| Global Remittances: A Brief Overview of Formal vs. Informal Channels

Global Remittances: A Brief Overview of Formal vs. Informal Channels

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Global remittances are an economic superpower. 

Through the years, they have proved to be a solid financial motor, connecting countries and people across regions.

Multiple factors are fueling this meteoric trend, but one element has truly changed the global remittance landscape: global access to safe, affordable, and reliable technology. 

In the parlance of the global payments industry, such cutting-edge remittances are often called “formal channels.”

To truly appreciate their effect, we must also understand the “informal” channels that stand in stark contrast to the technological advancements of the modern age.

Before getting into it, let’s get over some numbers.

Global Remittances in Numbers

After growing 5% in 2022, remittances to low-and-middle-income countries (LMICs) have reached $626 billion

While the big picture is staggering, the growth of remittances in individual countries is perhaps even more impressive.

India, for example, is on track to record over $100 billion remittances this year, making it the first country to ever cross that multi-billion-dollar threshold. 

While India saw a major increase in remittances, other regions are following closely behind. Latin America and the Caribbean saw an amazing 9.3% rise in remittances this year. 

What Are Formal Remittance Channels?

As the name implies, “formal” remittance channels constitute services offered by a registered financial entity. 

These channels often include money transfer operators, banks, credit unions, post offices, and mobile wallets.

For example, UniTeller’s remittance brand, uLink, is an internationally-regarded formal remittance channel. 

As such, it is backed by Grupo Financiero Banorte—one of the largest and trusted financial institutions in Mexico and Latin America. 

By leveraging state-of-the-art technology, the uLink app empowers users to send money through their smartphones and tablets in just a matter of minutes. 

Serving over 65 countries worldwide, uLink gives users multiple options to deliver funds by:

  • Credit to bank accounts.
  • Arranging cash pickup.
  • Deposit to digital wallets (in select countries).
  • Home delivery (in select countries).

While ensuring a safe and fast remittance delivery, uLink provides a great exchange rate and a completely transparent fee breakdown. 

These are the core benefits of formal remittance channels.

As companies like uLink have grown in popularity, formal remittance channels have gradually eliminated the need for using informal channels.

What Are Informal Remittance Channels?

While they vary from region to region, most informal remittance channels involve friends, travelers, or paid contractors to help get money from one geographic location to the next. 

In some regions, this remittance method is known as “Hawala,” which means “transfer” in Arabic.

In India,“Hundis” appeared in the late 12th century, providing a credit-based system that exists to this day. 

The point is clear: organized systems of informal remittance have existed for centuries and continue to provide economic relief.

The process is as simple as it is ancient: migrant workers entrust travelers with cash (or goods), a letter of intent naming the intended recipient, and a fervent prayer that the money would arrive at the right destination and in the original amount. 

Why Are Informal Remittance Channels Popular?

Until recently, informal remittance channels were thought to be at least 50% larger than the recorded formal remittance flows.

Though such numbers are difficult to measure, formal remittance channels have closed the gap in recent years. 

Nevertheless, many migrants continue to favor antiquated methods of sending money abroad.

There are several reasons for the popularity of informal channels:

  1. Some migrants hold far greater confidence in friends, travelers, and contractors than in modern financial institutions.
  2. Despite the growing presence of smartphones, many migrants nevertheless remain both unfamiliar with and mistrusting of digital technology.
  3. Many migrants are unbanked/underbanked and therefore unaware of and excluded from formal remittance channels.
  4. Informal channels often enable migrants to avoid paying remittance fees. 

While all four factors are important to consider, the last point deserves special attention. 

Formal remittance channels remain especially costly. 

In 2022, the average global remittance fee was roughly 6.3 percent of the amount sent, according to The World Bank. That’s nearly 4% higher than the United Nations’ Sustainable Development Goals (SDGs). 

At a 6.3% fee structure, a $200 remittance would be assessed a $12.60 penalty. 

Given the global state of economic insecurity, it’s no wonder that many migrants continue to risk using informal channels, so long as it means 100% of their remittances make it to their loved ones. 

Unfortunately, informal channels cannot consistently provide such guarantees.

Benefits of Formal Remittance Channels 

The advantages of formal remittance channels are well documented: they are efficient, affordable, fast, and safe to use. 

With uLink, for example, each transaction is backed by a major financial institution and supported by highly secure, encrypted mobile technology. 

Informal channels cannot equal any of these advantages. 

On the one hand, informal remittance channels hinge on a verbal agreement between parties. After all, transactions are not officially tracked or monitored at any point in the delivery process. 

In other words, the sender is entirely at the mercy of the agent, friend, or traveler. 

Yes, informal remittance channels may help senders save money by avoiding fees.

But what happens if the broker loses the money? What if they embezzle the funds? What if they get arrested or stopped at customs?

These are the questions that remain a thorn in the side of informal remittance channels. 

Besides, many informal remittance channels are now expressly illegal in many countries—despite remaining popular around the world. 

As time goes on, more migrants may ask this pressing question: “Why risk detention, jail time, legal action, and total financial loss just to avoid a fee?

That’s especially true when formal channels put the power of remittances right in your pocket. 

With just a few quick clicks, expats can send money around the world with total confidence in its safe and timely delivery. 

What the Future Holds

The future of formal remittance channels remains bright. 

As we move into 2023, two areas deserve our attention, including:

  1. Lowering remittance transfer costs: Payment infrastructure, anti-money laundering rules, compliance requirements, FX conversion costs, and banking legislation all have one thing in common: they drive up remittance fees.

    Until these costs are curbed, informal remittance channels will continue uncontested. And until these fees are reduced, more migrants will risk losing their money through risky brokers.
  2. Enhancing financial and digital literacy: Countless migrant workers are simply unaware of modern remittance channels.

    This is largely a shortcoming of central banks and other financial agencies. Such institutions have a rare opportunity to spread the awareness, education, and engagement needed for more people to embrace formal remittance channels.

    Fortunately, some nations have seen a stratospheric rise in digital growth and accessibility. In India, for example, smartphone penetration recently grew from 22% in 2017 to 60% by 2021.

    As we mentioned earlier, India will soon surpass $100 billion in annual remittances.
    That’s not a coincidence.

    The proliferation of smartphones and the rise of formal remittance channels go hand in hand. Such trends must be encouraged, expedited, and replicated around the developing world.

Ultimately, policy-makers, central banks, and technology pioneers can help close the gap between formal and informal remittance channels

This will not only serve the underbanked and unbanked populations, but over time, it will ultimately reduce the cost of remittance fees and ensure the security of each and every financial transaction. 

Partnering With UniTeller

When it comes to transferring money, UniTeller maintains a high standard of excellence.

As a fully licensed money transmitter in the United States, UniTeller remains intensely committed to providing international payment services with a transparent and flexible business model. 

Our professional team will provide in-depth training for you and your team, so you can see how the process works and begin completing money transfers right away. 

By partnering with UniTeller, you’ll also gain access to our multilingual Customer Service department, available seven days a week. 

Finally, as a UniTeller Selling Agent, you will have total confidence in the money transfer services you provide. With our advanced UniTeller Internet Web Interface, you can send remittances with ease. 

Plus, you’ll have access to our extensive network of over 200,000 paying locations in over 80 countries worldwide. 

It’s fast. It’s reliable. And it’s trusted by countless customers and business owners across the United States. 

Want to learn more about becoming a UniTeller Selling Agent? Click here to get started.