating the transfer of remittance funds, but transfer charges to
consumers continue to vary.
Reducing Charges on Sending Remittances
The players within the remittance industry constitute a crucial
piece in the puzzle of economic development. This testimony is based on
a report that analyzed more than 70 money transfer companies. Data
gathering was conducted to estimate fees charged, exchange rates used,
services offered, and types of distribution networks in place. Money-
remitting companies in nine different countries were studied, but
central focus was placed on four countries: Guatemala, El Salvador, the
Dominican Republic, and Jamaica. The other countries that were analyzed
were: Mexico, Haiti, Colombia, Nicaragua, and Cuba.
This report's findings show that:
In the past 3 years, charges have declined significantly in
some countries.
Transfer costs incurred by customers range from $7 to $26 for
sending $200.
Fee charges decrease with competition. Remitters to Mexico, El
Salvador, and Guatemala charge lower fees than companies sending
money to Jamaica and the Dominican Republic. For countries, like
Cuba or Haiti, where there are more market restrictions, charges
are higher.
Distribution networks demanding lower commissions tend to
promote the decline in charges. The use of electronic interfaces
also helps in reducing costs.
A growing number of companies offer money transfers in
dollars. This practice does not guarantee that received remittances
will be not involve disadvantageous exchange rate charges as banks
can sell dollars at adverse exchange rates. (This topic requires
further study and is beyond the scope of this report.)
Banks, credit unions, and credit and savings cooperatives are
increasingly opening money transfer franchises and are offering
some of the lowest charges at about $9. However, these institutions
continue to have a small and limited reach.
In some cases, the home country distribution networks are not well
established
within the credit union system.
Transfer Charges: Changes and Challenges
Perhaps one of the most significant changes in the remittance
market is the decline in transfer costs. Three years ago the cost of
sending remittances to different Latin American countries averaged
about 15 percent of the amount sent. Those transfer costs have now
declined. In 1999, for example, Western Union charged $22 for
transferring up to $200. By 2001 that charge was dropped to $15.
Although there is a relative decline in the price for customers,
fees plus the exchange rate applied to the amount received in local
currency still show a wide range in prices. For example, immigrants pay
from $6 to $26 to send $200. Figure 2 demonstrates the wide fee range
incurred by senders and recipients. One important aspect appearing in
Figure 2 is price elasticity. Remittance charges decline with volume
sent, and particularly observed in charges for amounts ranging from
$150 to $300. This finding is important as it shows that prices tend to
decline when customers send greater amounts; only 15 percent of
companies charge over 9.5 percent for $300. However, the majority of
customers send less than $200 a month in remittances and therefore do
not enjoy the benefits of price elasticity in the $300 amount (See
Table 2). This means that the majority of senders tend to pay over $15
in fees. Table 3 shows the fee per amount sent.
Table 2. Percent Distribution of Remittances Sent by Immigrants
------------------------------------------------------------------------
Amount sent Percent of senders
------------------------------------------------------------------------
Up to $150................................ 42.2
$151 to $250.............................. 22.4 (22% sends $200)
$251 to $300.............................. 17.0
Over $300................................. 18.4
------------------------------------------------------------------------
Source: IADB Survey on remittances.
Table 3. Fees Charged on Amount Sent
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fee Charge Scale
---------------------------------------------------------------------------------------------------------------------------------------------------------
Over $15 Between $10.01 and Under $10.00 Total
Amount (percent) $15.00 (percent) (percent) (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
$150.00.................................................................. 24.8 37.2 38.0 100.0
$200.00.................................................................. 35.7 31.8 32.6 100.0
$300.00.................................................................. 54.3 24.8 20.9 100.0
38.2 31.3 30.5 100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Data compiled by the author.
These charges represent a significant cost to clients in the money
transfer industry, where senders tend to be relatively poor Latin
American immigrants, for at least three reasons. First, Latino
immigrants are generally low-income people. According to the U.S.
Census nearly 33 percent of Latino (or Hispanic) households earn less
than $20,000 a year. Second, about 46 percent of Latin American
immigrants are not incorporated into the financial systems through
banks. About two-thirds of immigrants cash their salary checks in
check-cashing stores that charge exorbitant fees. Many of these same
immigrants then use what remains of their income to send remittances
back home. In this common scenario, immigrants are penalized in both
receiving and sending their earnings. Third, the real cost of sending
money is not higher than $6. This means that costs of receiving and
sending income remains a challenge to the majority of immigrant
remittance senders.
Table 4. Household Income by Race
--------------------------------------------------------------------------------------------------------------------------------------------------------
Household Income
---------------------------------------------------------------------------------------------------------------------------------------------------------
Between $20,001 and $35,000
Group Under $20,000 (percent) (percent) Over 35,000 (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hispanic/Latino....................................... 32.5 24.9 43.0
Non-Hispanic White.................................... 11.3 16.6 72.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: U.S. Census Bureau, CPS March 2000.
The companies that charge above 9.5 percent tend to have a
significant market share in the recipient countries. Specifically,
while only 24 percent of companies charge fees above 9.5 percent of the
principal, they have the largest market share. Therefore, these fees
affect a larger number of immigrants. According to the IADB survey on
remittances, 41 percent of senders used Western Union and MoneyGram.
Table 5. Remittance Companies Charging Over $15 on $200 Remittance
------------------------------------------------------------------------
Charge Company
------------------------------------------------------------------------
Over $20.................................. Uno Money Transfers; Ria
Finance Service; CAM;
Caribbean Airmail; Grace
Kennedy Remittance Services/
Western Union (Jamaica)
Western Union; Vimenca/
Western Union (D.R.);
Remesa Agil; RIA Express;
BPD International (D.R.);
Jamaica Air Express
Couriers; Paymaster/
MoneyGram (Jamaica).
Between $17.51 and $19.99................. MoneyGram; La Nacional/
Caribe Express (D.R.);
Mateo Express (D.R.);
Pronto Envio; Quisqueyana
(D.R.); Gigante Express
(home delivery) (ELS, GUA);
Girosol; Jamaica National
Overseas; King Express (to
the Interior).
Between $15 and $17.50.................... (GUA); MoneyGram--Bancomer
(MX); Rapid Remittance/Vigo
(MX); Ria Enviaw/Banco Mex
(MX); Ria Enviaw/telegrafo
(MX); ServiMex (MX).
------------------------------------------------------------------------
Country Differences
The price of sending remittances varies significantly from one
recipient country to another, and the level of market competition for
sending money to a specific country serves as a key determinant of that
country's average price range. When the
results are disaggregated by country, the price of sending ranges from
$7 to $26.
Mexico is the country with the lowest fees among the nine countries
studied. It is also the country with the greatest market choices for
customers. The competition in Mexico ranges from small businesses to
large corporations. Significantly, among the reasons for expanded
competition is the entrance of the banking industry into the remittance
market. Bancomer, Banamax, and Bancomex are major competitors in the
industry, offering direct money transfer services (like remittance
agencies) and/or working jointly with money transfer companies such as
MoneyGram and Ria Envia. The major competitor, Western Union, has
gradually lost its market share in Mexico due to the entrance of many
new competitors. The competitive market may make it more difficult for
remittance companies to survive. As prices have gone down in Mexico,
many companies have been unable to stay in the competition.
Following Mexico is El Salvador, which also exhibits greater
competition and is the second largest remittance recipient in the
Hemisphere. While Western Union remains a dominant player for El
Salvador with about 15-20 percent of market share, it also has to
compete with other companies. Its first major competitor is Gigante
Express, a courier company that mostly sells and sends money orders,
and which has also nearly a quarter of the market share. Second,
competition exists with commercial banks. BanSol, BanComercio, Banco
Agricola, and Banco Cuscatlan operate in the United States as money
transfer agencies and compete with Western Union and Gigante Express.
Banco Agricola, the largest bank in El Salvador, has about 10 percent
market share. The bank offices in Los Angeles transfer nearly $200
million a year. BanComercio has almost the same market share as Banco
Agricola.
The Dominican Republic has more than 15 well-established companies
remitting from the United States. These companies are grouped into a
conglomerate through an association named the Associacion Dominicana de
Empresas Remesadoras de Divisas, Inc. The members of this association generally have similar prices. As Table 8 shows, remittances to the
Domincan Republic tend to have relatively higher prices than other
countries with similar characteristics (high volume, significant
competition, and immigrant demographic concentration). These companies generally offer two kinds of charges: $8+5 percent (when sending in
dollars) and $5+5 percent (when sending in local currency) of the amount
sent. Remittance companies in the Dominican Republic usually offer a home delivery service as part of their fees. In other countries, home delivery
generally incurs an extra dollar fee. The Asociacion claims that their
charges offset price fluctuation. This claim is bolstered by the fact
that the standard deviation of the fees is the lowest among the
different countries studied, that is, $3.7. In other countries the
standard deviation is over $5, except for Mexico.
