The Diaspora Dividend - Leveraging Immigrant Remittances

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THE Diaspora DIVIDEND

leveraging immigrant remittances

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Globalization is accelerating international migration. Spurred by persistent income disparities, below-replacement fertility and population aging, international migration has taken on increased significance;

In 1965, only 75 million people lived outside of their country of birth. By 2000, that figure had more than doubled (175 million people) by 2000. Today over 3% of the world’s population lives abroad (United Nations, 2002);

As more people moved out of their home countries, remittances increased. This trend is likely to increase since international migration

I - Remittances in the Context of Globalization:

Remittances are the cross-country movement of money as a consequence of the cross-country movement of labor or immigrant workers, that is, international remittances are monies that migrants earn abroad and send back to their home countries. While each remittance is small, remittances are a major component of the international flow of funds because of the large number of remitters and the frequency with which they send monies;

For developing countries, remittance flows represent a major source of international finance - in many cases, larger than total foreign aid and second only to foreign direct investment;

is projected to remain high trough the 21st century;

Source: The Migration Policy Institute, www. migrationinformation.org

http://www.migrationinformation.org/

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Compared with profit-induced capital flows, remittances are more stable and less cyclical. Foreign direct investment (FDI), portfolio investment and bank credit tend to rise when the host country is doing well. Remittances, on the other hand, tend to be steady and increases during periods of economic crisis or natural disasters. Finally, unlike foreign aid, remittances are well targeted and go directly to the people who need them;

While financial flows, trade in goods and services, and various other forms of technology transfer are widely monitored, documented, reported and studied in great detail, the issue of remittances has not attracted adequate attention and interest among policy makers and the business community;


The World Bank reports that $126 billion in remittances changed hands worldwide in 2004, up from less than $2 billion in 1970 and $70 billion in 1995.

The World Bank last estimated that about $232 billion was remitted through formal channels in 2005, more than 70% of which ($167 billion) went to developing countries;

In 2002, remittances to developing countries exceeded both official development aid (ODA) and private debt and equity flows; (International Monetary Fund, IMF, 2002);


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There are several ways to examine remittances besides its total value. The two most common are remittances as a percentage of the GDP and remittances per capita. The ratio of remittances to merchandise exports are also used;

In 2001 Mexico, France, and India were the largest recipients of remittances, with inflows of $9.9 billion, $9.2 billion, and 19.1 billion respectively;

While Mexico is the country with the highest total remittances received, Lesotho has the highest remittances received as a percentage of GDP; and Luxembourg has the


highest remittances received per capita;

Researchers estimate that Latin America is the largest recipient of U.S. remittances. According to the Inter-American development Bank (IDB), the United States sent $28.5 billion in remittances to Latin America and the Caribbean in 2003, accounting for 75% of remittances to this area ( Inter-American Development Bank, 2004);


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Foreign Born and Global Remittance Flows by World Region

41m

6m

16m

31m

20m

25m

30m

6m

Source: Foreign Born, United Nations, 2002;

$3

$13

$8

$99

$70

$3

$64

$57

$6

$112

$113

$42

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In 2003, approximately $31 billion in remittances was sent from immigrant workers in the U.S. to their families and communities in Latin America;

Within Latin America, Mexico, El Salvador, and Dominican Republic were the top three countries to receive remittances from the U.S. remitters in 2001 ( Manuel Orozco, 2002);

According to a 2003 national survey of Latin American households, 6

I I- The Latin American Remittance Market:

million Latin American immigrants, or 42%, send remittances on a regular

Most remittances worldwide, 31%, are sent to the Latin America and Caribbean (LAC) region. The vast majority, nearly 82%, of the LAC total is sent from the U.S.;

Remittances are significant when compared to other capital flows to the region. Official development assistance (ODA), is dwarfed by remittances in every region within LAC, and remittances exceed foreign direct investment (FDI) in Central America and the Caribbean. Furthermore, remittances comprise 24% of Nicaragua’s GDP, 14% of El Salvador’s GDP and 35% of Haiti’s GDP;

Basis, and 2/3 of these send money at least once a month;

