The Evolution of Remittance Services

If you work abroad and send money to your family back home, you may be familiar with remittance. Remittance is transferring money from one individual to another across geographical boundaries. Seventy-five percent of remittances are often used as a lifeline for households, especially in developing nations; the remaining 25 percent are often used for savings, investments, or businesses. At the microeconomic level, remittances directly help alleviate poverty.

World Bank data shows remittances to low- and middle-income countries reached 656 billion USD in 2023. Data from Statista notes that the transaction value in the digital remittances market is projected to reach 273.48 billion USD in 2025 and a projected total amount of 319.15 billion USD by 2029.

Remittances also help increase investments by reducing credit constraints in developing countries, contributing to positive economic growth. Data showed that over 50 percent of remittances are sent to rural areas, where three-fourths of the world’s poor and food-insecure are located. The income of funds from abroad also dampens income volatility and inflation pressures in receiving countries. The funds act as insurance against macroeconomic shocks in the remitter’s home country.

Conversely, remittances can negatively affect a country’s economic growth by reducing labor supply and participation. Other studies reveal that increasing remittance levels can harm the long-run growth of recipient economies by appreciating the real exchange rate.

Traditionally, banks and brick-and-mortar money transfer operators have dominated cross-border money transfers. However, the industry underwent significant transformations thanks to technological advancements. Thanks to fintech innovations, mobile payment apps, digital wallets, and blockchain technology, sending money across borders is more accessible and affordable.

Traditional Remittance Channels

Years ago, traditional banks dominated the international remittance industry. Sending money through banks involves international wire transfers between sending and receiving banks. The payment instruction is shared with correspondent banks over a secured network (SWIFT). The remitted amount is paid out to the recipients, and the payments are settled between the two banks at a later point. International money transfer transactions often take three to five business days to complete.

Banks earn income mainly through two things: (1) remittance fees, which are often a percentage of the principal amount to be transferred, and (2) foreign exchange fees when converting currencies. Banks typically charge 20 to 45 USD in wire transfers and a 2 to 6 percent foreign exchange markup.

Money Transfer Operators (MTOs) are financial companies engaged in cross-border money transfers using either their internal system or by accessing another cross-border banking network. MTOs are often preferred by individuals sending small amounts of money since they usually charge lower fees than banks. However, they still have high rates due to intermediaries and physical offices.

The Rise of Fintech in Remittance Services

The rise and development of fintech has outpaced traditional money transfer methods through more accessible, affordable, and fast money transfer processes.

Here are key technological innovations that transform remittances thanks to fintech:

Mobile Payment Apps and Digital Wallets

Mobile payment apps offer seamless international money transfer services, enabling users to send money using smartphones. Meanwhile, digital wallets allow users to store money digitally and transfer it to other wallets or bank accounts locally or internationally.

Blockchain and Cryptocurrencies

Blockchain offers a decentralized ledger to ensure secure, transparent, and immutable transactions. It reduces the time and cost associated with international transfers since intermediaries are not needed.

Artificial Intelligence and Machine Learning

From a business perspective, AI and ML can be used to predict remittance flows so that providers can develop tools that meet clients' needs and demands. Automating remittances using AI and ML will revolutionize accounts payable and accounts receivable teams by transforming remittance processes, minimizing manual errors, boosting efficiency, and reducing costs.

Advantages of Fintech Over Traditional Banking in Remittances

Fintech has been a disruptive force in the remittance industry landscape. Here are some key advantages fintech remittance services offer compared to traditional banks:

Lower Transaction Fees and Better Exchange Rates

Fintech remittance services often offer better exchange rates and lower transaction fees due to adopting digital methods and relying on technological and operational innovation. Banks can charge up to 2 to 6 percent FX markup and 20 to 45 USD in wire transfer fees. On the other hand, fintech companies such as RemitBee offer competitive currency exchange rates for minimal costs. Your transfer fee is free when you remit over 500 CAD in one transaction!

Faster Processing Times and Real-Time Transfers

Fintech remittance services are often faster and more efficient than traditional banks due to their reliance on digital infrastructure and automated systems to accelerate the transfer process. Unlike lengthy processes with banks due to extensive paperwork and multiple intermediary financial institutions, fintech money transfers are initiated, processed, and completed within minutes.

Increased Accessibility for Unbanked Populations

Fintech innovations have opened remittance services to a broader audience. In developing countries where traditional banking is either lacking or has plenty of requirements, mobile payment apps and digital wallets enable people to receive and send money easily as long as they have a smartphone and internet access.

Enhanced Security Features and Fraud Prevention

AI and ML can flag unusual spending patterns or sudden changes in user behavior that may indicate fraudulent activity. ML algorithms can adapt to emerging threats and enhance accuracy over time by continuously learning from data inputs. Multi-factor authentication adds a further layer of security to an account by requiring verification forms before users can access their accounts or complete their transactions.

Challenges and Regulatory Considerations

Finance has a complex regulatory landscape, and staying compliant with these regulations can challenge the tech community. Here are some compliance challenges that fintech companies encounter:

Data Protection and Privacy

Fintech companies collect, process, and store personal and financial data, which makes them subject to data protection and privacy laws. These laws impose strict obligations on fintech companies, including obtaining consent, providing notice, respecting data subject rights, and ensuring security. Failure to comply will result in hefty fines and damage to reputation.

Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF)

These laws on AML and CTF require fintech companies to implement policies and procedures to detect, report, and prevent suspicious transactions. Failure to comply with these regulations can result in civil penalties, criminal sanctions, and regulatory actions.

Cross-Border Compliance

Fintech companies that operate across different jurisdictions are expected to comply with various (sometimes conflicting) laws and regulations per jurisdiction. This includes payment system regulations, foreign exchange regulations, tax laws, etc.

Licensing and Registration

Fintech companies that offer regulated financial services must obtain licenses and registrations from relevant authorities. These licenses include capital adequacy, governance, disclosure, and fair practices.

The Future of Remittance Services: Trends and Innovations

Due to new technologies and shifting consumer needs, the remittance industry’s evolution will continue in the years to come. Here are trends and innovations we can expect in the years to come:

Blockchain will power efficiencies in cross-border transactions. This will reduce processing times and costs while offering complete transparency.

More innovative payment systems will be created. AI-powered chatbots will streamline customer support, and virtual remittance assistants can further automate complex processes, including error detection and payment tracking.

Interoperability is becoming a standard. This will enable businesses to transact seamlessly across borders, promoting a more collaborative setting for a connected and equitable global payments ecosystem.

Conclusion: Embracing the Digital Transformation in Remittances

There is no other way to move forward with digitalizing remittances. True, remittances have come a long way from their traditional ways to the rise of fintech. Embracing these changes will result in convenience, accessibility, improved security, and affordability. However, fintech remittance service providers must adhere to regulatory conditions to ensure the safety of clients' data and finances. Doing so will also make a provider more credible and trusted.

If you want to send money abroad from Canada, the best fintech service provider is RemitBee. We offer the best currency exchange rates without imposing high fees. We will waive your transfer fee when you send over 500 CAD in one transaction!

Sign up with RemitBee.