In Jamaica, money transfers also tend to be more expensive. Western
Union, through its arrangement with the local firm Grace Kennedy,
controls the majority of Jamaica's remittance market. With about
200,000 transfers a month coming from the United States, Grace Kennedy,
manages somewhere between 65 percent and 70 percent of the market
share. Another competitor with operations in the United Kingdom and the
United States is Jamaica National Overseas, which is part of
Jamaica National Building Society. In 2001, Jamaica National Overseas
transferred $95 million from the United States, which amounts to 10
percent of the market share. These results show that there are
differences among countries for the charges to transfer money.
Competition among remittance sending companies is a key variable
explaining the country differences. However, there may also be other
factors involved, such as the type of institution participating in the
money transfer process or the technologies employed.
Difference Between Sending In Local and
Foreign Currency and Exchange Rate Issues
Charges vary depending on whether money is sent in local or foreign
currency. Money transfer institutions tend to charge more when the
amount is sent in U.S. dollars (as the company loses the ability to
profit with the foreign exchange). Conversely, if the money is sent in
local currency at lower fees, the recipient loses a percentage of the
remittance in the foreign exchange rates.
Table 6. Fee Charged and Type of Currency
----------------------------------------------------------------------------------------------------------------
Fee Charge Scale
-----------------------------------------------------------------------------------------------------------------
Over $15 Between $10.01 and Under $10.00 Total
(percent) $15.00 (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Local currency............................ 22.6 49.1 28.3 100
Dollars................................... 56.3 18.8 25.0 100
Dollars................................... 56.3 18.8 25.0 100
Did not want to provide an answer......... 28.6 71.4 100
Did not want to provide an answer......... 28.6 71.4 100
Money Order............................... 33.3 66.7 100
Money Order............................... 33.3 66.7 100
37.7 34.2 28.1 100
37.7 34.2 28.1 100
----------------------------------------------------------------------------------------------------------------
According to company officials in different countries and
businesses, most remitters request the money be sent in the country's
local currency. Because of the exchange rate losses, remittance
recipients' relatives receive less than the (monthly average) $200 that
is sent to them. On average, recipients lose nearly $60 a year from the
unfavorable exchange rates. Since the average household income for
Central American and Caribbean families is below $200 a month, the
price of sending and receiving remittances amounts to more than an
additional month's income.
Table 7. Average Fees Charged to Send $200
------------------------------------------------------------------------
Country Local C. Dollars
------------------------------------------------------------------------
Mexico.................................. $11.60 NA
El Salvador............................. $15.06 Same
Guatemala............................... $15.17 $18.00
Dominican Republic...................... $17.56 $19.50
Nicaragua............................... $18.71 Same
Haiti................................... $20.60 $21.00
Colombia................................ $16.67 Same
Jamaica................................. $19.25 NA
Cuba.................................... $25.58 NA
------------------------------------------------------------------------
Remitting Institutions
Despite average prices of over 8 percent of the amount sent plus
over 2 percent in the exchange rate applied, there are some businesses
that offer lower priced transfers (i.e., 4 percent of a $200
remittance). Banks, for example, tend to charge less than $10 for
transfers, whereas money transfer companies charge more. Nearly 60
percent of banks but only 30 percent of money transfer companies
charged $9 or $10 for any transaction under $200 (See Figure 4). These
companies tend to be located in El Salvador, Mexico, and Guatemala, the
most competitive markets.
There are numerous reasons why banks offer lower charges. The home
country offices of banks involved directly in money transmission: (a)
are generally the largest banks in the country, (b) have the capacity
to acquire capital upfront to back the outflow of transactions, (c)
have an already-existing distribution network, (d) are better known by
the sending clientele, and (e) concentrate on attracting volume from
demographically concentrated areas where migrants of the bank's country
reside. Smaller players such as money transfer companies often have to
find an investment partner as well as banking or other financial
institutions to arrange distribution schemes and are therefore likely
to incur extra costs.
Nevertheless, the availability of banking institutions involved in
money transfers is limited and in most cases banks do not provide an
inexpensive service, merely a cheaper one. In addition, banks often
respond to the presence or absence of competition, and do not
necessarily offer a lower fee service. For example, Jamaica and the
Dominican Republic have banking institutions with branches operating as
money transfer companies in the United States. However, their charges
are not necessarily lower than the other nonbanking institutions
remitting to these countries (See Table 8).
Table 8. Financial Institution Charging Less Than $10 for a $200 Remittance
[as percent of total charges]
----------------------------------------------------------------------------------------------------------------
Money Transfer Company Bank of CU
Country -----------------------------------------------
Under $10 Above $10 Under $10 Above $10
----------------------------------------------------------------------------------------------------------------
Colombia........................................................ 25 75.00 NA
Cuba............................................................ NA
Dominican Republic.............................................. 8 92.00
El Salvador..................................................... 27.27 73.73 75
Guatemala....................................................... 42.86 57.13 100
Haiti........................................................... 100
Jamaica......................................................... 16.66 83.33
Mexico.......................................................... 41.17 58.83 66.66 33.33
Nicaragua....................................................... 36.36 63.63
All countries................................................... 25.53 74.47 57.14 42.86
----------------------------------------------------------------------------------------------------------------
As noted, prices set by companies vary significantly. Operating
costs to transfer money include service to the customer through a point
of sale with an agency; use of the electronic interface to transfer the
amount; availability of capital to back the money upfront,
establishment of a distribution network on the receiving side; and
customer service. Generally for money transfer companies, the cost of
executing an individual transaction runs somewhere between $3 to $6 per
transfer (some analysts argue the costs are even lower). Banks already
have an infrastructure in place in the home countries, therefore their
costs may be lower. One company which charges $10 to remit to Mexico
and Central America explained that their company spends 40 percent on
transfer costs and the agent, another financial institution, retains
50 percent of the fees. In addition to the remaining 10 percent, this
company uses the foreign exchange rate as a source of profit. Their
primary means for this business to increase profits was to increase
volume and keep costs down. In contrast, other companies share less
than 50 percent of the fees with the agents. Furthermore, some
remittance businesses cut out the need to pay agents by opening their
own agencies and only need to cover overhead expenses. These entities
are likely to have lower expenses.
At least one third of companies transfer remittances at $9 and $10,
and some offer $7 transactions, which still make a profit (even without
including the exchange rate applied). Companies charging more than $10
and often over $14 per remittance transfer cannot explain why their
costs are considerably higher. Western Union generally argues that
their charges are higher by virtue of offering a ``premium service,''
that is a service that is 100 percent guaranteed in terms of location,
speed, reliability, and safety. Western Union does have a sophisticated
and widespread company infrastructure. They have agencies throughout
the United States and partner companies in Latin America. This capacity
has rendered this company the remittance institution with the highest
revenues in the Western Hemisphere. Latin America is Western Union's
most important market after the United States, Canada, and Western
Europe, and represents over 20 percent of the company's revenues. The
company does appear to have two advantages over many of its
competitors. First, are Western Union's extensive geographical
locations. Second, but more ambiguously, Western Union may offer better
customer services than some of the competition. For example, Western
Union operating as Vimenca or Grace Kennedy notifies recipients that
their money has arrived and provide toll free numbers to their clients
so that they can inquire about the status of a transaction. However,
other companies have proven capable of offering very similar services
to Western Union while charging lower fees.
Conclusion and Recommendations
Although remittances are regarded as an important source of income
by recipient countries, charges continue to be high. With prevailing
advanced technology in which money transfers can (and do) cost very
little or nothing to the most savvy senders and recipient, it is worth
asking how these advantages can be extended to common remitting
immigrants. For example, a person with a U.S. bank account could allow
his or her relatives in the home country to withdraw cash with an ATM
debit card sent by the account holder while only paying for the use of
the ATM.
Expanding sending methods as well as competition (or leveling the
playing field) are factors that help reduce money transfers. Moreover
educating customers about costs and charges is another important
method. In Latin America there is a need to greater facilitate money
transfers of any kind, be they remittance, savings, investment, or
consumption. A comprehensive effort to support senders and recipients
should foster an environment in which remittances are less costly and
can also have a developmental leverage.
Motivate Unbanked Migrants in the United States to
Use Formal Financial Institutions
Only six out of 10 Latin American immigrants use, or consider
themselves to have meaningful access to, bank accounts. The effects of
being unbanked are significant. People are not only susceptible to
higher costs and difficulties on a daily basis, but also they lack the
ability to establish credit records and obtain other benefits from
financial institutions. Helping migrants to enroll in the banking
industry would help ensure lower fee transfers. Some Government and
private institutions are already engaged in that effort and could
target a strategy linking remittance transfers with banking options as
a way to attract migrants into the financial system.
