Key Terms

Digital Remittance: Basic Terminologies

Section 1: Remittance behavior

Remittance

The International Monetary Fund (IMF) defines remittance as
household income sent or given by individuals who have migrated to a new economy and have become residents of those economies. Remittances
therefore include both cash and non-cash items that are sent/received
through formal or informal channels. Essentially, it can include sending of money, donation or a gift either through official or unofficial means.

The Sender

Often a friend or family member sending money to the receiver to support living costs or other expenses.

The Receiver

Recipient of the money remitted. In the context of this manual the recipient is either a refugee or a returnee.

Remittance Service Providers

Facilitate money transfers between the sender and the receiver. They do this with official documentation to provide cross-border money transfer services including commercial banks.

Formal remittance

refers to remittances sent to a country through legal channels, where flows are typically documented in regulated financial systems.

Informal remittance

refers to remittances that occur through private or unrecorded channels. Such transfers are usually based on trust.

Section 2: Digital remittance ecosystem

Digital Remittance

A mechanism for sending money using electronic systems. It makes money transfers easier, quicker and allows for money to be sent remotely. Digital remittance supports transactions such as direct deposits, debit and credit card transactions, online bill payments and wire transfers. Depending on the remittance service provider, mobile applications and/or websites can support direct transfers to banks, debit and credit accounts.

Mobile Money

A technology that enables mobile phones to be used to transfer money between various accounts. Mobile money services typically offer the following products:

  • Domestic or international money transfers: Domestic money transfers involve sending/receiving money within the same country while international transfers are cross-border. Mobile payments including bill payments: uses the mobile phone/ device to facilitate financial transactions/payment for goods/ services offered such as electricity, airtime, hospital bills etc.
  • Bulk disbursement: bulk payment is a quick way of transferring/ sending money/funds to multiple recipients, commonly used when paying salaries, employee benefits or supplier payments.
  • Merchant payment: payment to wholesale traders or distributors
    who purchase goods in bulk and redistribute to retailors

Saving products

“Traditionally, the storage of a customer’s money by a bank within an interest-bearing account. It is sometimes used more loosely to describe any store of money, such as the balance of electronic money within a mobile wallet.”

Credit

“Money or an object that is lent, usually with the understanding that the loan will be paid back, usually with interest.”

Insurance

To cover costs such as health expenses.

Airtime

“Purchase of mobile phone airtime via mobile money, usually funded from a mobile money account.”

Payment of utility bills

“Making a payment for a recurring service, either in person (“face to face”), or remotely.”

Innovators

Includes private operators and developers in the tech industry who develop new ideas/strategies/technologies to address/improve various components of money transfer so as to improve access, utilization and satisfy user needs.

CSOs/NGOs

These are voluntary, not-for-profit entities that work within the social sphere, have direct ties to communities in which they work and advocate for community interests. These include village associations, community based organisations and non-governmental organisations.

Governments

The administrative component (national or local government units) in the remittance ecosystem that is in charge of developing and administering public policy i.e. policy guidelines that regulate money transfer and operation of different players within the sector.

Private sector

Part of the remittance landscape that is run by individuals, private companies, banks, manufacturers, fintech companies and RSPs that provide remittance services with the intention of making profit.

Beneficiaries

These are remittance receiving individuals/households or ecosystem system service users.

Section 3: Types of services provided by digital remittance channels

Foreign Exchange

“Exchange rates are defined as the price of one country’s currency in relation to another. Exchange rates may be expressed as the average rate for a period of time or as the rate at the end of the period.”

Airtime top-up

“Purchase of airtime via mobile money, usually funded from a mobile money account”

Bill payment

“Making a payment for a recurring service, either in person (“face to face”), or remotely.”

Credit/loans

“Money or an object that is lent, usually with the understanding that the loan will be paid back, usually with interest.”

Savings

“Traditionally, the storage of a customer’s money by a bank within an interest-bearing account. It is sometimes used more loosely to describe any store of money, such as the balance of electronic money within a mobile wallet.”

