What are remittances? A complete guide

The world is more connected than ever, thanks to changes like ​​the rise of the internet and increased global trade. Not only can we send a message halfway around the globe in just a few seconds or access information from anywhere in the world at the click of a button, but we can also send money across international borders.

In fact, the amount of money being transferred internationally has risen hugely in recent years. This is due to a number of factors, including economic migration. More and more people are living and working abroad – a large number of who then send money back home. This type of money transfer is known as a remittance and, in this guide, we’ll explore the importance of remittances, how they affect the economy, and explain how to send one.

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WorldRemit Content Team

7 mins readUpdated
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What is a remittance?

A remittance is a sum of money transferred from one party to another – typically abroad. The term is derived from the word remit, which means to send back. According to most definitions, to remit is to send money in payment of a demand, account, or draft so, ​​broadly speaking, any payment of an invoice or a bill can be called a remittance.

But the term is more commonly used to refer to money sent by someone working abroad to family back home – the sender of the remittance being the foreign worker and the recipient a relative in their home country. You may also hear these money transfers referred to as workers’ or migrant remittances.

Examples of remittances

  • Sending regular money to support relatives while you’re working abroad – for example, sending a bank transfer to pay for rent or other necessities

  • Paying bills or invoices at home via cheques

  • Transferring emergency money onto a prepaid card for your friends and family to use in another country

  • Paying invoices in your home country for work or services completed while you’re away

  • Paying service providers in another country on behalf of your family

  • Sending one-off funds abroad as a gift – for example, a wedding present

  • International students utilising money transfer services to send and receive money between countries

Why are remittances needed?

Many workers move abroad seeking economic opportunities. Economic migrants sending home part of their earnings in the form of either cash or goods do so to support their families. These remittances play a large role in the economies of small and developing countries. According to the International Monetary Fund (IMF), “for many countries, money transfers from citizens working abroad are a lifeline for development.” In fact, remittances are one of the largest sources of income for people in low-income and developing nations.

Every year on the 16th June, there’s an International Day of Family Remittances to recognise the hard work of these individuals who support family members and communities with the money they send back home. In total, according to the UN, there are 200 million migrant workers, who send money home to over 800 million family members. The remittances they send are important for a number of reasons:

  • Remittances often exceed direct investment and international development assistance in the countries

  • Remittances tend to be more evenly distributed among developing economies than other capital flows

  • Remittances tend to increase during economic downturns or after a natural disaster, whereas private capital flows tend to decrease

Indeed, despite the coronavirus pandemic and other global uncertainties, remittance flows have continued to grow in 2021 and 2022. World Bank data shows remittances to low-and middle-income countries reached US$605 billion in 2021 – a growth of over 8% compared to 2022. In 2022, the total is predicted to reach $630 billion.

How do remittances affect the economy?

The average remittance is $200-$300 USD every one to two months, according to the World Bank data. While individual transfers aren’t huge, the total value of global remittance flows is substantial. Between 2022 and 2030, an estimated $5.4 trillion USD will be sent by migrant workers back to their communities of origin in developing countries. More than anything, though, the regular individual payments are a lifeline to those who receive them, as well as the local communities. According to the UN, remittances “prove transformational” and:

  • Underwrite many basic household needs

  • Support skills formation and opportunities through education and entrepreneurship

In terms of the average remittance cost, that $200-$300 can make up as much as 60% of a household’s total income in recipient countries. But it only represents 15% of what they’re earning. The rest of the worker’s income stays in their host countries – it’s money they spend to live. So they’re supporting economies in two countries, it’s just the impact is much greater in recipient countries. According to research, there are more than 70 countries that rely on remittances for at least 4% of their gross domestic product (GDP).