Create a Board That Provides Oversight for Remittance Companies, and in
Particular Their Fees and Exchange Rates
As with a large range of organizations, oversight boards are
important institutions that help guarantee corporate transparency and accountability as well as compliance with standards for products and
services. The United States needs such an institution on a nationwide
basis for money transfers. A remittance oversight organization could
include representatives of money transfer companies as well
as customers and other independent and knowledgeable parties. It could
serve as or establish an independent board that reviews practices and
other issues relating to remittances to Latin America (and elsewhere).
Establish a Customer Rights Office on the Recipient Side to Educate
Recipients About Costs and Better Measure Effectiveness and
Efficiency of Services
Remittance recipients are seldom aware of many of the practices and
methods of the remittance companies. For example, many senders do not
know about the different exchange rates that prevail among many
companies. Furthermore, there is no independent research or checks on
effectiveness or efficiency of the various services. Nongovernmental
organizations could contribute significantly by educating money
recipients about being informed customers.
Money Transfer Company Partnership with Small Banks and Credit Unions
The experience of Quiesqueyana, Vigo, and RapidMoney of partnering
with small banks and credit unions points to important options to help
reduce costs (see annex). These three companies offer an alternative to
remittance recipients that enhance their use of this income source through lower fees or access to an ATM for cash or a VISA debit card for purchases. Expanding these alternatives will also increase market competition and
improve an imperfect remittance market.
Bank Partnership with Banks and Credit Unions
Another important strategy to help lower charges is to increase
bank-to-bank agreements in the United States and Latin America
regarding money transfers. Currently, banks generally charge over $30
for an international wire transfer. However, when the prospect of
increased volume is considered, banks often show interest and are
prepared to lower these fees. Harris Bank and Wells Fargo are important
examples of this type of initiative. These banks arrange money
transfers through Mexico's Bancomer. Money recipients in Mexico are
also encouraged to use the banking industry by the mere act of
receiving their currency at a bank rather than at a money transfer
agency.
Expand Debit Card Use and Motivate Recipients to Open Dollar Accounts
Debit card access to shared bank accounts is one way to greatly
reduce transfer charges. But it is important that credit unions and
banks encourage money recipients to have credit union or bank accounts
as well. Credit unions and other banks can enhance the welfare of
remittance recipients by encouraging them to opening accounts and earn
interest on their money. The percentage of Central American and
Caribbean people with bank accounts is generally below 20 percent
(except in Jamaica which has a much higher percentage). Banks and financial
institutions are key development agents and, as they reach out more to society, the multiplying effect on development increases.
* * * * *
ATTRACTING REMITTANCES: MARKET, MONEY AND REDUCED COSTS
Report Commissioned by the Multilateral Investment Fund of the
Inter-American Development Bank
January 28, 2002
Introduction \1\
This report analyses four Central American and Caribbean countries
from the perspective of what governments and other actors are doing to
promote an enabling environment conducive to economic exchange between
immigrants residing in the United States and their homeland. The report
examines which policies and practices are most conducive to enabling an
environment that attracts foreign currency to Latin America while
keeping the expense of the money transfers as low as possible from the
perspective of the senders, recipients, and developing countries. As
the report explains, there is a growing interest among government and
private sector groups to reach out to migrants as economic agents. To
that effect efforts are being made to establish an environment
conducive to economic exchange.
---------------------------------------------------------------------------
\1\ Many thanks to Kenneth Blazejewski for research support in the
preparation of this report.
---------------------------------------------------------------------------
Central American and Caribbean countries are gradually being
integrated into the global economy. Migration, mostly to the United
States, has significant economic
effects in these countries. In particular, worker remittances flow
continuously from United States-based migrants to support at least 10
percent of the households in Central American, Caribbean, and other
countries. This influx of foreign capital is of enormous benefit to
entire societies, however, and not just the direct beneficiaries. Some
of these wider benefits can be seen in the consumer spending they
encourage and the foreign currency they provide to governments.
Governments are important agents of economic change and through
policies and regulations can attract migrant capital and decrease the
price of remitting money. Governments need to consider what policies
they might adopt to achieve these goals. These may include increasing
migrant understanding of alternative sending methods, encouraging or
requiring the market to offer cheaper methods to transmit remittances,
and developing policy initiatives that enable and encourage an
environment that attracts more worker remittances or investment.
From the business perspective, competition among both existing
financial service companies and potential new remittance transfer
entrepreneurs needs stimulating to lower prices and increase services
offered to actual and potential customers who send remittances abroad.
The private sector transferring remittances can contribute to increased
remittance flows by lowering transaction costs, and offering
development alternatives to individuals and groups through their
services.
Four countries are studied in detail for this report on enabling
environments. These countries are El Salvador, the Dominican Republic,
Jamaica, and Guatemala. The study is based on more than 50 interviews
in the four countries. Government, private sector, and nonprofit sector
institutions were consulted and their representatives interviewed to
assess the extent to which regulations, policy and private initiatives,
and other incentives have been put into motion to transfer migrant
currency (in the form of remittances, savings, investment, or
donations) to home countries more cheaply and/or efficiently.
The future scenarios to better attract and increase foreign migrant
currency look positive for most of these countries. There are a number
of initiatives in the making, many of which will materialize in ways
that will enable an environment to transfer remittances at lowered
charges and expand economic activities in savings and investment by
migrants. The first section of the report analyses the continued trend
of contact between migrants and their home countries. The second
section analyses whether there is an environment that allows migrants
to economically engage their home country, or to at least send foreign
currency at low costs. Finally, the report offers concrete
recommendations to further enable and promote the environment for
remittance transfers.
Background
In addition to sending remittances, migrant workers provide other
important sources of revenue and economic stimulation to their
countries of origin. This first form of economic engagement has
historically been remittances. However, these cash flows are by no
means the only benefit to the countries of origin. There are at least
three other forms of economic support. First, in addition to cash,
migrants bring consumer goods to their families and communities.
Second, nationals living abroad visit their home countries, often
regularly, expanding or revitalizing the tourist industry and related
economic sectors such as airlines and other forms of transportation.
Third, immigrants purchase products from their countries of origin
while in the United States thereby stimulating growth in the so-called
``nostalgic industries.'' Fourth, immigrants may and sometimes do
invest in businesses in their native lands, including but not
exclusively in the nostalgic industries. Finally, many migrants provide
financial support to facilitate development and philanthropic
initiatives through Home Town Associations (HTA's), which donate cash,
goods, and in-kind services to communities in the countries of origin.
In most of the countries under study, economic connectivity between
migrants and their native country is a recurrent process. Tourism for
El Salvador and the Dominican Republic has a strong component of
nationals living abroad. In the Dominican Republic, for example, nearly
40 percent of tourists who arrive in the country are Dominicans living
abroad, predominantly in the United States. Their average length of
stay is more than 15 days and they spend around $65 a day. From the
John F. Kennedy Airport alone, annual flights to Santo Domingo carry nearly
140,000 people. Another 95,000 travel from Miami (See Table 1 below).
The situation is similar in El Salvador. Over 40 percent of people
arriving into the country are Salvadorans. Grupo Taca, an airline
carrier that serves Central America, flies 21 times a day from the
United States to El Salvador. The same pattern is observed in countries
such as Nicaragua and Mexico. At least 20 percent of tourists arriving
to Mexico are Mexicans residing in the United States. The wealth
generated by these flows is significant.
Table 1. National Origin and International Tourists
----------------------------------------------------------------------------------------------------------------
Total
Tourists Nationals Percent Year
----------------------------------------------------------------------------------------------------------------
Dominican Republic.......................................... 2,169,977 845,102 0.38945 1999
Jamaica..................................................... 2,231,765 103,379 0.04632 2000
Mexico...................................................... 9,793,900 2,203,100 0.22495 1997
----------------------------------------------------------------------------------------------------------------
Source: Banco Central, Republica Dominicana, http://www.bancentral.gov.do/; Bank of Jamaica, Statistical Digest
October 2001, Table 36.1; Banco de Mexico, www.mexico-travel.com.
Moreover, in a smaller proportion perhaps, migrants have become a
new market attracting exports from their home countries. Ethnic imports
to the United States, in the above-mentioned nostalgic industries,
including items such as local beer, rum, cheese, and other foodstuffs,
have gained more attention among producers in Central America and the
Caribbean. For example, exports to the United States of El Salvadoran beer tripled from $1 million to $3.3 million between 1999 and 2000.
By October 2001, exports had increased to $3.5 million, and promised to
reach $4 million by the end of the year (USTR 2002). In many cases, home country producers have also established businesses in the United States to cater to the migrant community.
