Costs, economic identity and banking the unbanked 1

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1 Costs, economic identity and banking the unbanked 1 One very important type of financial activity performed by Latinos in the United States is the international transfer of remittances to their families in Latin America. In 2002, immigrants sent more than $30 billion to Latin America as part of family obligations. The costs associated with this transfer, however, are very high. Limited access to banking institutions is an important reason why sending remittances remains costly. Many remittance-sending Latino households remain outside of formal financial streams, partly because they lack economic identity. The lack of economic identity increases the cost of economic transactions such as processing paychecks, remitting money abroad, and obtaining services such as telephone, cable, or even electricity. Within this context, is important to provide basic means to enable Latino communities to be better informed customers and to insert themselves into banking institutions and enjoy a range of financial services. Key to that idea is the recognition of the positive effect of the consular identification card. a) Flows of remittances to Latin America and their senders Remittances to Latin America began to increase in volume in the late 1980s, surging from nearly $1 billion in 1980 to $3.7 billion in 1990 and $30 billion in 2002 (see Table 1). These remittances may be as important to national economies as exports, which traditionally have been the greatest contributor to gross national product. Table 1. Family remittances to Latin America, Bolivia $90,300,000 Brazil a $4,000,000,010 Colombia $2,272,000,000 Costa Rica $200,000,000 Cuba a $1,100,000,000 Dominican Rep. $1,939,300,000 Ecuador $1,432,010,000 El Salvador $1,935,200,000 Guatema la $1,579,000,000 Guyana a $100,000,000 Haiti a $810,000,000 Honduras $720,000,000 Jamaica $1,200,000,000 Mexico $9,815,000,000 Nicaragua a $660,000,000 Peru $1,100,000,000 Trinidad and Tobago $50,900,000 Venezuela $220,000,000 Eighteen countries $29,223,712,012 Source: Central Banks of each country. a Author s estimates. 1 Manuel Orozco, Inter-American Dialogue, Washington, DC. Testimony presented before the Congressional Hispanic Caucus, March 26,

2 Remittances to El Salvador have, on occasion, exceeded the total value of exports, and are over half the value of exports in the Dominican Republic and Nicaragua. 2 Even in countries like Mexico, which has a strong export-oriented market, remittances equal 10 percent of the total value of exports, almost as much as the income from tourism, and about 80 percent of the value of foreign direct investment. Millions of Latino immigrants send remittances back home to most, if not all, countries of Latin America. On average, an individual Latino immigrant sends $260 from the United States, but these amounts vary depending on the migrant s country of origin. As the figure below shows, Mexicans, Brazilians, and Costa Ricans send the most, while Peruvians, Haitians, and Nicaraguans send the least. These remittances are sent at least seven times a year. Mexico Brazil Costa Rica Paraguay Chile Ecuador El Salvador Bolivia Guatemala Jamaica Honduras Colombia Venezuela Panama Dom. Rep. Argentina Peru Haiti Nicaragua Figure 1.Average amount sent by immigrants Source: NMTA; Monthly Average using data from January to December This amount represents at least ten percent of the migrant s income. According to the 2000 Census, a significant portion of Latinos earn less than $20,000 a year. This is important considering the country of origin variations in amounts sent by the immigrants. For example, Mexicans, who represent the largest share of Latinos in the United States, 2 Orozco, Manuel, Globalization and Migration: the Impact of Family Remittances to Latin America in Latin American Politics and Society, (Summer 2002), V. 44, n.2, pp

3 send 22 percent of their income home in the form of remittances, the highest among Latinos. Dominicans and Nicaraguans earn less than other Latinos. For example, Nicaraguans living in Miami have the lowest incomes of all migrants in the area. According to a survey conducted in Miami, 48 percent of Nicaraguans household had an income below $25,000, with an average of $1821 a month. 3 Table 2: Personal Annual Income of Hispanics (percent) Mexicans Cubans Central and South Americans Less than $20, to 34, Over 35, Source: US Census, One important feature about immigrants who send remittances is that their patterns change over time. Specifically, there is a curvilinear trend in sending money. In the first years of arrival, people tend to send less, partly because of their limited income and because of obligations incurred when arriving in the country. As immigrants settle over time, they send more, partly because they earn more. But after an extended period of time, commitments to the country of origin are reduced again. This last part of the curve results from two factors. First, obligations in the host country (such as schooling, health, and housing) increase. Second, relationships with family in the country of birth have changed for various reasons (death, migration, or social mobility) and new relatives have arrived to continue obligations with the extended family. A survey conducted in November 2001 by Bendixen and Associates at the request of the Inter-American Development Bank asked 1,000 immigrants about length of time in the United States and the amounts sent. 4 The figure below shows the relationship between these two answers. In the area where most immigrant responses were located (sending less than $100 or between $101 and $300), there is a curvilinear trend. Those who have lived in the United States less than five years tend to send less than those who have lived in the country between five and ten years. However, as immigrants pass the ten year mark, they send below-average amounts. 3 Fernandez- Kelly and Curran 2001 Ethnicities : children of immigrants in America edited by Ruben G. Rumbaut and Alejandro Portes, p Bendixen and Associates. Inter-American Development Bank Study on Remesas and Related Subjects; November 2001, 1,000 Interviews, Margin of Error: 3%. 3