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The value of the average remittance sent to Latin America is $240. However, this figure varies by the immigrant’s country of origin. Mexican and Brazilian immigrants tend to send larger amounts - on average about $350 a month. By contrast, immigrants from the Dominican Republic and El Salvador send closer to $225 a month, while Nicaraguan immigrants send only $150 a month ( Manuel Orozco, 2002);

Current options for remitters to transfer funds abroad fall, in general, into three categories: informal channels, wire transfers by money transfer companies, and remittance services at regulated financial institutions;

Approximately 17% of U.S. remittances to Latin America are made via informal channels, with mail and hand delivery being the most common of these conduits;

The vast majority of remitters rely on the services of money transfer companies (MTC). While there hundreds of local MTCs, Western Union and Money Gram are two of the largest and most well-known in the

U.S.; In the U.S., MTCs have a strong presence in immigrant communities and are often located in grocery

stores and other convenient places. Most are open evenings and weekends, and many provide one-stop shopping by offering other financial services such as check cashing and money orders

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While quick and convenient, MTCs charge the highest prices for remitting funds. First, a service charge is levied - in most cases, a flat fee, resulting in a regressive pricing model that enacts a sizable charge on small remittances. A second charge is assessed via the foreign exchange rate;

The cost of transferring money can represent a significant loss to immigrants and their families. Latin American immigrants in particular pay a high percentage of their remittances in the form of fixed, pre-transfer fees because they tend to remit frequently and send small amounts in each transfer. For example, in a survey of 100 institutions, the cost of remitting $200 to Latin America ranged from $5 to $37.37 (Manuel Orozco, 2002);

World Bank estimates suggest that for every 10% increase remittances to developing countries, the number of people living in poverty is reduced by 1.2% (Global Policy forum, 2004). Another study found that for every dollar received in remittances, Mexico’s GNP increases by $2.69 for urban households and $3.17 for rural households (Adelman and Taylor, 1990);

In their report, Billions in Motion, Suro and his colleagues estimate that close to $1 billion a year could be saved by U.S. and Central American households if remittance fees were lowered to 5% of the transaction cost;

According to surveys conducted by the Inter-American development Bank’s Multi-lateral Investment Fund (IDB-MIF), the majority of remittances in Latin America are spent on basic household needs such as food, health, housing and utilities. Other expenditures include education, real estate, savings and investments;

Some evidence suggests that remittances declines steadily as immigrants acculturate, although the amount those remitting send home will increase as employment earnings rise. Complete family units are particularly important in determining whether money is sent abroad;

For temporary immigrants, however, the dynamics are unlikely to be the same. Those who have arrived recently are the most likely to send remittances, largely because of their strong ties to their home countries;

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20%

31%

49%

0% 20% 40% 60%

More than $30,000

Between $20,000and $30,000

Less than $20,000

4%6%6%6%

9%10%

59%

0% 10% 20% 30% 40% 50% 60%

Other Central America

Dominican Republic

El Salvador

Mexico

Annual Income Country of Birth

6%

12%

30%

34%

15%

0% 20% 40% 60%

65+

35-49

18-24

Age

10%

7%

35%

46%

0% 20% 40% 60%

College graduate

Some College

High school diploma

No HS diploma

Education

5%

20%

23%

52%

0% 20% 40% 60%

Less than 1 year

1-5 years

5-10 years

More than 10 years

Residency

20%

37%

38%

5%

Citizen

Legal resident

Undocumented Immigrant

No answer

Legal Status

Who are the Latin American Remittance Senders in the U.S.?

Source: Understanding Remittances to Latin America, Sergio Bendixen, Joint Conference on Remittances, ADB, 2005

?

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The Remittance Sending and Receiving Process:

Average amount sent: $240

Frequency of remittance: 12.6 per year

1%

2%

7%

11%

79%

0% 20% 40% 60% 80%

Credit union

Mail

Bank

Person traveling

IMT Company*

*IMT Company = International Money Transfer Company

How do you usually send money?

Dominican Republic 38%

El Salvador 28%

Guatemala 24%

Mexico 18%

Honduras 16%

Colombia 16%

Ecuador 14%

Brazil 2%

Remittance Recipients in Latin America:

Where the money comes from?

0%

1%

17%

0%

30%

9%

2%

4%

21%

31%

31%

58%

76%

5%

50%

38%

0% 20% 40% 60% 80%

DominicanRepublic

Colombia

Brazil

Ecuador

Japan Latin America Europe U.S.