Another important development in the nostalgic trade industries is
migrant investment in their home countries to manufacture foodstuff
such as cheese, fruits, and vegetables. A number of migrants residing
in the United States have set up businesses back in their home
countries to establish stores of various kinds. One particular example
of such a company is Roos Foods, Inc., a food manufacturer that
produces and sells processed milk products in Central America and to
Central Americans and Mexicans residing in the United States. Roos
Foods operates in the United States but with franchises in Nicaragua
and El Salvador. This trend of migrant investment in home countries
will likely continue in the coming years.
Moreover, investment is not limited to individual enterprises. A
recent survey of migrants residing in the United States commissioned by
the Inter-American Development Bank asked how interested they were ``in
investing in a fund that would benefit the economic development'' of
their country. Thirty-eight percent of respondents said that they were
somewhat interested or very interested (IADB 2001). These patterns of
continued and of increasing economic interaction bring into focus the
need to examine the extent to which there exists an environment that
facilitates a relatively uncomplicated process through which migrants
can strengthen their relationships with their home countries, starting
with a low cost method to transfer remittances. Specifically, are there
factors facilitating or enabling an environment for migrants to work as
active economic agents? Is there an enabling environment that helps
businesses compete in the remittance market and lower transaction
costs? The following sections seek to answer these questions.
An Enabling Environment
With increased labor migration, governments, civil society, and the
private sector are now faced with the prospect of attracting more
worker remittances, migrant
association donations, migrant capital investment, as well as trade
opportunities. Governments and businesses need to ask themselves what they
can do to help lower the costs of remittances and attract more money. What policy and regulatory changes would be most helpful? What stands in the
way of those changes? Would regulation of courier agencies and other
remittance transfer businesses reduce costs? Can governments and
financial institutions help channel greater amounts of remittances
through the banking system?
An enabling environment is one that facilitates with ease economic
interaction among players. Five factors that enable a particular
economic environment are:
the presence of a significant number of economic players;
communication and networking efforts;
readily available information about transactions;
policy, business initiatives, and ventures aimed at key
economic sectors; and
resource availability to enhance initiatives and motivate
players.
Within this context, governments and businesses (as well as
nongovernmental groups, which lie largely beyond the scope of this
report) can promote initiatives that not only address cost reduction in
the transfer of remittances, but also enable other elements of an
economic environment that is attractive for migrant transfers of
various kinds. Factors that may hinder or enhance migrants' decisions
to increase, diversify, and strengthen the impact and value of
transfers include (but are not limited to) the following:
Cost and delivery. These factors are affected by many forces,
including prevailing monopolies or ineffective oversight over money
transfers.
Exchange rates.
Banking regulations. For example, allowing those working in
the United States to keep dollar accounts with favorable interest
rates in their home countries would likely increase remittance
flow, as well as enhance how those remittances are used,
encouraging savings and investment.
Granting trading licenses to individuals who already have
enough foreign exchange to import or export commodities. These
initiatives can attract savings coming from remittances received by
local entrepreneurs.
Nonexistent or insufficient incentives to attract immigrant
investment and/or donations. Governments can create incentives
through policies such as facilitating favorable loan interest rates
to migrant groups or reducing import duties for hometown
associations' donations. Banks and credit unions can offer
strategies to attract remittances, savings, and other investments
to their institutions and support the development of the receiving
community.
This project reviewed current policies governing foreign currency
transfers to Latin America, as well as the outreach efforts to migrants
by the banking industry in selected Latin American countries. The
report finds that, overall, there are no major obstacles for migrants
to transfer resources (remittances, donations, or investments), or for
companies to engage with the diaspora. On the other hand, however,
there are few major or widespread initiatives to increase and enhance
the quantity, range, and value of flows. Among other concerns, there is
a need for outreach and marketing to migrants. Except in El Salvador
where a nascent program exists, and in Jamaica where a new trade policy
links the country to its diaspora, there are no strategies in place.
Private sector initiatives to engage their fellow compatriots also
offers promising opportunities, but they are in their early stages and
involve few players. The report now reviews the state of the
environment vis-a-vis migrant opportunities to economically engage
countries of origin.
El Salvador
According to U.S. census figures, there are at least one million
Salvadorans in the United States. The Central Bank of El Salvador
estimated that Salvadorans sent nearly $2 billion in remittances in
2001. In addition, as noted above, Salvadorans travel to El Salvador
frequently and maintain an economic relationship with their families,
communities, and country whenever possible. El Salvador's economy was
dollarized on January 2001, which has reduced speculation in worker
remittances. Nevertheless, the costs of money transfer remain high
overall.
Government institutions as well as the private sector and civil
society are seeking initiatives and strategies to enable an attractive
environment for migrants to engage economically with El Salvador.
Helping to reduce costs and attract more remittances are among their
priorities. The government's priority is to draw economic resources and
investment to El Salvador, including those of migrants, rather than to
focus on remittances. The business sector remains focused on extending
and enhancing the remittance business in its own right.
Government initiatives-- Central Bank authorities stress that there
are few regulations about foreign currency, particularly since El
Salvador adopted the dollar as the country's legal tender. Individuals
can open dollar accounts, and banks are allowed to do so both for
nationals or foreigners. One significant change has been that dollar
deposit accounts increased by 6 percent since early 2001. The Central
Bank must keep records of incoming foreign currency and identify its
sources. To that effect the Bank uses a procedure to review foreign currency operations, which compiles figures from reports provided by banks, foreign exchange businesses, and other institutions authorized to carry out
international financial operations.
The Salvadoran government has sought to reach out to its diaspora,
but the efforts do not always have the necessary follow-through. In
2000, the Ministry of the Economy sought to adopt a strategy aimed at
cultivating migrants as potential investors. The Ministry created a
``trading cluster'' with the purpose of linking Salvadoran enterprises
with diasporic business partners. This strategic alliance approach
serves as a departure point to promote trade at larger scale. By
January 2001, the strategic alliances emerging from the Ministry's
initiative had reached monthly deals of $100,000 to purchase
agricultural goods such as beans. Later in the year, however, such
efforts seemed to have lost momentum. The Office of Competitiveness at
the Ministry stressed that these were important efforts and El Salvador
should think of these strategic alliances as economic beachheads.
Nevertheless, as of late 2001, there were no continued initiatives in
place and that no follow-up to the previous effort.
The Foreign Affairs office also engaged in outreach efforts with
expatriate Salvadorans as part of an initiative emanating from the
Vice-President of the Republic. The Direccion General de Atencion a la
Comunidad en el Exterior (hereafter, the Directorate) created in
January 2000, is an office that coordinates with other government
agencies outreach efforts with Salvadorans living abroad. The
objectives of the office have been to link the Salvadoran government
with the community living abroad, carrying out initiatives that
strengthen the relationship between the diaspora and El Salvador. The
office has paid attention to four areas: Economics, cultural issues,
community organizing, and migration. Much of the office's work has
involved networking with the diaspora, particularly with hometown
association leaders. It has also promoted development in a number of
areas. One initiative was to promote diasporic assistance to housing
reconstruction following the early 2001 earthquake that devastated
parts of the country. Another project has been the
office's role in facilitating communication between hometown
associations and local governments in order to engage the former in
small development projects. To that effect the Fondo de Inversion
Social para el Desarrollo Local de El Salvador, a government agency,
has linked with hometown associations to carry out small development
projects in rural sectors of the country. Construction projects have
been at the core of this relationship in which hometown associations
participate as joint partners providing material for basic
infrastructure and assisting with property acquisition. Other efforts
by the Directorate have been to facilitate the tax-exempt status of
goods donated by Salvadorans living abroad.
In 2002, the Directorate will promote a portfolio of development
projects identified with the assistance of the Ministry of Agriculture.
These are generally low-budget investment projects involving less than
$30,000 (and which average about $10,000). These projects would be an
attractive incentive to migrants interested in either
investing or in donating capital. Another important initiative is the
creation of a $300,000 matching fund to implement joint partnership
activities with hometown associations. This matching fund represents an
incentive to attract HTA's to engage in or expand development
initiatives for their communities of origin.
Table 2. Projects Proposed by the Outreach Directorate
------------------------------------------------------------------------
No. of
Project Amount Projects
------------------------------------------------------------------------
Chicken farms................................. 60,355 7
Fish farms.................................... 56,690 2
Gardens....................................... 27,500 6
Handcraft..................................... 10,500 1
Organic....................................... 10,500 1
Other......................................... 12,700 2
Vegetables.................................... 9,200 1
Social........................................ 18,500 2
Fruit......................................... 10,800 2
------------------------------------------------------------------------
Source: Outreach directorate.