4 45.00% Figure 2. Length of time living in the U.S. and amount sent 40.00% 35.00% 30.00% 25.00% Between $1 and $ % 15.00% Less than one year Between 1 and 5 years Between $100 and $300 Poly. (Between $1 and $100) Poly. (Between $100 and $300) Between 5 and 10 years More than 10 years b) Costs to transfer remittances How much does it cost to remit? Most remittance-sending immigrants use some form of formal or informal intermediation. Remittances transfers from the United States to Latin America have largely been handled by money transfer operators (MTOs), which are authorized to engage in banking activities not involving the receipt of money on current account subject to withdrawal by checks. Immigrants send money through small businesses, large corporations, or even individual entrepreneurs. To a lesser extent, individuals carry money directly to relatives. Formal money transfer costs range from 4 to 20 percent of the value sent. These costs depend on the presence of informal networks, market concentration or level of competition, technology, and the presence or absence of banking institutions. Cuba, Nicaragua, and Haiti are among the most expensive countries for remittance transfers. In these three countries, there is a high level of informality in money transfers, no regulatory environment supporting competition or low cost transfers, and no innovative technologies. In other countries, such as Jamaica and the Dominican Republic, the presence of monopolies or oligopolies explains the high prices. El Salvador, Ecuador and Mexico have the lowest transfer costs. For El Salvador and Ecuador, both dollarized economies, costs are lower because receiving households do not face foreign exchange penalties. Overall, fees, rather than exchanges rates, account for more of the cost variation. More importantly, competition in these countries also affects costs. Mexico experiences a high level of competitiveness among large and small businesses. At least five 4

5 corporations (Western Union, Dolex, Vigo Corporation, Ria Envia and MoneyGram) compete and may hold about 80 percent of the remittance market share. A second group of businesses competes to clear the remaining share. Competition is also present in El Salvador and Guatemala. In both countries, most of the remittance flows are handled by fewer than ten companies. In El Salvador, for example, four Salvadoran banks compete with Western Union and Gigante Express. In Guatemala, three banks compete with King Express and Western Union, but informal transfer is still more common than in Mexico or El Salvador. Table 3. Average amount sent by an immigrant in the U.S. and cost of sending it Country Average Cost (%) Cuba $ $25.00 a 16.67% Venezuela $ $30.86 b 13.54% Nicaragua $ $14.60 a 10.00% Haiti $ $15.50 a 9.57% Bolivia $ $24.89 b 9.02% Dom. Rep. $ $17.40 a 8.74% Jamaica $ $26.80 b 8.06% Peru $ $13.50 a 7.07% Colombia $ $19.89 b 6.21% Guatemala $ $19.02 c 5.76% Honduras $ $17.17 b 5.56% Mexico $ $18.87 c 4.99% El Salvador $ $15.07 c 4.39% Ecuador $ $15.58 c 4.07% a cost to send up to $200 b cost to send $ c cost to send $ An important caveat to stress about costs is that pricing varies depending on the type of money transmitter business. Companies like Western Union continue to be among the most expensive. C) Banking on remittances? U.S. banks entering the market Despite the fact that remittances transfers occur on a daily basis and at high volumes, costs continue to be high. One important reason is due to the limited participation of banks. Traditionally, banks have used conventional wiring mechanisms that are extremely expensive for individuals and more suited to corporations transferring large sums of money. This has left money transfer institutions to take care of workers remittances. The end result has been higher costs to senders. Encouraging immigrants to send remittances through banks has significant advantages. First, offering remittance transfers would increase the opportunities to bank many unbanked Latinos. At least 50 percent of immigrants lack access to bank accounts in the United States, yet the overwhelming majority demands various financial services, such as cash checking, automatic bill payment, or money transfers. Second, sending remittances through banks offers a more competitive rate. Evidence from European and other 5