Section 4: Cost of sending and receiving digital remittance

Remittance Corridor

The geographical connection between a country from which money is sent and the country to which it is sent forms a remittance corridor. For example, the United Kingdom and United States are top two remitting corridors for Kenya and Somalia based on the average remittance flow.

Bank-to-Bank transfer

Money can be transferred between two bank accounts held with the same bank (intra-bank transfer) or between bank accounts held in two different banks (inter-bank transfers). Most international money transfers are inter-bank transfers. Bank-to-bank transfers can be facilitated through over the counter transactions or through wire transfer, which is a faster way of sending money between two financial institutions.

Debit/Credit Card to Mobile Wallet

There are remittance providers that allow their clients to make money transfers using a credit or debit card. Such transactions can be made through:

  • The sender’s bank account: with 3 options a) online, b) over the phone and 3) by visiting a branch.
  • Globally recognised RSPs such as Western Union, MoneyGram, PayPal and Transferwise, which allow clients to do online transfers using a credit/ credit card.

Debit/Credit Card to bank account

Money transfer can also me made directly from a credit card to a bank account. This too has three delivery options: a) online, b) over the phone and 3) by visiting a branch. The sender only needs to link the card with the bank account.

Agent (Cash) to Agent (Cash)

Local and International remittance service providers have agents strategically located in major towns, including refugee camps in Kenya and Somalia. These are outlets and sub-outlets of main RSPs that offer transaction services: clients can deposit, withdraw or transfer money. Transaction process includes physically visiting an agent with required identification documents to send to another agent or pick money sent through an agent.

Agent (Cash) to mobile wallet

Involves physically visiting the nearest RSP agent in person, fill in form or present identification documentations to the agent and recipient’s mobile phone number. Most RSPs give unique reference numbers to be used by the recipient to withdraw.

Mobile wallet to mobile wallet

Mobile wallet to mobile wallet: Entails sending money directly from one mobile wallet to another.

Types of remittance costs and their impact

Exchange rate

The OECD defines exchange rate as “the price of one country’s’ currency in relation to another” i.e. the worth of one currency when compared to with a foreign currency. In simple terms it can be treated as the price being charged to purchase a foreign currency. The rates (prices in this case) are prone to fluctuation and therefore change constantly.

International money transfer

International money transfer are subjected to daily exchange rates. Depending on the fluctuation (exchange rate behavior), the sender or receiver can either save money or lose a fraction from the transaction. The knowledge on how exchange rates affect transactions is important for a user to ensure he/ she does not opt for a money transfer that charges high margins on transfers.

Sending fees

Most remittance service providers charge users a fixed amount for assisting in transferring money from person-person. The fee depends on the remittance service provider one is using as well as the amount sent and the currency in which the money is being sent. Some fees also depend on how one is sending the money i.e. from a bank account, mobile wallet, debit or credit card.

Withdrawal fees

Fees charged for receiving international transfers. They are charged when receiving money either from a bank account, mobile wallet, automated teller machines or an agent. Related charges can also be incurred when one pays for goods and services using a debit/credit card or mobile money. For example Equity bank charges 1% on large withdrawals (more than USD 5000) made from Paypal account.

Interest Rate

The terminology is common when it comes to borrowing/ lending/saving money. It is the fee that one is charged for borrowing/saving money. It is commonly expressed as a percentage of the total amount borrowed or saved. For example when one saves some money, he/she will earn some extra money on top of the principal amount. Using a similar principle, money to be repaid is usually more than the amount borrowed, based on the agreed interest rate.

All the five factors have a direct effect on the amount of money expected to be delivered upon withdrawal.

Section 5: Costs of sending and receiving digital
remittance

Fees structure

How transactions costs are calculated by RSPs. This can include a range of factors from RSP service charges to currency exchange rates.

Exchange rates

Defined as the price of one country’s’ currency in relation to another. Exchange rates may be expressed as the average rate for a period of time or as the rate at the end of the period.

Transfer speed

The time between which money sent by the remitter is received by the beneficiary.

Products and services offered

The range of remittance of other financial services provided by the RSP

Transfer methods/ Payment options

The remittance channel used to transfer money between sender and receiver, for example via an online credit card payment to a mobile money wallet.