Private sector initiatives--Businesses in El Salvador have
recognized the value of remittances as an economic instrument that
enhances a company's profits. However, there remain significant areas
for businesses to improve the products and services they provide to
both migrants and recipients. For example, the banking industry in El
Salvador has significant international operations and many banks
already offer money transfers. The four largest banks in El Salvador
(See Table 8) have branches in the United States. Money transfers to El
Salvador are competitive and a leading company, Western Union, despite
controlling a significant portion of the market with 254 agencies,
competes regularly with the banks and courier agencies.
Although many banks offer remittance services, banks have largely
failed to offer recipients opportunities and incentives to open bank
accounts and save their money. As in most countries, there is an
assumption among some banks that because most money recipients are low-
income individuals who predominantly use the money for consumption,
they are not potential bankable customers. That belief impedes banks
from offering sufficient incentives to senders and recipients or
training them to use the banking industry.
Table 3. Top 10 Banks in El Salvador
------------------------------------------------------------------------
Assets in 2001
Bank (in U.S. Branches in the
dollars) U.S.
------------------------------------------------------------------------
Agricola S.A..................... 2,546,526,000 BancoAgricola,
branches in
California and
Washington.
Cuscatlan de El Salvador S.A..... 1,931,919,000 New York.
Salvadoreno S.A.................. 1,405,586,000 BanSol, branches in
California and
Washington.
De Comercio de El Salvador, S.A.. 923,568,000 Bancomercio
branches in
California and
Washington.
Scotiabank El Salvador, S.A...... 401,220,000
Hipotecario de El Salvador, S.A.. 253,488,000 Works with Western
Union.
Capital S.A...................... 237,593,000
Credomatic S.A................... 205,365,000
De Fomento Agropecuario.......... 172,439,000 Works with Western
Union.
Citibank N.A..................... 165,366,000
------------------------------------------------------------------------
Source: Estrategia y Negocio, Diciembre 2001-Enero 2002.
Despite this assumption of ``unbankability,'' most bankers agree
that some of those receiving remittances open bank accounts at some
point in their economic lives. For example, in Banco Hipotecario, bank
officials estimated that 20 percent of money recipients open accounts
and enjoy the benefits of banking. Banco Agricola estimates that 30
percent of remittance senders and 10 percent of recipients have bank
accounts. Banco Agricola offers three services to senders; remitting to
a savings account through agencies in the United States, remitting to a
relative's account (or providing a cash payment), and bill payments.
However, neither of these banks has incentives to actually attract
recipients into the banking industry or to offer them or the sender
standard banking benefits, such as housing loans or other types of
financial opportunities.
Cooperatives have more initiatives and outreach to remittance
senders and recipients, but the cooperatives are less widespread than
the banks. The Federation of Salvadoran Savings and Credit Cooperatives
(Fedecaces) initiated the IRnet system, which provides international
wire transfers among credit unions, in coordination with the World
Council of Credit Unions. This important initiative, which has enormous
potential benefit to senders and recipients of remittances (as well as
others), continues to be limited due to lack of resources. Two major
impediments are the small number of people who are members of credit
unions and the need to develop computer software that would allow for a
more efficient money transfer system. Despite these constraints, the
program has been able to attract clients into its money transfer
system. Fedecaces has also made use of 26 points of service in El
Salvador in addition to its central offices and the participation of 18
cooperatives.
Fedecases' relationship with other financial institutions
underscores arguments this report makes about best practices and the
advantages of enabling environments that facilitate flows, customer
empowerment, and related economic and social benefits. Originally,
Fedecases would only transfer remittances from a U.S.-based credit
union such as L.A.-based Comunidades. In order to expand its service in
the United States, it then arranged to send money through three money
transfer companies; Vigo International, Rapid Money, and Viamericas,
all companies which charge lower prices than their business
competitors. Fedecases' remittance service tripled from the moment in
expanded its activities with the money transfer companies. Prior to
this expansion, between January and September 2001, the Fedecaces
transferred $483,068. Because of its new expanded reach, remittance
transactions in the last 3 months of the year were almost double those
of the previous 9 months, resulting in a year-end total of $1,203,583.
Also notable is that the average remittance transaction was $400, which
is about double the usual transfer amount. Fedecaces'
approaches are apparently consolidating their customer base as
Fedecaces' officials report that every month 10 percent of recipients
decide to associate with the cooperative.
Other institutions have explored opportunities to engage with their
home country diaspora. Two examples are the Banco Multisectorial and an
NGO, Infocentros. Banco Multisectorial is an organization that provides
funding for housing and other development projects, usually through
other institutions. It has provided credit to sell homes in El Salvador
to Salvadorans living abroad. However, partly due to the lack of
outreach and marketing strategies and partly due to Banco
Multisectorial's lack of knowledge about the Salvadoran population
abroad, only $2 million was financed. Infocentros is a Salvadoran NGO
that offers training to use and access to the Internet. They have
``infocentros'' which are computer centers like Internet cafes, and an
infrastructure already in place. This organization is exploring using
its infrastructure and expanding its offices throughout the country to
offer money transfer services through low-cost, Internet-based,
transactions to Salvadorans residing abroad. This initiative could
offer other important benefits to the recipients such as educating the
recipient community about new technologies.
El Salvador is clearly working to build a better economic
relationship with its diaspora. However, banking institutions need to
better explore the opportunities of attracting migrant capital, as well as making efforts to bank the unbanked in El Salvador. Overall, positive
efforts and initiatives are being set in place, but further dialogue on economic interaction with Salvadorans living abroad needs to take place between private sector entrepreneurs and government.
Dominican Republic
There are nearly one million Dominicans in the United States, the
majority of them residing in New York and Florida. In 2001, these
Domimicans sent $1.8 billion in remittances to their home country.
Despite this volume, the third largest amount among Latin American
countries, charges for transfers are higher than for El Salvador,
Guatemala, and Mexico. Moreover, there are no specific initiatives in
the Dominican Republic to establish linkages with the Dominican diaspora,
although government officials and private sector groups are eager to
initiate such economic schemes. Greater knowledge and understanding of
the money transfer market and the development of policy initiatives by
the government could stimulate active engagement with Dominicans living
abroad.
Government initiatives-- Government officials in the Dominican
Republic value remittances as an important source of income for the
economy. Central Bank analysts estimate that between 1995 and 2000,
after tourism, family remittances represented the second source of
foreign currency earnings, reaching $7.3 billion, or 8 percent of the
country's GDP. Central Bank officials also maintain that since the
onset of economic liberalization, dollar transfers may be made freely
and regulations on foreign currency only occur for transactions above
$5,000. Foreign exchange businesses and money transfer companies must
comply with regulations when handling transfers exceeding $5,000. Bank
obligations are limited to verifying that transactions are registered
as remittances and both banks and nonbank financial institutions must
report the remittances they handle.
Notwithstanding the enabling provisions of economic liberalization,
the government and private sector could do much more to promote a money
transfer environment that is effective, inexpensive, and attractive to
migrants as well as implement other measures to enhance economic
relationships with expatriate Dominicans. Tourism is a case in point.
Despite the fact that nearly 40 percent of tourists who traveled to the
Dominican Republic in 1999 were Dominicans who spent an average of $741
during their typical 15 day stay, the Tourism office has no program in
place to reach out to this sector. Although tourism officials recognize
that promoting ``internal tourism'' for Dominicans living abroad would
bring important benefits to the country, they admit that their approach
is to promote ``international tourism.''
More broadly, there is no government consensus as to how to
interact with and relate to Dominicans overseas. In the Foreign Affairs
Ministry, for example, an official was concerned about the difficulties
and risks of having an economic strategy targeting migrants living
abroad. Nevertheless, an outreach policy is considered necessary and to
that effect, the Foreign Affairs Ministry created an Overseas Affairs
Office. Moreover, the Office of Investment Promotion in the Dominican
government has a clear understanding that partnering with Dominicans
living abroad will enhance the country's development opportunities, but
has no policies in place to define an appropriate strategy or
orientation. In other words, the recognition by this office that the
government and private sector must create conditions to attract migrant
capital investments has yet to translate into policy or practice.
Private sector--Generally, Dominicans suspect that the costs of
sending remittances may be high. However, the Associacion Dominicana de
Empresas Remesadoras de Divisas, Inc. has an effective public relations campaign that contends that their prices are fair. Moreover, though some businesses in the Dominican Republic are aware of current market behavior
and high prices, they often feel they should not get involved. Remittance
companies themselves could also offer development contributions to the
communities receiving remittances, such as donations or joint ventures
with communities living abroad. Vimenca, Western Union's representation
in the Dominican Republic, with near a 30 percent market share,
explains that they offer various charity donations and would be
interested in participating in other projects. Mr. Freddy Ortiz,
President of the Remittance Association agrees on the importance of the
developmental contribution that the Association's member companies can
provide.