6 migrant-hosting countries shows that banks offer low cost money transfers and other financial services. The recent entrance of U.S. banks in the market suggests a similar trend. Third, banks gain significant financial benefits when they integrate this segment of the population into the formal financial system. Low cost from banks and banking the unbanked An analysis of thirty banks remitting to Mexico in the past 18 months, particularly from Chicago and California, showed four methods by which banks send remittances 5 : a) the offer of debit cards which can be used by the recipient in ATMs in Mexico, b) U.S. banks operating as money transfer agents through arrangements with Mexican banks (generally, Bancomer and Banamex), c) traditional wire transfer (SWIFT), and d) alliance between banks and money transfer operators. Their charges have varied; Table 4 offers the average charges according to these transfer methods. Debit cards offer the lowest cost. Through this service, some companies offer a very low fee and profit instead from the exchange rate. In the majority of cases, however, those with access to debit cards are usually required to have a bank account with the institution in the United States. Table 4. Charges made by banks to transfer remittances (by method employed) Method employed Charge Percent (fee and exchange rate diff.) Debit Card withdrawal at ATM % US Bank as MT, pick up at Mexican % Bank/Agency Traditional wire transfer (SWIFT) % Source: Orozco, Manuel. Changes in the Environment, Washington, DC: Inter-American Dialogue, Recently, Bank of America and Citibank introduced new programs utilizing ATM technology to transfer remittances. Bank of America s SafeSend program and Citibank s Money Card each issue debit cards to a designated person in Mexico upon enrolment of a person in the United States. SafeSend charges $10 per transfer while Money Card charges $7.95, plus a $5 monthly maintenance fee. Moreover, lessons from other countries where remittances are sent show that banks reduce money transfer costs. For example, immigrants residing in Europe who send money to Turkey, Portugal and Greece, and Pakistanis in the Arab oil-exporting countries pay much less than the average Latin American sending from the United States (see figure below). 6 5 Orozco, Manuel. Changes in the Environment, Washington, DC: Inter-American Dialogue, March Orozco, Manuel. Worker Remittances in an International Scope Washington, DC: Inter-American Dialogue, March

7 Figure 3. Cost of sending remittances to selected countries as % of amount sent Pakistan 0.40% Turkey Portugal 3.10% 3.40% Ecuador 4.07% El Salvador 4.39% Mexico 4.99% Honduras 5.56% Guatemala Colombia 5.76% 6.21% India 6.00% Greece 6.80% Peru 7.07% Jamaica 8.06% Dom. Rep. 8.74% Bolivia Haiti 9.02% 9.57% Nicaragua Venezuela Cuba 9.73% 13.54% 16.67% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% Remitting through banks also offers an important substantive benefit to immigrants. According to Bendixen and Associates, 44 percent of Latino immigrants lack bank accounts. Miami-based Strategy Research Corp stresses that 54 percent of Hispanics have no banking relationship of any kind. In contrast, 68 percent of African-Americans and 93 percent of non-hispanic whites have accounts. Providing a banking relationship to Hispanics also helps establish credit history and increase lending for housing, health and other investments. Benefits to Banks U.S. banks are beginning to realize the significance of remittance transfers. One of the main motivations for banks involvement in the remittance market is to attract Hispanic customers. According to Bloomberg, Wells Fargo, Bank of America Corp., Citigroup 7

