EconSouth (Third Quarter 2004)

Banks and the Growing
Remittance Market

As the immigrant population in the United States booms, the amount of money sent out of the country is skyrocketing. Banks are taking steps to enter the lucrative remittance market despite significant cultural barriers.

The southeastern United States contains four of the top 10 remittance-sending states. Latin American immigrants in this country, like the dos Santos family of Decatur, Ga., sent nearly $30 billion to their home countries in 2003, and that figure is expected to rise.

In recent years, payments sent by immigrant workers back to their home countries have soared. According to the Inter-American Development Bank (IDB), in 2003 Latin America received $38 billion of those payments, up from $32 billion in 2002. Of that sum, immigrants in the United States sent approximately 75 percent.

The size of this flow of money from the United States corresponds to the increase in the Hispanic population living and working in the United States; according to the U.S. Census Bureau, their numbers grew by 50 percent from 1990 to 2000 and in 2003 totaled 39.9 million. The majority of Hispanics in the United States come from Mexico, the world’s largest remittance-receiving country; a 2003 Pew Hispanic Center report says that 18 percent of all adults there receive remittances originating in the United States.

Remittances—noncredit payments, which are often sent to a distant place—can have an even larger impact on smaller countries (see the table). The 2003 Pew report indicates that in El Salvador 28 percent of the adults receive remittances, and those remittances are equivalent to 18 percent of the country’s gross domestic product. According to the IDB, remittances sent to countries in Latin America in 2003 totaled more than the combined amount of foreign direct investment in and official development assistance to Latin America.

Choosing among remittance methods
Migrants have a choice of how they transfer their money back to their homeland. Informal—and often less secure—means such as sending cash with a courier or through the mail remain the choice of 17 percent of Latin American remitters, according to the Pew report, though this figure has been on the decline. Wire transfer companies currently dominate the remittance market, with 70 percent of Latin American remittances sent through companies such as Western Union and Moneygram. These companies have gained the trust and loyalty of the Hispanic community and have adapted to the needs of this community by offering convenient locations, hours, and a comfortable business environment for Hispanic immigrants.

In recent years, banks have entered this market and are competing with these traditional vendors. Wells Fargo, the first bank to enter the remittance market, began offering remittance services in 1995. Since then, U.S. and Mexican banks have partnered to provide services specifically designed for the Mexican immigrant population. In 2002 Bank of America partnered with Grupo Financiero Santander Serfin, and Citibank entered into a partnership soon afterward with Banamex. Earlier this year, the Federal Reserve System initiated FedACH International, an automated clearinghouse that enables any financial institution in the United States to send payments to Mexico.

Seeing banking’s benefits
An increase in banking among Hispanics provides benefits to banks as well as to Hispanic customers. Banks benefit by having the potential to tap into a large market. Customers benefit since bank accounts help address some problems that Hispanic immigrants often encounter concerning money. Many recent immigrants do not have bank accounts, so they often carry around large amounts of cash or keep large amounts of it in their homes. This practice makes them targets for theft. Banks provide, among other things, a place where Hispanic immigrants can keep their money and earn interest on it.

Building a relationship with a bank can provide a number of additional benefits for immigrants. Savings accounts help immigrants establish a financial foothold that in turn gives them access to loans with competitive interest rates that can encourage the purchase or construction of homes. Banks can also help immigrants finance the establishment of small and medium-sized businesses.

One of the most important benefits that banks can provide to immigrants is lower transaction costs for remittances. According to a 2004 Pew Hispanic Center report by Manuel Orozco, senior researcher for the study of international migration at Georgetown University, the average value of a remittance is $400, and currently the majority of these transactions occur outside the financial system. Sending money through a wire transfer company can involve high transaction costs in addition to high exchange rate margins between the United States and the destination. By offering programs involving debit card withdrawals from ATMs, banks can offer lower transaction fees. As competition has increased in recent years, the overall cost to immigrants of sending remittances has come down.

According to Orozco’s 2004 study, the average cost of remitting $400 has declined to 4.4 percent in 2004, down from 6.29 percent in 2001. The cost of sending a smaller amount has also decreased, falling by 50 percent since the late 1990s. The study added that the majority of the decrease, however, occurred between the late 1990s and 2001, when the rate dropped from about 15 percent to approximately 8 percent. The rate of decrease has slowed considerably in the past three years.

Although banks can demonstrate an array of benefits to remittance senders, they face many challenges in entering this market. Banks’ influence on lowering transaction costs has been diminished because they have not been able to attract more of the remittance market. Currently only 11 percent of Latin American remittance senders use banks to send money back to their native country, according to the 2003 Pew report. In fact, only 3 percent of Mexican immigrants conduct their remittance transactions through banks, Orozco’s 2004 study indicates. Taking full advantage of the potential banks have to lower or eliminate transaction costs requires a bank account on both ends of the remittance transaction. Still, costs can be reduced somewhat even if only one party in the remittance transaction has a bank account.

Many Mexicans in the United States are unaccustomed to having bank accounts. A July 27, 2004, Wall Street Journal article states that only 20 percent of Mexicans living in Mexico have a bank account, and almost 30 percent have no access to financial services. This low participation rate stems from a traditional distrust of banks and citizens’ unfamiliarity with the banking sector since Mexican banks have traditionally focused their services on the wealthy. This distrust extends to Mexicans’ attitudes toward banking in the United States.

Because banks have not regarded rural neighborhoods as financially attractive markets, rural Mexicans are often underserved by banks. However, these rural and less affluent areas are significant recipients of remittances. U.S. banks, partnered with Mexican banks, are beginning to expand banking access to the poor and rural populations of Mexico.

Exploring immigrants’ low banking participation
In his 2004 Pew study, Orozco found that of Hispanic remittance senders in the United States, 43 percent do not have checking or savings accounts. Only 25 percent of Mexican immigrants have any bank account. Research using data from the Mexican Migration Project, a collaboration between researchers at universities in Mexico and the United States, suggests reasons that affect a Mexican immigrant’s decision to open a bank account in the United States. The probability of an immigrant opening a bank account increases when a combination of factors exists: the immigrant is paid with a check, speaks English, has migrated more recently, stays in the United States for a longer period of time, and has more exposure to banks. Also, immigrants who are better savers are more likely to open a bank account; those who don’t save money, conversely, tend not to open an account they don’t need.

Data from the Mexican Migration Project also point to factors that influence a Mexican immigrant not to open a bank account. Immigrants who have been in the United States for a short time believe that they will be returning to their home country soon and feel that a bank account is unnecessary. Immigrants with limited exposure to banks are often suspicious of banks’ pricing and feel that banks may take advantage of them. By addressing the factors that make opening an account less likely, banks will be better able to attract this growing market.

Some immigrants’ undocumented status discourages them from opening bank accounts. Undocumented immigrants fear that opening a bank account will reveal their status. The Mexican government has begun issuing an identification card—the matricula consular—that many banks have begun to accept as a form of identification, allowing Mexican immigrants to open bank accounts without revealing their immigration status. In 2001 Wells Fargo was the first bank to accept this form of identification, and within two years the number of accounts opened at Wells Fargo using the matricula consular surpassed a quarter of a million. Nevertheless, the vast majority of undocumented immigrants still do not have bank accounts.

Banks also have other obstacles to overcome to attract immigrants. Banks need to provide more convenient locations and hours of operation, overcome cultural and language barriers, and gain the community’s trust and loyalty. Orozco’s research into the banking habits of immigrants predicts that as banks gain more experience and insight into attracting these new customers, their share of the remittance market will increase.

This article was written by Kasey Maggard of the regional group of the Atlanta Fed’s research department.

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