Source: Understanding Remittances to Latin America, Sergio Bendixen, Joint Conference on Remittances, ADB, 2005

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Profile of the Brazilian Remitter and Receiver:

Profile of the Brazilian Remitter:

Remittances come from the U.S. (50%), EC (31%) and Japan (17%);

Has an annual income below $30,000;

Has basic education below high school (70%);

Average of 9.7 remittances a year;

Average amount sent of $428;

42% send less than $200;

44% send money at least once a month;

35% once a year;

62% send money in the first 3 years;

Over 1 million Brazilians live in the U.S. and nearly 280,000 in Japan (2004).

Source: Banco do Brasil, Ministry of Foreign affairs, Bendixen e Associates, 2004

Profile of the Brazilian Receiver:

65% are women;

63% hold banking account;

53% are received through a bank;

29% via money transfer companies;

33% are brother or sister;

Only 8% receive more than $1,000;

85% originated in the U.S. and EC are less than $500;

53% originated in Japan are less than $500.

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Major Players in the Remittance Business to Brazil:

Source: Banco do Brasil, Ministry of Foreign Affairs, Bendixen e Associates, 2004; Caixa Economica Federal, 2006.

8%

10%

29%

53%

0% 10% 20% 30% 40% 50% 60%

Credit Union

Fast Delivery/Mail/Others

Foreign Remittance Company

Banks

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Major Players in the Remittances Business to Brazil:

Source: Banco do Brasil, Ministry of Foreign Affairs, Bendixen e Associates, 2004; Caixa Economica Federal, 2006.

SWIFT* and regular bank transfers;

Western Union with Banco do Brasil:

BCP with Caixa Economica Federal:

Private remittances companies.

*Society for Worldwide Interbank Financial Telecommunication supplies secure messaging services and interface software to wholesale financial entities.

SENDER BENEFICIARY

SENDER

EXCHANGE US$/R$

EXCHANGE US$/R$

BENEFICIARY

EXCHANGE US$/R$

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III – Leveraging the Economic Power of Immigrant Remittances

Remittances touch the lives of over 500 million people around the world. Conservative estimates put the number of people receiving some form of economic benefit from remittances at 1 billion - almost 1/6th of the planet’s population (Joint Conference on Remittances, Manila, Philippines, 2005);

The remittance “economy” is an interesting example of globalization at the bottom of the pyramid (BOP) - a kind of “transnational BOP” linking developed and developing countries:

Brazilian immigrants

(99.693% pop. - mostly low-income workers)*

Employees of Brazilian embassies & consulates

Employees of Brazilian companies with branches or offices abroad

Employees of multinational companies

Brazilian Population Living in the U.S. Remittances sent to Brazil

Globalization at the Bottom of the Pyramid – Brazilian Example in the U.S.

80% of remittances from Brazilians living in the U.S. are sent to low-income Brazilians

(0.3% pop.)*

Students

(0.007% pop.)*

Source: UC Davis, Immigration Data, 1999; Institute of International education, 2005. Analysis by Alvaro Lima and Peter Plastrik, 2006.* Percent of the total Brazilian population living in the U.S..

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Remittances are the initial point into the world of financial services for many local economies and poor individuals/families. Once they are sending/receiving remittances, they have joined the global financial service system;

The challenge is to move them through the “value chain” of financial services - savings, investment, credit, insurance, etc.. The difficult is that in one hand, mainstream financial institutions are at odds with the financial needs of the low-income segment of the Diaspora and on the other, non-financial institutions (money transfer companies, check cashing, etc.) by law cannot provide deposit-based products:

Savings & Loans

Deposit Accounts

Small Savings

Borrowing ( short term loans, e.g. payday loans)

Sending Money to Families

Paying Bills

Cashing Checks

Mainstream Financial Institutions

Financial Needs of Low-income Immigrant

Bills Payment

Check Cashing

Money Transfer

Non- Financial Institutions

Low-income Immigrant Needs Versus Financial Offerings

Source: Alvaro Lima and Peter Plastrik, 2005.