8 Inc. and other U.S. banks plan to spend at least $8.5 billion through 2005 to attract Hispanic customers as revenue from investment banking and corporate lending lag. 7 A growing number of U.S. banks have entered the remittance market through money transfer technologies, often based on the use of smart cards. So far, these new players are primarily concentrating on the Mexican market and maintain a small market share (probably less than 5 percent). Prior to 2001, a few U. S. banks and credit unions offered money transfers to other countries at low costs. The most widely publicized case of a bank entering the remittance business is Wells Fargo. 8 Although Wells Fargo initiated a program in 1996 targeting the transfer of remittances to Mexico, in 2001 it fully released its product, Intercuenta Express, charging $10 for amounts under $500. Since then, more than thirty banks have become involved in remittance transfers, including First Bank of the Americas, Banco Popular, Citibank, Elgin State Bank, Bank of America, and Harris Bank. 9 Community banks have also been keen on targeting ethnic minorities and Latino migrants in particular. In North Carolina, the Southern Community Bank and Trust has sought to attract Latinos by offering a range of financial services, including remittance transfers. The bank has four branches staffed with bilingual employees and has been able to attract 1,022 Hispanic customers in Winston-Salem in less than two years. Hispanic accounts represent 5 percent of the total in the bank and show rapid growth. The bank offers checking and savings accounts, certificates of deposit, low-cost wire-transfer services, and home and car loans. 10 In Atlanta, the United Americas Bank is also targeting the Latino community and is becoming a competitor of mainstream commercial banks like Citibank and Bank of America. Jorge Forment, President of the United Americas Bank, argues that if banks want to grow, they better try to get a foothold into the Hispanic market. His bank has focused on the Latino community by offering money transfers and other traditional banking services. The bank started with $12 million in capital, and now has assets worth $71 million. United Americas Bank financed a mall called Plaza El Bigote, worth $1.4 million. 11 Other examples of community banks profiting from and benefiting migrant communities exist in Chicago and also among credit unions. The Latino Community Credit Union (LCCU) in North Carolina offers transfers to Mexico and Central America. It not only offers low remittance charges but also provides important services to the Latino 7 Scott Silvestri, Citigroup, Wells Fargo Buy and Build to Attract Hispanic Savers, Bloomberg, January 15, 2003, 8 The Tampa Tribune, May 22, 2002; Associated Press, May 22, 2002; Business Wire, October 27, 1997, July 11, Business Wire, July 30, 2002, April 23, 2002; The American Banker, May 9, 2002, April 24, 2002; PR Newswire, May 9, 2002; The Financial Times, May 28, 2002, April 29, 2002; 10 Sturiale, Jeanne, Opening Doors Winston-Salem Journal, November 25, Chapman, Dan, A boom in banks: Financial institutions catering to immigrants are giving U.S. chains a run for their money The Atlanta Journal-Constitution, October 22, p.1f 8

9 immigrant community. Latinos in the area generally do not have bank accounts. The credit union thus provides an alternative to the community by inviting them to open checking accounts with low deposits of $25 (as opposed to $500 or $1,500 in most banks). Moreover, this particular credit union uses the remittance fee charges to provide other free services and lending opportunities to its members. In Milwaukee, Mitchell Bank has introduced an innovative approach to attract traditionally unbanked migrant groups into the institution. CEO James Maloney opened a branch called Cardinal Bank at a predominantly Hispanic high school. The bank is managed by students and offers a range of opportunities to students and their parents. The immediate effect of this outreach strategy has been an increase in the number of Mexican immigrants opening bank accounts, resulting in a higher demand for local goods in the area. d) The Consular ID and U.S. banks The participation of these banks in offering remittance transfers has involved adopting innovative outreach strategies. One important piece of innovation has been the adoption of the consular identification card. At least 80 banks have accepted alternative forms of personal documentation in order to attract migrants who lack other forms of governmentissued identification. In particular, the consular identification card issued by the Mexican consulates, known as the matricula consular, is being increasingly accepted at banking institutions throughout the country. The consular identification is an instrument that provides basic information certifying that the person is an immigrant of Mexican nationality. This form of identification has proven useful in attracting immigrants into financial institutions and allowing them to obtain driver s licenses. U.S. banking institutions have found a new stream of capital from this immigrant population. Furthermore, the card enables an immigrant to have a recognized economic identity, which facilitates interaction with certain institutions. The consular identification card increases overall community safety and is used by banks in conjunction with a utility bill, driver s license or a statement certifying physical residence in a given area. For banks and community leaders, the consular identification has offered new opportunities to individuals and communities. Pamela Voss of the First Bank of the Americas created in 1998 and serving Mexican communities stresses that the consular identification card is an instrument that allows access to financial institutions. Immigrants lacking bank accounts often fall prey to check cashers and payday lenders. 12 The card has sophisticated features to ensure that it is a secure and reliable form of identification. It contains a holographic seal printed over the photo, an infrared information band and messages readable through a decoder. The card is an important means of identifying people boarding planes or entering buildings. Moreover, the consular ID fills a void in circumstances where a minor incident could become more 12 Jackson, Ben, Legal, political risk in ethnic marketing The American Banker February 14 th, 2003, p.1. 9

10 serious due to a lack of identification. For example, the police will benefit by having a recognized form of ID when dealing with immigrants. This latter issue is important because police in some cities will not release a person arrested before a court appearance on minor charges without an acceptable form of identification. 13 The card can work as an instrument to better identify money senders. Moreover, accepting the consular identification promotes traceable transfers. With prevailing tracking tools that detect money transfers, the ID expands information about the sender. The consular identification card enables an individual laborer to have fair access to the market economy and to avoid abuse by financial predators. It is a basic form of recognizing one s identity: As one immigrant noted, Part of human dignity is the right to identify yourself Sachs, Susan, New York, citing security, rejects Mexican ID cards in The New York Times, December 28 th, 2002, Section B; p. 4, Column Song, Jason, Mexican cards give sense of identity The Baltimore Sun Company, November 12, p.1b. 10