Although banks are relatively uninvolved in the remittance
business, there are some exceptions. Banco Bancredito is involved in
the money transfer system but only to a very limited extent and with a
small number of customers who are remittance recipients. Although
Bancredito has 51 branches throughout the Dominican Republic, it only
received a little less than $4 million a year in remittances from the
United States. Most of these transfers arrive into dollar savings
accounts kept by Dominicans living in the United States. The bank
recognizes that it could seek to attract or offer incentives to new
customers to have dollar accounts. Banco Mercantil, which works mostly
with trade, is interested in the remittance market and offers a money
transfer scheme through a debit card in conjunction with Quisqueyana, a
remittance company with offices in the United States. Customers in the
United States go to Quisqueyana offices and transfer the money to the
bank, while the recipient in the Dominican Republic receives a card,
referred to as a CashPin, that can be used regularly to withdraw
remittances. This new venture represents an important advance in money
transfers because it enables recipients to not only cash their money at
any ATM, but also to buy goods at commercial establishments through its
relationship with VISA.
Two other banks more involved in money transfer are Banco Popular
(BPD International) and Banco Hipotecario Dominicano. BPD
International, whose Dominican counterpart is the largest bank in the
country, has various money transfer operations, including remittances
(see Table 9). They also have arrangements with other money transfer
companies. Banco Hipotecario remits significant amounts through its
branches in New York and its market share could reach 14 percent. This
bank also offers other packages to senders and recipients of
remittances. The company has a tourism office that is seeking to
attract the Dominican market living abroad. Hipotecario's business
strategy emphasizes attracting recipients into the banking system, as
well as providing housing loans to both senders and recipients.
Table 4. Top 10 Banks in the Dominican Republic
------------------------------------------------------------------------
Branches in the
Bank Assets as of June 2001 U.S.
------------------------------------------------------------------------
Popular..................... 2,263,825,210 New York.
De Reservas................. 1,755,155,500
Intercontinental............ 1,169,223,960
B.H.D....................... 959,072,170 New York.
Nacional de Credito......... 719,812,480
Del Progreso................ 672,601,000
Citibank.................... 377,483,630
Mercantil................... 339,626,600 Quisqueyana.
Scotiabank.................. 263,290,980
Osaka....................... 165,044,670
------------------------------------------------------------------------
Source: Estrategia y Negocio, Diciembre 2001-Enero 2002.
Nevertheless, there is still much the banking industry and other
business sectors can do and offer to money senders and recipients.
Important contributions would include providing or expanding interest
bearing dollar accounts, housing or construction loans, regular savings
accounts to low income recipients, retirement packages to senders, and
other financial opportunities. These could enhance both business
interests and the needs of the remittance sector.
Finally, as in El Salvador, a nascent interest in money transfers
has emerged among the cooperative system and is reflected in the
initiatives of the Association of Cooperatives, known by its Spanish
acronym AIRAC. One major advantage of the cooperative system in the
Dominican Republic is that many of its branches operate in rural areas
and sectors less frequented by banks. Cooperatives also offer a more
welcoming environment for remittance recipients, as they seem to be
less ``formal'' than banks. In places where remittances are transferred
through cooperatives the community also receives benefits from the
association. One cooperative, San Jose de las Matas, transferred half a
million dollars in remittances during a 12 month
period. Many of the recipients have joined the cooperative since they
began receiving their remittances through it. Thus remittances can play
a developmental role among low-income recipients by functioning as a
resource that over time can be saved. AIRAC is seeking to expand its
services by providing ATM's to the cooperative network and set a more
effective and inexpensive money transfer system than that currently
offered by remittance agencies.
The increasing participation of banks and cooperatives in the
Dominican money transfer system has led to new opportunities for
improvement. In addition, the government's interest in addressing
policy options for migrants living abroad may also be a positive
indicator for the emerging enabling environment. Within that context,
there is a need to discuss current costs, as well as opportunities to
improve services and available options for senders and recipients.
Jamaica
Jamaica is a very different country from other Latin American and
Caribbean countries, not only by virtue of its language (as there are
other English-speaking Latin American countries), but also because it
is the Latin American country with the largest proportion of its
population living abroad. The Jamaican diaspora is spread out around
the world. Jamaica has a population of only 2.5 million people, but has
800,000 immigrants in the United States alone. These 800,000 Jamaicans
sent $900 million in remittances in 2001. Another distinctive
characteristic of Jamaica is that one single company, Western Union,
through Grace Kennedy Remittance Services Ltd., manages the majority of
the money transfer market. Grace Kennedy/Western Union controls about
65 percent of the market. It also has some of the highest remittance
sending fees in the region. As in the Dominican Republic, awareness of
the high relative cost of money transfer is limited in the government
and society. An enabling environment that better facilitates money
transfers is needed in Jamaica, as is recognized in some sectors of
Jamaican society and reflected in some government policies.
Government-- Officials at the Bank of Jamaica, the Central Bank of
Jamaica, believe money transfers to Jamaica flow smoothly. The bank's
primary interest to date has been limited to monitoring the quantity of
financial flows, rather than broader enabling (or disadvantageous)
factors that may promote or inhibit those flows. There are currently no
restrictions on foreign exchange capital flows. There currently are,
however, conversations about money laundering regulations with the
Ministry of Finance and the Banking industry in order to increase monitoring of money transfers that may arrive into the country for nonlegal purposes.
While officials interviewed were not aware of any complaints or
concerns about the remittance transfer companies and systems, they,
like their Dominican counterparts, did express concern when informed of
the fees and exchange rate markups remitting Jamaicans incur.
Outside the money transfer business, government officials at the
Ministry of Finance recognize that there is no strategy to attract
migrant currency earnings. There is only a general strategy to promote
investment. There have been some outreach attempts, but in general
these have been isolated efforts. Through one such initiative, the
National Housing Corporation encourages Jamaicans in the United States
to build homes in their homeland.
In contrast, one area in government where there is a serious focus
on Jamaicans living abroad is in foreign and trade policies. This
strategy recognizes the need for Jamaica to ``be proactive in shaping
the new rules of the international trading environment rather than
passively allow these rules to be shaped by other countries.'' In that
context, one area of attention consists of attracting the support of
Jamaicans living overseas. Under this policy, the government
established the following objectives. It aims to:
Implement the Charter for Returning Residents.
Operate as an information center and contact point for
Jamaican overseas organizations and communities-activities should
focus on information gathering and analysis of overseas asset
creation activities.
Promote policy to support the interests of Jamaican
communities abroad through political and economic activities.
Encourage and mobilize Jamaicans abroad to assist in national
development.
Encourage mass communication with Jamaicans overseas, that is,
through television and radio programming.
Provide trade-related assistance to Jamaicans overseas to
increase capital flows to Jamaica, that is, marketing networks,
cultural activities. (Jamaica's New Trade Policy)
This strategy linked a previous effort (formalized in 1993) with
the creation of the Department for Jamaicans Overseas. This department
originally worked to assist Jamaican returnees, and later expanded to
maintain links with its diaspora. The new policy of the government has
been read as an important step in its recognition that the country's
integration in the global economy depends in significant part on its
relationship with its diaspora. Yet, given the absence of specific
projects, there is also recognition that the government has yet to move
from this policy agenda into policy implementation. Despite these
shortcomings, the government has expressed enthusiasm over linking up
with Jamaicans living overseas. Officials are also interested in
learning from other countries' experiences in creating an environment
that facilitate greater contact.
Private Sector--The private sector is clearly aware of the
importance of the diaspora, and it looks to the United Kingdom, Canada,
and the United States as the places where Jamaicans are residing. It is
also aware of the importance of family remittances coming into the
country. As one chief bank official expressed it, ``there is no debate
that dependence on remittances is strong and does not constitute a bad
thing; it is a reality we need to adapt to.'' Banking institutions like
commercial banks and building societies participate in money transfer
to some extent. However, there is little concern over the control that
one company, Grace Kennedy, exerts over the remittance market. Grace
Kennedy's greatest competitor is Jamaica National, a building society
that transfers 10 percent of the remittances that come into the
country. It charges $15 for any transaction, as compared to $22 by
Western Union/Grace Kennedy.
Aside from Jamaica National, there are some other banks that
provide remittance services. These institutions use MoneyGram in the
United States and charge similar or slightly lower fees than those of
Grace Kennedy. No bank examined identified a strategy to enable an
environment more conducive to attracting migrants' foreign currency for
other economic purposes.
