In today's interconnected world, the term "remittance" has gained paramount significance as a vital financial concept, carrying profound implications. Broadly speaking, it is often used interchangeably with the term "payment." Remittance accurately describes any form of bill or invoice payment. However, in recent times, the term has become more commonly associated with money that foreign workers send home to support their families. This association arises from the verb "remit," which means to "send back," thereby reflecting the essence of remittance.
Over the years, the term "remittance" has evolved to encompass digital finance, particularly focusing on cross-border transactions. This article aims to shed light on the workings of remittance, providing insights into how to send remittance transfers and the associated terms.
- What Is Remittance?
- How Does Remittance Work?
- How to Send a Remittance Transfer?
- Understanding Remittance Technology
To get started, let's establish a clear definition of remittance.
What Is Remittance?
As of 2023, more than 3.5% of the world's population resides outside their country of birth, a figure projected to grow steadily for decades to come. Remittance represents cross-border money transfers and thus has witnessed a steady increase in global transboundary transaction volumes in recent years.
The global volume of remittance payments made in 2022 reached a staggering $794 billion. To provide a comparison, in 2020, according to IOM UN Migration, this volume stood at approximately $702 billion while back in 2000, it was a mere $126 billion. With the continuous growth of migration levels and further advancements in the digital finance sector, the global remittance volume is expected to experience even faster growth. Consequently, the demand for cross-border transactions will continue to rise. Notably, in 2022, India, Mexico, and China emerged as the top three recipients of remittances.
Remittance entails the transfer of funds between two individuals or between an individual and an entity. Typically, remittance transactions are conducted through electronic payment methods or wire transfers, predominantly for international transfers. Fortunately, these transactions are processed swiftly, requiring minimal time for completion.
As mentioned before, migrant workers constitute the primary social group utilizing remittance as they send earnings back home to support their families. Remittances make up a significant portion of the gross domestic product (GDP) of developing countries.
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However, it is worth noting that in the present era, many individuals who make purchases from foreign retailers also engage in cross-border payments. Thus, the number of individuals making such payments is unlikely to decline anytime soon, further emphasizing the relevance of remittance in today’s economy.
How Does Remittance Work?
The process of remittance payments can vary depending on several factors. When sending cryptocurrencies, the transaction relies on blockchain technology and crypto wallets for processing. In contrast, transactions involving traditional bank accounts operate differently.
Cryptocurrency transfers are not bound by borders. Whether the money is sent within a country or abroad, the fees, speed, and other aspects remain consistent. On the other hand, fiat money transfers are a little more complex. The sent funds are converted into the local currency. Subject to fluctuating exchange rates. The sender typically incurs fees imposed by the bank. By the end of the transaction, the receiving party obtains the money in the local currency, with a portion of the value potentially lost in the exchange process and additional fees too.
How to Send a Remittance Transfer?
When it comes to sending remittances, many people opt for wire transfers, with SWIFT and Western Union being popular choices accepted in most countries. Prior to initiating a remittance, it is important to choose a bank that works with the recipient's bank. Failure to do so may result in the payment being routed through an intermediary bank, incurring additional commissions and extending the time needed for the transaction to be completed. At times, remittance payments can take up to a week to process. Alternatively, remittances can be sent through Automated Clearing House (ACH) payment method. Money orders and checks are also viable non-cash remittance options that often have lower costs, although they may require more time for processing.
A more convenient option for remitting money is through electronic funds transfers (EFT). Usually, EFT payments are completed within a day and do not require the same paperwork needed for wire transfers. On top of that, EFTs often charge smaller fees. However, the time and fees involved may vary depending on the countries of the parties involved and the specific EFT platform used. The main drawback of EFTs compared to wire transfers is the relatively lower level of security they provide.
In recent times, the most modern methods for remittance involve the use of cryptocurrency apps and specialized fiat money remittance apps. These platforms offer quick and user-friendly solutions for sending money. Furthermore, they often impose minimal fees on users. These apps frequently provide messaging capabilities, facilitating payment confirmation and enhancing the overall user experience. Nonetheless, it is crucial to exercise caution when utilizing apps due to the presence of hackers and crypto scammers who target the funds of payment app users.
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Cryptocurrencies are unaffected by the geographical locations of the parties involved, making international transfers as quick and cost-effective as local ones. However, it is important to note that crypto platforms may not be universally available and can be subject to jurisdiction-related restrictions. Therefore, before initiating a transaction, ensure that the platforms used by both you and your recipient are supported in your respective countries. XGo supports remittance, among other features that involve cryptocurrencies.
Understanding Remittance Technology
Distinguishing between a remittance and a bank may not be immediately apparent to most individuals, as these terms are not entirely interchangeable. Remittance refers to a payment made between two individuals or the banks they utilise. On the other hand, a bank transfer involves a payment made between two accounts. Thus, when the same person moves money from one account to another, it is considered a transfer rather than a remittance. The resulting transaction is sometimes referred to as an outward remittance, when money is sent and an inward remittance when money is received.
Information pertaining to the recipient of a remittance in a business-to-business (B2B) transaction is typically provided in a "remittance slip" or a "remittance letter." These documents are often attached to t payment records to provide the recipient with additional information.
For B2B remittances, banks are a preferred choice due to their stringent verification procedures, enhanced funds protection, and comprehensive data collection. Opting for a bank ensures the security of all financial information associated with the money transfer and offers a higher level of safeguarding for your accounts and related operations.
Is remittance taxed?
Generally, remittance payments are subject to taxation. Therefore, it is crucial to check the remittance tax regulations in your country before sending or receiving such payments. While some countries do not tax individuals on remittances, most jurisdictions require business entities to include remittance transactions in their tax reports. The specific size of remittance taxes varies across different countries.
How much does it cost to remit money?
The cost of remitting money depends on the country you are sending money from and the chosen payment method. According to the World Bank, the average global cost of remittance in 2021 was approximately 6.4% for a $200 transaction. Wire transfers can incur fees of around $50, while remittance apps typically charge around 4 to 5 percent. Overall, the emergence of fintech companies has contributed to a decrease in remittance fees.
What information do banks involved in remittance need?
When remitting money through banks or other financial institutions, it is important to be prepared to provide relevant information about the parties involved. Key remittance data required by financial institutions include the remitter's data, such as their name and address, as well as the data of the seller or payee, which should include their name and address.
Additionally, the payment receiver's account number, the balance due or invoice amount, the transaction due date, the invoice number, and the chosen payment method are all essential pieces of information.