Among economies where remittance inflows represented a very high shares of GDP in 2021 were:

  1. Lebanon (54%)

  2. Tonga (44%)

  3. Tajikistan (34%)

  4. Kyrgyz Republic (33%)

  5. Samoa (32%)

The same data confirmed the top five recipient countries for remittances in 2021 were:

  1. India

  2. Mexico

  3. China

  4. The Philippines

  5. Egypt

We also discuss the top ten remittance recipients in greater detail, but, in summary, remittances form a huge part of the global economy, particularly supporting the economies in developing countries. What’s more, it encourages those receiving money to open bank accounts to spend or save. This promotes greater financial inclusion, especially for those who may have been overlooked e.g. those in rural communities, and further develops local economies.

How remittances work

You can make a remittance in a variety of ways, including using cash and card payments, relying on physical cheques, or trusting specialised international money transfer companies. What you choose will depend on factors such as where you’d like to send money, how quickly you need to send it, and how your recipient can collect the funds.

For most remittances, there are three main players: the sender, the recipient and the remittance service provider. There needs to be a remittance service provider in both the sending and receiving country, although it doesn’t have to be the same. Providers will apply the exchange rates they’re offering and charge a fee; charges will vary depending on the provider. The sender will be able to choose how to pay for the transfer, as well as the recipient being able to choose how to collect.

Payment method options for making a remittance

While common among migrant workers, anyone can make a remittance transfer. If you would like to send money abroad, you’ll find that you have a lot of options for making remittances. But during the fourth quarter of 2021, the cost of sending money across international borders remained, on average, high at 6%, according to the World Bank.

Based on available data, the top five source countries for remittance outflows in USD in 2021 were: 

  1. The United States (74.6 billion)

  2. Saudi Arabia (40.7 billion)

  3. China (22.9 billion)

  4. The Russian Federation (16.8 billion)

  5. Luxembourg (15.6 billion)

There is variation depending on the country you’re sending money to/from, as well what payment method and provider you use. For example, South Asia was the least expensive region to send remittances (4.3%), and SubSaharan Africa the most expensive (7.8%). Across data for different corridors – the countries you’re sending from and to – remittance costs tend to be higher when they’re sent through banks rather than through digital channels, or through money transmitters offering cash-to-cash services.

Your options for sending remittances are:

Money transfer services

Money transfer services like WorldRemit offer convenient ways to send money to many countries. You’ll typically need a bank account, debit card or credit card to fund the transfer but we will give you options to send money online, through an app, a website or in person. The money can then be received in numerous ways too, including through a bank transfer or a cash pick up.

Banks or credit unions

If both you and who you’re sending money to have access to bank accounts, you can transfer money to another account abroad via an electronic bank transfer. The money should be available to withdraw shortly, but it does rely on everyone involved having a bank account.

Credit cards

Credit card payments are instantaneous, but most service providers charge a fee when you send money or pay with them.

Cheques

You can write and send a cheque (or money order) yourself, so it may be a cheaper alternative. However, cheques rely on the receiver having access to a bank account and posting them may not be the most secure way of sending money.

Prepaid cards

Prepaid debit cards allow you to load up an amount of money onto a card for your family to use. They use the card to pay for things or withdraw money until the funds are gone.

When sending remittances, how you pay the bank, company or agent is referred to as the payment method. How the recipient of this money transfer receives it is known as the delivery method. Delivery methods can be:

  • Monetary

  • Non-monetary e.g. mobile airtime top up

  • Cryptocurrency

  • Electronic

  • Non-electronic

The differences between how you send money and how it's received is key to understanding remittances. It’s a key difference between remittances and bank transfers. When sending a bank transfer, money is sent digitally from one account to another. Both parties need a bank account.

Remittances, on the other hand, refers to money transferred from a range of sources and received in a variety of means. You can still transfer to and receive money into a bank account, but remittances also include cash, cheques, prepaid cards and more. The person who you’re sending money to doesn’t need a bank account. The way you send and receive money will depend on your circumstances, as well as what’s suitable for where you’re sending money to.

Key remittance terms defined

Remittance advice

A remittance advice is essentially a proof of payment document, typically sent by a customer to a business to inform them of a completed invoice payment.