The credit union system is seeking to implement a nationwide
strategy to offer remittance transactions and use the earnings from the
transfer charges to implement educational packages to its members. One
credit union that transfers money from Florida through a Cayman Island
bank has demonstrated the benefits of money transfers by suggesting
that their revenues have increased significantly since working in the
remittance service sector.
The recognition of the importance to increase interaction with the
diaspora is a significant step for the Jamaican government. One
concrete strategy for this country should be to identify the needs of
the remittance sending and recipient populations, including lower fees,
facilitating new economic opportunities, and providing other
financial services.
Guatemala
Unlike the other three countries reviewed here, Guatemala has a
relatively small population living abroad. Census Bureau estimates that
there are less than 500,000 Guatemalans in the United States.
Nevertheless, in 2001 these Guatemalans sent nearly $700 million to
their country of origin. The government has generally recognized the
importance of Guatemalans living abroad and has expressed interest in
engaging with its population. In practice, however, limited efforts
have actually been made. The private sector is beginning to engage
migrants by entering the money transfer business.
Government--According to the Guatemalan Central Bank, the law
allows transfers in dollars. However, some officials fear that the free
negotiation of foreign currency could lead to increased exchange rate
speculation. Guatemala does not have higher markups in the exchange
rate than other countries under study. There are some impediments to
people opening dollar accounts, but these are not related to banking
regulations but to commercial banks' policies. In particular, many
banks in the country require a $500 deposit to open dollar accounts,
and customers are also required to have an account in Quetzales.
Private Sector--The banking industry in Guatemala has established
money transfer offices in the United States to offer services to
Guatemalans. The majority of banks have offices in Los Angeles, which
function to transfer remittances. These bank offices compete among
themselves to attract market share by offering low fees. A new large
bank, G & T Continental, plans to enter the U.S. remittance market in
May. The bank's strategy will be to offer more than one service: In
addition to transferring money, it will provide basic information about
issues of concern to Guatemalans such as migration and legalization, as
well as low-income housing opportunities in Guatemala.
Table 5. Top 10 Banks in Guatemala
------------------------------------------------------------------------
Branches in the
Bank Assets as of June 2001 U.S.
------------------------------------------------------------------------
Industrial................... 1,003,543,590
G & T Continental............ 974,531,670 Los Angeles.
Del Cafe..................... 630,943,330
Agromercantil de Guatemala... 527,635,130 Los Angeles.
Reformador................... 419,877,690
De Occidente................. 404,530,770 Los Angeles.
De Desarrollo Rural.......... 386,592,820
De Exportacion............... 253,788,460
Internacional................ 241,104,490
Credito Hipotecario Nacional. 176,557,690
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Source: Estrategia y Negocio, Diciembre 2001-Enero 2002.
Recommendations
The countries studied are still thinking about how to enable an
environment by which money transfers can occur without complication and
at lower cost. In Latin America there is a need to enable an
environment that facilitates money transfers of any kind, be they
remittances, savings, investments, or consumption. However, since the
most tangible and costly interaction between migrants and their home
country is remittances, priority must be paid to this particular issue.
Current efforts to enable an adequate money transfer environment are in
their early phases and international support could provide valuable
input to help expand and improve the current reality.
A comprehensive effort to support senders and recipients of money
transfers should foster an environment in which remittances are less
costly and can exert developmental leverage.
Establish Customer Rights Offices to Educate Both Senders and
Recipients About Costs and How to Better Measure Effectiveness
and Efficiency of Services
Remittance recipients are not aware of many of the practices and
methods of remittance companies. For example, many senders do not know
about the different exchange rate markups that prevail among different companies. Furthermore, there is no independent research or checks on
effectiveness or efficiency of the various services. Nongovernmental
organizations could contribute significantly to the improvement of the
market by ensuring that migrants approach the money transfer companies
as informed customers.
Create A Task Force On Remittances and Development to Explore Concrete
Possibilities for Sending and Recipient Countries
Players in the remittance market can further enhance and enable the
remittance environment by acting in three strategic areas: Helping
reduce money transfer fees, expanding financial opportunities to
recipients and senders, and leveraging the developmental potential of
remittances. To that effect, a task force of key players should be
established to formulate agendas and policies that can improve the
value, flow, and use of remittances [and their effective management].
The task force would also help formulate strategies that leverage the
developmental potential of remittances and other migrant earnings.
Members of the task force would make recommendations to the United
States and Latin American governments, as well as international
organizations regarding key development practices influenced by
remittances. Task force membership should include key players in the
remittance process such as business officials, policymakers from the
United States and Latin America, leaders of Latino hometown
associations, and international organizations. The task force would
need to meet in the United States and Latin America, and help shape a
strategy on cost reduction and economic development. One important role
of the task force would be to highlight important developmental
strategies as identified in studies and the task force meetings. The
task force's main objective would be to draw attention in the Inter-
American community to the role of remittances in development and to
support specific policy options and proposals that
facilitate development.
An Expanded Role for Latin American and
United States Civil Society Organizations
Implicit in many of the above recommendations, and indeed in much
of the report, is that the nonprofit, nongovernmental organization
(NGO), or civil society sector has a very important role to play in
promoting a better remittance system, from encouraging lower fees to
empowering citizens to use mainstream financial institutions, to
promoting the developmental and investment potential of remittance
flows. Examples of such civil society participation range from the
customer rights NGO in Honduras to the invaluable and innovative role
of credit unions, themselves nonprofit organizations. Nevertheless, a
full discussion of the role of the civil society sector--both what it
currently offers, and what it can offer immigrants, their families, and
their communities through international financial flows--is beyond the
scope of this study, which was commissioned to focus on government and
business. An important area of future policy study is how to promote
the enabling and enhancing role of the NGO/nonprofit sector in the
United States and home countries.
----------
PREPARED STATEMENT OF SUSAN F. MARTIN, PhD
Professor of Law and Executive Director
Institute for the Study of International Migration
School of Foreign Service, Georgetown University
February 28, 2002
Mr. Chairman, Members of the Committee, thank you for providing
this opportunity to testify at this hearing on worker remittances.
During the past decades, remittances have grown significantly in scale
and impact. The 1999 International Monetary Fund's Balance of Payments
report shows that countries in the Western Hemisphere received more
than $16 billion per year from workers residing abroad. Worldwide, the
flow of remittances exceeds $100 billion per year, with more than 60
percent going to developing countries. Having stated these statistics,
it is worth noting the weaknesses of existing data on remittances.
These numbers likely under-represent the scale of remittances by
billions of dollars since many countries have inadequate processes for
estimating or reporting on the funds remitted by foreign workers.
Correcting for under-reporting, the Inter-American Development Bank
(IDB) estimates that total remittances in the Western Hemisphere now
likely exceed $23 billion per year.
Remittances will likely continue to grow in size as international
migration continues to grow. During the past 35 years, the number of
international migrants has doubled from 76 million to more than 150
million worldwide. \1\ The Western Hemisphere has seen a comparable
increase in the number of international migrants living and working
abroad, growing to about 40 million across the whole hemisphere. Almost
three-quarters reside in the United States. Of these more than half
come from other countries in the Americas.
---------------------------------------------------------------------------
\1\ International Organization for Migration, World Migration
Report: 2000, Geneva: UN Publications, 2000.
---------------------------------------------------------------------------
There are a number of reasons that international migration is
likely to continue to grow in the future, and with this growth, will
come continued growth in remittance flows. Under classic theory,
immigration occurs when there is a combination of push/supply and pull/
demand factors, as well as networks to link the supply of migrants with
the demand of employers and families in receiving countries. Economic
globalization and integration is fueling all parts of this equation. On
the demand side, businesses, particularly but not exclusively
multinational corporations, press for access to a global labor market
for their recruitment of personnel. This pertains to both skilled and
unskilled labor. On the supply side, when rising expectations for
economic advancement are not met quickly enough, migration is tempting
for workers who can earn far more in wealthier countries. Generally,
those most likely to migrate have some resources to invest in the move.
A second, related factor stimulating increased migration involves
the transportation and communications revolution that makes it easier
to move and keep contact with one's home community. Increasingly,
trans-nationalism is becoming a reality for today's migrants. Although
circular migration has always been present, with migrants living
sequentially in the source and receiving country, migrants can now live
at one and the same time in two different countries. Even those who
permanently relocate are able to keep in touch with family members at
home far longer and more easily than in the past. Not only do such
contacts reinforce the networks that produce future migration, but they
also mean that many migrants will continue to send remittances to
parents, siblings, and other community members even after they
permanently resettle themselves.
Increased immigration generally means increased remittances, to
return more directly to the topic of this hearing. Until relatively
recently, researchers and policy makers tended to dismiss the
importance of remittances or emphasize only their negative aspects.
