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What Are Remittances?

Essentially, an electronic funds transfer is a transaction by which funds move from one institution to another or one account to another at the direction of an institution’s customer and through the transmission of electronic instruction messages that cause the institutions to make the required bookkeeping entries and make the funds available. Funds transfers are the primary mechanism used by the business community for fast and reliable transfer of funds between two parties.

The funds transfer process generally consists of a series of electronic messages sent between financial institutions directing each to make the debit and credit accounting entries necessary to complete the transaction. A funds transfer can generally be described as a series of payment instruction messages, beginning with the originator’s (sending customer’s) instructions, and including a series of further instructions between the participating institutions, with the purpose of making payment to the beneficiary (receiving customer).

Money transfers from citizens working abroad.

A typical remittance transaction takes place in three steps:

- The migrant sender pays the remittance to the sending agent using cash, check, money order, credit card, debit card, or a debit instruction sent by e-mail, phone, or through the Internet. • The sending agency instructs its agent in the recipient’s country to deliver the remittance.
- The paying agent makes the payment to the beneficiary. For settlement between agents, in most cases, there is no real-time funds transfer; the balance owed by the sending agent to the paying agent is settled periodically through a commercial bank. Informal remittances are sometimes settled through goods trade.
- The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country. Some smaller operators charge the beneficiary a fee to collect remittances, presumably to account for unexpected exchange-rate movements. And remittance agents (especially banks) may earn an indirect fee in the form of interest (or “float”) by investing funds before delivering them to the beneficiary. The float can be significant in countries where overnight interest rates are high. Remittances are typically transfers from one person to another person or household.