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Lost in intermediation: how excessive charges undermine the benefits of remittances for Africa

Research reports

Written by Kevin Watkins, Maria Quattri

​Remittances from African migrants play a vital role in supporting health, education, food security and productive investment in agriculture.  Yet many of the benefits of remittance transfers are lost in intermediation as a result of high charges. Africa’s diaspora pays 12% to send $200 – almost double the global average.

In effect, Africans are paying a remittance ‘super tax’. Reducing charges to world average levels and the 5% G8 target would increase transfers by $1.8 billion annually. That figure is equivalent to the sub-Saharan African cost of paying for the education of some 14 million primary school age children – half of the out-of-school total; improved sanitation for 8 million people; or clean water for 21 million.

Weak competition, concentration of market power and flawed financial regulation all contribute to high remittance charges. Just two money transfer operators (MTOs) – Western Union and MoneyGram – account for two-thirds of remittance transfers. We conservatively estimate that the two companies account for $586 million of the loss associated with the remittance ‘super tax’, part of it through opaque foreign currency charges. ‘Exclusivity agreements’ between MTOs, their agents and banks restrict competition and drive up prices, as do African financial regulations favouring banks over other remittance payment options.

Governments and regulatory authorities in sending countries should do far more to promote competition and encourage innovation. Financial regulators – such as the UK’s Financial Conduct Authority – and legislative bodies should actively review the practices of MTOs. All regulators should demand higher standards of transparency for foreign exchange charges, as envisaged in the Dodd-Frank legislation adopted by the US.  African governments should do more to secure a better remittance deal for their citizens. Prohibiting exclusivity agreements is one immediate priority, along with ending the stranglehold of banks on remittance payments.

Kevin Watkins and Maria Quattri