They often argued that money sent back by foreign workers were largely
spent on consumer items, pointing out they seldom were invested in
productive activities that would grow the economies other developing
countries. They also feared that those receiving remittances would
become dependent upon them, reducing incentives to invest in their own
income-generating activities. Moreover, what was considered to be
excessive consumerism, they argued, would lead to inequities, with
remittance-dependent households exceeding the standard of living
available to those without family members working abroad. Often,
government attempts to encourage or require investment of remittances
were heavy-handed and led to few economic improvements. Over time, the
critics pointed out, remittances would diminish as the foreign workers
settled in their new communities and lost contact with their home
communities. Sometimes, wives and children would be left behind, with
the all-important remittances no longer contributing to their
livelihood.
Many of these problems still exist, but recent work on remittances
show a far more complex and promising picture. Perhaps because the
scale of remittances has grown so substantially in recent years--it
quadrupled in the Western Hemisphere during the past decade--experts
now recognize that remittances have far greater positive impact on
communities in developing countries than previously acknowledged. Such
experts as Edward Taylor at the University of California at Davis argue
that even consumer use of remittances stimulates economic activity,
particularly when households spend their remittances locally.\2\ The
multiplier effects of remittances can be substantial, with each dollar
producing additional dollars in economic growth for the businesses that
produce and supply the products bought with these resources.
---------------------------------------------------------------------------
\2\ Ibid.
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The microeconomic effects of remittances can also be important.
Important contributors are the hometown associations (HTA's) of
migrants abroad who send communal resources to the villages from which
they emigrated. Collected through a
variety of means, these resources have helped villages improve roads,
water and
sanitation systems, health clinics, schools and other community
infrastructure. The HTA's often start with small resources but they
have the potential to grow to significant size. According to one study:
``Consider the Salvadoran `United Community of Chinameca': Their first
largesse was $5,000 to build a school, and then they built a septic
tank worth $10,000. Later they constructed a Red Cross clinic at a cost
of $43,000, and bought an ambulance worth $32,000.'' \3\ Some State and
local governments match the resources from HTA's in order to magnify
their impact. There has been a recent trend toward encouraging the
HTA's to invest in small businesses and manufacturing activities, in
order to produce new jobs for villagers. These are truly grassroots
initiatives that involve community-to-community development.
---------------------------------------------------------------------------
\3\ B. Lindsay Lowell and Rodolfo O. de la Garza, The Developmental
Role of Remittances in United States Latino Communities and in Latin
American Countries, Washington: Inter-American Dialogue, June 2000.
---------------------------------------------------------------------------
With the new recognition of the importance of remittances has also
come greater understanding of the challenges brought by the large-scale
transfer of money. HTA's and their home communities may not have the
technical expertise to determine the best ways to invest in community
development. The strength of a grassroots initiative can become its
weakness if HTA's and local villages disagree about the best use of the
remittances or if they invest the funds poorly. There are some
initiatives underway to provide technical assistance and training in
this regard. For example, the Inter-American Foundation funds such
assistance through the Fundacion para la Productividad del Campo, also
known as APOYO, in several Mexican states. The Inter-American
Development Bank has held several conferences and regional workshops to
stimulate discussion of mechanisms to increase the development payoff
of remittances.
Also, remittances are often used to help families address emergency
needs that could, perhaps, be better addressed through other means--or
prevented altogether. For example, many households use some portion of
their remittances to deal with emergency health care needs because they
lack access to routine health care and do not have insurance coverage.
The Mexican Migration Project asks respondents how their family members
use remittances. According to one research study, ``the largest single
reported use of remitted or saved funds was health care expenses for
family members. Among those who remitted (approximately 60 percent of
respondents) fully three-quarters reported that some share of the funds
were used for health care expenses.'' \4\ At the same time, many
migrants do not take advantage of an initiative by the Mexican
government that enables them to purchase health insurance for families
in Mexico for a very low rate per month. Such cross-border health
coverage, purchased in the United States for relatives at home, could
be a more effective use of remittances than the funding of emergency
care. Since many migrants return periodically to their home
communities, such cross-border programs could also provide the largely
uninsured U.S. residents with a source of health care as well.
---------------------------------------------------------------------------
\4\ Louis DeSipio, Sending Money Home . . . For Now: Remittances
and Immigrant Adaptation in the United States, Washington: Inter-
American Dialogue, January 2000.
---------------------------------------------------------------------------
The cost of transferring remittances is another issue that needs to
be addressed. These transfer costs can be exceedingly high. One study
found that many Mexican migrants lose as much as 25 percent of the
value of their remittances through fees and poor exchange rates.\5\ In
some cases, one or a few wire transfer companies have a lock on
distribution points for purchasing or receiving money orders. The
market appears to be responding to this situation, with greater
competition leading to lower transfer costs, but more needs to be done
in this area. In particular, it is essential to regulate the new
companies to ensure that they have the capacity and resources to
transfer the funds. In this regard, it is also necessary to monitor the
companies to guard against fraud and the use of legitimate remittance
transfers for money laundering purposes.
---------------------------------------------------------------------------
\5\ Binational Study.
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Immigrants often mention that they use a few well-established
companies because of their greater reliance. To date, though, the
business is dominated by wire transfer companies rather than financial
institutions that offer a wider range of services to customers. The
greater entry of banks and credit unions could help reduce costs and
abuses even further. To the extent that credit unions, for example,
reinvest transfer fees in the remittance receiving communities, the
development potential could be increased still further. There are new
initiatives in this area. The Inter-American Development Bank's
Multilateral Investment Fund supports programs to enable the
transmission of remittances through financial institutions that work
with the low-income clients, such as credit unions and microfinance
institutions.
Greater financial literacy among remitters, as well as clearer
information about the actual costs of transferring funds, would also
reduce abuses in this area. Financial literacy programs have many
benefits for both immigrants and financial institutions. A particularly
useful initiative was pioneered in Rogers, Arkansas. The curriculum
covers such issues as basic banking services, how to write checks, how
to establish a credit history, how to buy a house, and retirement
planning. The training program is offered by a local bank, in
cooperation with corporations in the area. With greater financial
literacy, the largely immigrant workforce has become more savvy
consumers who are less likely to be victims of abusive and predatory
financial practices, while the bank that has offered the courses has
significantly increased its customer base for a number of bank
products--a win-win situation for both.
It is well to remember that it is often the poorest residents of
the United States and other wealthy countries that are sending
remittances abroad. Latin American migrants tend to have low incomes,
often living in poverty, yet they remit billions of dollars to their
home countries. While beneficial to the families and societies at home,
it is well to ask if the remittances come at a cost to those settling
abroad. What trade-offs are they making to save sufficient resources to
remit? Are they unable to make investments in education and skills
upgrading, for example, in order to send the billions home? Are there
ways, perhaps through community-investment programs supported by
remittance transfer companies, to invest some of this lost income in
development activities in their new places of residence? Are there
programs that could help remitters make better-informed decisions about
remittance transfers to reduce the transaction costs they incur?
As these brief remarks show, the growth in remittance flows
requires better answers to some fundamental questions: For example, how
can governments best estimate the actual flow of remittances; how
precisely are remittances used, and are there alternative mechanisms to
gain more ``bang-for-the-buck''; to what extent can the multiplier
effect of remittances be increased by initiatives to encourage local
purchase of locally produced goods; how best can transfer costs be
reduced to maximize the level of remittances reaching local
communities; and how best can governments and international
organizations help HTA's and home villages make the most effective use
of the communal remittances for development without impeding local
initiative. Given the scale of remittances today, and their potential
as a tool for development, these issues are clearly deserving of
attention.
While I will not try to make recommendations today about the full
range of issues that I have raised, I will offer some suggestions about
approaches that Congress could adopt or encourage:
Encourage financial literacy programs for newcomers to the
United States, many of whom do not understand the U.S. banking and
wire transfer systems, so they will be better consumers of these
services.
Require companies transferring remittances to provide a
``truth in transfer'' statement that shows fees and exchange rates,
as well as the actual amount that will be received at the other end
of the transaction.
Establish a regulatory framework that will better ensure that
wire transfer companies have adequate resources and proper
procedures for conducting business here and overseas (such
regulations will also ensure that these companies are not using
their remittance business as a cover for money laundering for drug
cartels, terrorist organizations, or other illegal operations.
Encourage companies that transfer funds to invest a portion of
their profits in economic development projects in communities in
the United States and home countries that send or receive
substantial remittances.
Support technical assistance initiatives to help boost the
development potential of individual and collective (hometown
association) remittances, as well as to stimulate competition and
enable financial institutions that work with low-income populations
to participate in remittance transfers.
Thank you for providing me this opportunity to testify. I will be
pleased to answer any questions you have.