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At the household level, remittances enhance the well-being and economic security of the poor by providing critical resources for spending on immediate subsistence needs, such as food and housing as well as improved health care and education. Remittances also provide resources for investment, savings and entrepreneurial activities which in turn have a stimulating effect on local and national economies;

Harnessing the development impact of immigration calls for policies that aim at improving the structures underlying the remittance process in order to bring the “unbanked immigrant” into the conventional financial world. This should be a major goal of the community development field;

Do not have enough money;

Do not write enough checks to make it worthwhile;

Prefer dealing with humans (“high touch”);

Do not trust or do not like dealing with banks;

Privacy and Legal Risk Undocumented immigrants are afraid to enter

branches with security guards or that a bank

record may reveal their identifies to the INS;

Fear that their unfavorable credit histories will be Revealed;

Products and Services Services charges are too high;

Period for cashing checks is too long;

No “one-stop” shopping experience;

Minimum balance requirements are too high;

Few Financial Assets

Level of Comfort


No bank has convenient hours or location;

Cannot manage or balance a checking account

Bringing “unbanked immigrants” into the conventional financial world is an important step towards building individual and community assets to help sustain the economy in the primarily low- and moderate-income areas where many “unbanked immigrants” live;

However, few financial assets, level of comfort, privacy, and lack of appropriated products and services drive low-income immigrant consumers away from banks and to alternative providers;

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In order to maximize the benefits of remitting through formal channels, partnerships between the financial sector, government and non-governmental organizations should enhance outreach to migrants, ease constraints and restrictions and educate migrants on good banking habits;

However, in order to serve this market effectively, mainstream financial institutions, non-profit financial providers, etc. need to undergo a strategic shift towards a more customer-driven, life-cycle, bundled products and services;

BanksCheck CashersBodegas

Grocery Stores

Western Union orsimilar InstitutionGovernment

Loan Sharks

Liquor StoresInformal SavingsMechanismsCookie Jars

Pawn Shops

Key:

Receiving

Income

Cashing

ChecksPaying Bills

Sending

money to

families

Building

savings

Borrowing

Money (short-

term loans,

e.g., payday

loans)

Buy convenience

items

(stamps, pre-

paid calling

cards, etc.)

Welfare Dependent

New Immigrant

Working Poor

Bootstrapper

Emerging Middle

Class

Seniors

Routine financial needs

Financial Needs of Low-income Populations


Financial institutions might structure their portfolios to first meet the needs of low-income immigrant consumers, then transition them to more mainstream services, ultimately building wealth creating instruments:

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• Check cashing and other services

provided by traditional checkcashers

• Low minimum balance depositaccount

RETAIN

Credit and loans

• Traditional savings accounts withsome non-traditional features, e.g.Union Bank Nest Egg account

• IDA-like accounts, with moreflexibility

BUILD AND GROW

Insurance and Investments

CONVERT

Savings

A full-service portfolio structured to create wealth and serve the life-cycle needs of low-income unbanked immigrant

WEALTH!!

ATTRACT AND ACQUIRE

Basic Services

• Health, life, auto and mortgageinsurance

•Savings bonds,pensions,other investment options

• High-risk, depositsecured emergencyloans

• Loan guarantees

• Creative financing forsmall businesses andhomes

Financial Literacy and Education programs must be offered throughout the Life Cycle

INCOME


• Low cost money transfer

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Finally, there three distinct opportunities to “leverage” the economic power of immigrant funds in ways that will improve quality of life of immigrants in the U.S. and conditions “back home:”

Capital investment pools for back-home development - Portions of the remittance flows that are not used to subsidize consumption by households in developing nations can be “pooled” and invested more strategically in developing educational, community, and business assets back home. The capital pools could take various forms: a community foundation, a set of IDAs, a scholarship fund, a matching fund for local infrastructure, a business financing fund, etc.

