BY JAN SMITH
AND LUIS SOLER
Remittances are a basic mechanism for the development of recipient countries, but it is vulnerable to economic downturns. In the wake of the economic slowdown, remittances sent by immigrants living in Spain have gradually fallen off in recent months. This is the logical effect associated with higher rates of unemployment in the construction and real estate sectors, and to a lesser extent, in services. Recipient countries are beginning to feel the “aftershocks” of the Spanish economic crisis as they receive less funds from their emigrants abroad.
In contrast, in 2007, remittances from Spain broke all records, reaching over €8 billion. In October 2007, remittances sent from Spain amounted to €770 million - a record level for a single month; however, as of November, the figure dropped 6 percent. Since December, there has been a gradual decline at a rate of about 4 percent compared with the each previous month. The construction and services industries, where jobless rates have climbed, have particularly been affected. Almost 60 percent of Latin American immigrants work in one of these two industries, and their ability to send money has fallen considerably. According to our estimates, the Latin American remittances market in Spain will decrease by 10 percent by the end of the first quarter of 2009.
High interest rates negatively affect the spending capacity of all households that rely on income from the immigrant worker. More restricted financing means less available funds for remittance payments. Both residents and the immigrant population in Spain must spend more money on food and fuel because of rising prices, in addition to juggling rent and mortgage payments. As a consequence, both the employed and unemployed immigrant population have less money to send to their countries of origin. For some countries, as in the case of Bolivia, the drop in inbound remittances could well exceed 20 percent. These figures are based on remittances sent through formal channels, such as remittance operators and bank drafts. Although the waning flow is cause for concern, it is worth understanding the dynamics of the informal channels in times of crisis because they highlight adaptations made by the sender, which can compromise the legality of some of the transfer instruments.
In times of crisis or strict currency and regulatory controls, the percentage of transfers through informal channels tends to increase. Historically, there are two channels of this kind. The first is sending cash with individuals who are traveling to the sender’s country of origin. This practice currently accounts for an estimated 5 percent of the transfers made to Latin America. The second practice is to use postal or courier services, which in Spain oscillate between 10 percent and 12 percent of remittance transfers.
To date, the use of personal transfers has not increased significantly and it is not expected to grow. This can be attributed to the long distances and expensive air fares between Spain and Latin America. Indeed, personal travel by Latin Americans in Spain to Latin America dropped 8 percent in 2008. Of equal note, only 14 percent of unemployed emigrants in Spain intend to return to their countries in 2009.
In contrast, the use of mail and courier services has grown. Studies conducted by Kroll with emigrants from the Dominican Republic show that transfers through courier services jumped by 50 percent over last year. Generally, two or three high-denomination euro bank notes are sent sandwiched between pages of documents or magazines. Transfer costs by courier services are diluted because a greater amount is sent on one occasion, compared with sending smaller amounts more frequently through traditional services. It was initially believed that sending money through courier services would be unsafe. Nevertheless, there are several noteworthy advantages for emigrants. Most of the courier companies are international corporations with excellent reputations and service. Frequently, the package arrives before a bank draft and has the benefit of home delivery and being able to send personal details (in addition to the money).
The use of courier services also lends itself to the consolidation of remittances in much more flexible ways than formal channels. ID requirements for both sender and recipient are less stringent and ceilings on value sent are inapplicable. For example, a person can send money from various persons and, in turn, the person receiving the money hands it out in the destination country. Depending on the country, between 12 percent and 16 percent of the people receiving money in Latin America from Spain immediately make a transfer after receiving the remittance. National transfer fees are low enough to facilitate this service (where it exists) in most of the cases. In 2007, only 9 percent of Latin American immigrants in Spain said that they consolidated their remittances with other parties. This number jumped (depending on the nationality) 20 percent to 30 percent by mid-2008. Studies by Kroll in Latin America confirm this trend. The number of Peruvians and Colombians who reported receiving remittances and dividing them at least three times soared to more than 30 percent.
Debit cards are another form of money transfer that has been difficult to measure. On average, 70 percent of Latin American emigrants in Spain have bank accounts and a third of them use the remittance services or bank drafts to send money back to relatives. In 2007, just 14 percent of them said that they used the debit card as an occasional tool to send money. The biggest obstacle was the fear of giving account access to relatives living abroad. Low banking penetration among the remittance-receiving community in the country of origin also restricts the use of banking channels for remittance payments.
Nevertheless, the growing practice of consolidating remittances has also had an impact on the use of debit cards and bank drafts. In both cases, there has been an increase in both volume and value. An analysis of ATM withdrawals from Spanish debit cards in Central America and the Dominican Republic reveals an increase. Although the amount of bank drafts to Mexico has fallen, the average value to some cities has climbed almost 20 percent. In July 2008, the number of Latin Americans in Spain who claimed to have used a debit card more than once to transfer money rose to 22 percent.
These forms of sending money have not been fully studied or measured by the banking and remittance industries. Given this fact, the net impact on the true value of the decline in remittances is likely a little less painful because a portion of the formal channels is now flowing in new or informal channels.
There is a high risk that the new channels used can also be abused and hijacked by money laundering. This potential for abuse is raising concerns among legislators who are debating whether to extend anti-money laundering and terrorism financing measures to the transaction. If successful, these measures would imply greater scrutiny of courier packages and greater limitations on debit card activities. This creates the need for companies with strong backgrounds in compliance and anti-money laundering services, who can help traditional and the new “de facto” remittance companies stay clear of problems.
This article is republished with permission from Tendencias, the magazine of Kroll InfoAmericas.