Why 90% of Remittances Happen Offline
Posted on Mar 15, 2015 by Naysawn Naderi
Like many tech companies in the valley, when Regalii first launched, the plan was to focus most of our attention on online transactions. We quickly realized, however, that doing so would mean neglecting most of the industry. By our estimates, about 90% of all remittances currently happen offline.
To reach this conclusion we had to take a closer look at who sends money, why they send it, and the conditions that many US immigrants face when getting established in the country.
Who Sends Money
Remittance senders fit a general profile: They tend to be recently arrived, young, married men with little education, low earnings, and little familiarity with formal banking systems.
With strong ties back home, the majority of new arrivals send home portions of their monthly earnings — approximately a few hundred dollars—every month. The amount of money sent, even the likelihood that an immigrant sends any money at all, decreases the longer a person lives in the U.S.
Female migrants send the same amount of remittances as men but in higher proportion to their income. Men normally remit to their wives whereas women generally remit to extended family members. It is common for mothers who migrate without their children to send money to the person or people taking care of them.
A Cash Reality
Many newly-arrived immigrants, documented or not, are confined to low-skilled jobs such as manual or domestic labor and are often compensated off the books in cash.
Many never deposit their cash wages and lack common financial services. Many are unbanked, with no access to mainstream financial services, or underbanked, which means they have limited access to banks and rely heavily on alternative services such as multi-service stores, check cashers and payday loan company for the typical services provided by a bank.
When your assets are in cash, even if you have a bank account, it’s just easier to keep working with cash. Therefore, when sending money abroad, it is also easier to work directly with a money transfer store in your neightborhood than to have to go through the extra steps of making a bank deposit, waiting for the cash to appear in your account and then sending it using your favorite online service.
Wariness Of Online Transactions
Apart from the fact that many immigrants deal primarily in cash, there is a general sense of distrust of online transactions in the immigrant community. Many recently arrived immigrants are simply not familiar with e-commerce, as it is not common in the developing world.
This distrust can also stem from a combination of problems frequently associated with e-commerce: the absence of accountability, a lack of transparency and a hesitance to try new methods.
Further, recently arrived immigrants, especially those from Latin America, tend to have lower raters of internet connectivity than those born in the US. As of 2010, only 55% of Latinos overall had home internet connections compared to 75% of whites. Spanish-dominant Latinos are also much less likely to use the internet at all with only 47% online, compared to 81% of English-dominant households.
Offline Dwarfs e-Commerce
Yet, Latino immigrants are not alone in their current proclivity for conducting transactions offline. In general, offline spending is 16x larger than online spending. As of 2013 only 6% of total US retail spending- roughly $262 billion out of $4.5 trillion - happened online.
Further, the more expensive a good or service, the less likely someone will pay for it online. Some follow the logic, that if you are displeased with a purchase you make in person you know who to hold responsible and where to reach them. However, online, it can feel like there is virtually no individual responsibility.
For remittances, with the average amount sent per transaction being $300-$500, it is understandable for even banked, highly connected, and capable individuals to have reservations about sending large sums online.
The Future of Remittances
Despite everything stated above, the rapid adoption of smart phones may change the remittance industry. For many Latinos, initial Internet access will be through a cell phone as opposed to a computer. As smart phones become ubiquitous, the cost of online transfers goes down, and users gain more confidence in transacting on their phones, surely the percentage of remittances which happen online vs offline will increase.
I’m curious on your thoughts on the topic, please share your thoughts below.