Investment pools for immigrant wealth creation - Portions of the remittance flows can be pooled to invest in the economic development of immigrant groups in the U.S., they can generate even more wealth that can be sent back home;

“Bundled” services to immigrants in the U.S. - The number of remittance-sending immigrants in the U.S. is huge - and potentially an an untapped market for other product and services. Banks and other organizations already are trying to attract some of this market to other financial services;

Leveraging remittance flows are attractive for Banks and Remitters:

For Banks:

From a financial perspective, the fee revenue can be substantial. Moreover, the revenue stream is highly stable;

Sending money every month, remitters tend to be loyal customers, sticking with a remittance service and recommending it to others (Roberto Suro, 2002);

Additionally, remittance flows tend not to be adversely affected by economic downturns in either the sending or the receiving countries;

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A recent study of Mexican remitters found that 76% of respondents cited health expenses, food, and daily maintenance primary reasons for remitting funds. With family members reliant on these funds for basic needs, a majority of remitters make sending money a top priority regardless of other financial pressures;

Remittance programs can also generate a new customer base for a bank’s other products. Remittance programs can help banks capture these individuals by bringing them in the door and introducing them to the institution. Cross-sell averages for remittance program participants tend to be higher than those of other bank customers. In the Wells Fargo program, remitters use an average of 5.7 of the bank’s products, compared with only 4.3 for all other customers;

Aside from the unbanked, remittance programs can bring in more customers by improving the institution’s image in the community;

Finally, remittance programs may help fulfil regulatory requirements, specifically the community development test of the Community Reinvestment Act (CRA);

For Remitters:

By offering remittance programs banks provide a valuable service to remitting customers, who benefit significantly from both cost savings and financial skill building opportunities;

Bank programs in general have lower fees (on average 35% less than money transfer companies) which benefits tremendously the low income customer. The Pew Hispanic center has estimated that if the price of sending a remittance to Latin America was reduced to 5% of the transaction, remitters and their families would save over $1 billion a year;

bank remittance programs also offer an introduction to the banking industry to new and unbanked immigrants facilitating access to financial products and services that allow them to build wealth, establish credit, and obtain reasonable loans (some banks offer financial education programs);

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IV- Innovative Practices for Leveraging Remittances

Most innovative approaches to leveraging remittances can be divided in four practices:

Forced Capture - Governments worldwide attempt to capture portions of the remittance flow. Few countries have attempted to mandate that a certain percentage of the earnings of their workers abroad be deposited into a national fund to be used partially for development. Only South Korea has succeeded, while mandatory earmarking of remittances has failed in the Philippines, Pakistan, Thailand, and Bangladesh. The Korean case however is part of a “package system”since the Korean workers are employed by Korean companies, which are assisted by the government in winning contracts, and these companies deposit worker’s earnings directly (Puri and Ritzema, 1999);

Other ways government tried to capture part of the flow of remittances were through taxation since such money usually comes from earnings. Justification depends, of course, on the extent to which the workers benefit from the taxes if they live primarily outside their country. In practical terms, it has been difficult to identify the source of unilateral transfers , and the threat of taxes could simply drive the money off the books;

Financially-induced Capture - Mexican banks several years ago began offering “remittance bonds” backed by money send from immigrant laborers in the U.S.. Banco Cusctlan, in El Salvador, handles at least one-third of the country’s $1.2 billion in remittances and in 1998 offered $50 million in remittance bonds;

Other countries offer migrants foreign-currency accounts in domestic banks that are not subject to foreign-exchange regulations (Puri and Ritzema, 1999). In Asian countries such as India and Pakistan, interest rates are higher than those on domestic deposits. Premium exchange rates may be offered;

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Another set of practices aims to influence the use of remittances for production instead of consumption. Incentives such as reduced tariffs for the importation of machinery and equipment to establish micro-enterprises by migrants abroad or returning immigrants (Puri and Ritzema, 1999);

Matching programs in partnership with hometown associations are increasingly being used. The Mexican state government of Zacatecas began in 1992 a formal tripartite two-for-one “matching fund” project - that is, for every dollar donated by immigrants, the federal and state governments each contributed an additional dollar. A three-for-one program now exists that include the municipal government - Tres por Uno program;

Hometown associations consist of members from the same town or state in the migrant-sending country that pull their remittances or raise funds collectively to finance projects in their home countries. Although the Mexican experience has proved to be the most successful to date, Salvadoran, Dominican, and Guatemalan groups have being encouraged by their governments to for organizations.;

The Fox Administration expanded in 2002 the Mexican program “Adopta una Comunidad” to encompass the 90 Mexican regions with the highest migration rates. The program is now called “Padrino Program” and it is geared towards successful Mexican-American businesspeople, who are encouraged to invest in one or more of the over 1000 projects identified by the Presidential Office for Mexicans Abroad in consultation with local communities;

USAID has provided funding to the Transnational Development Fund administered by the Pan America Development Foundation (PADF). The Fund leverages collective remittances from Diaspora groups such as Home town associations through matching grants awarded on a competitive basis;

In some cases, private sector players have contributed to these ventures as is the case of CEMEX….;

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Bank-to-Bank partnerships - Several U.S. financial institutions have created low-priced remittance services by establishing a relationship with one or more foreign banks. Remittances are made by transferring funds directly between accounts at partnering banks. By employing financial institutions on both sides, these programs carry little risk for senders, recipients, and partner banks;

To date, Citizens Bank offers New England’s Cape Verdean population low-cost remittance service in partnership with two Cape Verdean banks. Wells Fargo Bank’s remittance program allows remitters to send up to $3,000 a day to Mexico. The program, Intercuenta Express, is a partnership with three Mexican banks: Bancomer, Banorte, and HSBC Mexico. Banco of America created the SafeSend program to provide a low-cost way to send remittances to Mexico. New England’s Sovereign Bank in partnership with America Express, offers American Express TravelFunds Card. Though originally designed for travelers, Sovereign Bank also offers this product to remitters. Remitters can load the card at Sovereign and sent it to a recipient abroad . The card can then be used worldwide at ATMs and retailers that accept America Express (see also Banco do Brasil and Caixa examples, slide 13;

Because of the account-to-account nature of funds transfer, bank partnership remittance programs have have encountered all the hurdles referred before (see slides 15 and 16);

Rather than foreign banks, some major U.S. banks and credit unions are turning to ATMs to provide the necessary distribution network for their remittance services. In an ATM remittance program, a customer creates a dedicated remittance account at the U.S. bank that can be accessed by two ATM cards - one of which is kept by the sender and one which is sent to the recipient abroad;

Diaspora Transnational Philanthropy- There are a few small foundations helping on diverse causes around the world. However, Diaspora philanthropy is a very undeveloped field with few donors aware of its possibilities;

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25

26

27

28

29

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V - Thinking Beyond Remittances:

Recru

itmen

t

Remittances

Rep

resentatio

n

Returns

POLICIES TOWARD REMITTANCES:

• Possible taxation;• Decrease competition of money transfers (e.g. Mexico);• laws with mandatory remittances (e.g. Eritrea)• Financial incentive programs• Entrepreneurial Support (in Japan, the new project “Dekassegui*

Entrepreneur” launched by IDB through its MIF (Multilateral Investment Fund) to be implemented by SEBRAE (Brazilian service to Support Small and Medium-size Companies) and ADB will provide financial and informational support for those who want to invest their money in the home country).

POLICIES TOWARD RECRUITMENT:

• Countries have bilateral agreements;

POLICIES ENCOURAGING RETURNS:

• Indian Investment Centre;• Networks and Associations (e.g. Silicon Valley’s connections

with Taiwan, India, China);• Quotas, immigration restrictions;

REPRESENTATION:

• Protection and intervention while abroad (e.g. Filipino consulates are active in defend Filipinos abroad against human and labor rights abuse);

• Extending citizenship rights abroad (e.g. members of the Eritrean Diaspora voted for independence in the 1993 referendum, and many participated in the drafting of the new Constitution);

• Welfare services (e.g. Philippine Overseas Workers Welfare Administration);

• Potential influence on foreign policy of receiving country ( e.g. lobbies in the U.S.).

4Rs & D

THE FOUR R’s OF EMIGRATION (4Rs & Development):

* Dekassegui Brazilians living in Japan mostly of whom Japanese decent.

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Web sites:

www.sendmoneyhome.org

http://www.delapaz-ewf.org/

http://www.lindenfund.org/

http://www.africaDiaspora.com

http://www.migrationinformation.org

http://migration.ucdavis.edu

http://www.transcomm.ox.ac.uk

http://www.cis.org/

http://www.ercomer.org/

http://www.iom.int/

http://www.international.metropolis.net

www.migrationpolicy.org

http://www.sendmoneyhome.org/

http://www.delapaz-ewf.org/

http://www.lindenfund.org/

http://www.africadiaspora.com/

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DEFINITIONS AND DATA:

The understanding of Diaspora in this presentation is very similar to the definition offered by G. Scheffer: “Modern Diasporas are ethnic minority groups of migrant origins residing and acting in host countries but maintaining strong sentimental and material links with their countries of origin - their homelands.” (A New Filed of Study: Modern Diasporas in International Politics, G. Scheffer);

The unbanked are individuals who do not have a transaction account with a traditional financial institution, like a commercial bank, thrift institution, credit union, or securities operation. Transaction accounts form a comprehensive category comprising checking, savings, and money market deposit accounts, as well as money market mutual funds and call accounts at brokerage firms;

The only major source of comparative statistics on remittances is the Balance of Payments Statistics Yearbook published yearly by the IMF. The data used in the publication is two years old - if it was published in 2002 it uses 2000 data. There are three variables needed to calculate total remittances: workers’ remittances, compensation of employees, and migrant transfers. Workers'’ remittances are the value of monetary transfers sent home from immigrants working abroad for more than a year. Compensation of employees is the gross earnings of foreigners residing abroad for less than 12 months. Migrant transfers are the net worth of migrants who move from one country to another;

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EXTRA SLIDES

34

Network ExternalitiesThe value to customers is in the full

range, life-cycle value proposition

Increasedmarket size

IncreasedattractivenessIncreased value

and reduced risk

Increased sales

Integrated Product LinesSwitching costs increase due to

investment in offering,learning and use

Increased customerinvestment andcommitment toproduct/service

Increased value tocustomer ofproduct/service

Increased loyalty fromincreased switching costs anddecreased value of competitors’product/service

Leverage Education and Technology

Technology development and financialeducation reduce operating, fixed, and

distribution costs

High-volume salesdrive down fixed-cost component

Lowerprices andmarketingcosts

Highmargin

In order to serve the financial needs of low-income residents effectivelyand profitably, financial institutions need to develop new retail bankingmodels, integrate product lines, and leverage education and technology

Three Strategic Adjustments

New Retail Banking Models

35

These three key strategic adjustments should follow these general characteristics...

Integrated Product Lines:

• Adjust products and services offerings to match low-income consumer needs

• Integrate products to profitably serve low-income consumers over their life cycle

• Offer full service product line spanning from basic services to asset-building instruments

• Create migration mechanisms to move consumers from basic services to wealth building

New Retail Banking Models:

• Redesign branches to match full service - life cycle character (one-stop-shop)

• Redesign branches to reduce investment costs (light structures; mail box etc. style)

• Explore co-location of “express” branches (supermarkets, etc.)

• Mix high touch with technology (bricks and clicks) to reduce operating costs

1

2

Leverage Education and Technology:

• Design financial literacy, credit counseling, investment advisory programs to educate consumers and enable them to migrate from basic services to wealth building

• Leverage relationships trough partnerships with non-profit organizations to deliver training and counseling

3

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Basic Services

Wealth CreatingStrategies

Insurance &

Investments

Credit &

Loans

Savings

Product/Service bundle




Product and service bundles may be designed to move low-income immigrant costumer relationship further along the life-cycle:


37

“FIRST MILE PROBLEM” “LAST MILE PROBLEM”

Access to banking services in sending countries is a serious constraint on the volume of remittances in formal channels and on banks ability to influence prices;

The most cost effective means to remit money cross-border is by electronic transfer between financial intra-bank accounts;

The “first mile problem” explains in some degree the robust growth of Western Union and informal channels despite their high costs - the failure of banks in sending countries to provide access to affordable, simple remittance products;

Migration to other financial and wealth-building products such as interest-bearing deposit and savings accounts, etc.

The limited market knowledge of the “unbaked”households in the receiving countries;

Households without deposit accounts in the formal system are economically “disenfranchised” because they can neither send nor receive deposit money throughout the banking system;

The exclusion of the poor from the formal financial system limits their ability to efficiently manage their resources, save and establish sound financial habits. This, in turn, reinforces their poverty and makes it less likely they can use credit effectively;

The failure of the banking system to develop economically viable means to bank the “unbaked immigrant” is a market failure in both developed and developing economies, where banks are narrowly focus on the affluent, corporate and real estate markets;

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ISSUES AND CONSTRAINTS IN SENDING AND RECEIVING COUNTRIES

Government & Nonprofit

The Diaspora Dividend - Leveraging Immigrant Remittances