Some businesses will include a remittance advice section on their invoices, so it’s easier for the customer to fill in and return, but sending a remittance advice letter with your payment is not mandatory when transferring money. It’s seen as more of a courtesy used more regularly in customer-to-supplier transactions, rather than family remittances. It’s also more common with certain types of payment methods like cheques.

Remittance address

A remittance address is an address an individual or business uses to receive payments. It may be the same as their general mailing address, or it could be a specific remittance address. For example, it could be a P.O. box or the recipient may use a bank or money transfer service, so it could be the address of those.

Remittance float

A remittance float is the time it takes for the money to be processed when you’re sending a remittance payment. It’s the time between money being sent to when it arrives and is deposited into the recipient's account.

As a result of migration, remittances are common. These types of money transfers have also been increasing rapidly in recent years due to advances in financial technology. Historically people making smaller remittances, typically those for whom the money is sent to is a lifeline, would be charged high fees of up to 20% in certain remittance corridors. But the remittance industry is more competitive than ever with low-cost online services emerging to make money transfers more affordable, aiding developing and emerging economies in their transition to a more inclusive financial future.

WorldRemit is a fast and secure service that lets you transfer money online to over 100 other countries using a computer, or our app. We offer better exchange rates and lower fees than most conventional banks and money transfer services – plus, we don’t charge you any transfer fees on your first three transactions. Whether you’re sending money to pay a bill back at home or support your family, we’re here to help. Use our calculator to see how much it would cost to send money to different countries around the world.

Remittances: FAQs

What’s the difference between remittance and payment?

The main difference between a remittance and a payment is whether the money is travelling overseas to meet a demand or requirement. While all remittances are payments, not all payments are remittances. Remittances are most commonly sent by foreign workers to their home country – the word remittance comes from the verb, “to remit”, or to send back.

Is a remittance the same as a bank transfer?

Remittances and bank transfers are not the same thing. You can send a remittance via a bank transfer, however. A remittance refers to a transfer of funds from one person to another, typically abroad, as a gift or payment. Remittances can be sent via bank transfer and many other forms of payments such as cheques, wire transfer or money transfer services.

How long does a remitted payment take?

Payment processing times vary depending on the payment method and service you choose. Where wire transfers may take 3-5 business days or longer, online bank transfers can usually be completed within one business day, or instantly.

This communication is intended for marketing purposes only and does not constitute or provide legal, tax, investment or financial planning related advice.

What is a remittance?

The term 'remittance' derives from the word 'remit', which means 'to send back'. Remittance refers to an amount of money transferred or sent from one party to another, usually overseas.

Remittances can be personal money transfers made to family and friends, as well as business payments.

Today, more remittances are being sent than ever before, and two key factors are driving this increase:

  • Migration – more people are now choosing to live and work abroad. Therefore, many remittances are made by people working and living abroad to family back home.

  • Globally connected businesses – the internet makes it easier than ever for businesses to connect and collaborate with suppliers, clients and employees all around the world. This has resulted in a sharp increase in overseas remittances paying for business invoices.

How to send a remittance

If you need to pay a remittance, there are several ways to do so, including:

The cost you need to pay depends on the provider and service that you choose.

Offline companies like Western Union or MoneyGram used to be big players However, people are now shifting more towards online providers, such as WorldRemit, as they offer the best value for money.

Jargon buster

Ready to send a remittance? Use our handy guide to demystify remittance jargon and simplify the process of sending money abroad.

3D Authentication

If your card uses 3D secure, a window will appear on the screen when you’re making an online payment, asking you to enter an additional security code before the payment can be put through. This extra layer of security is designed by your card provider and helps to protect you from credit and debit card fraud.

ABA Number

Also known as a bank routing number, an ABA number is a nine-digit code used to identify banks in the USA.

ACH

ACH (automated clearing house) payments are made through the USA's ACH network. It's a network that provides bank transfers between bank accounts in the USA.

AML

AML (anti-money laundering) processes are used by financial institutions to detect and prevent illegal money laundering activities used by criminals to disguise money they have gained illegally as lawful income.

Cash advance

A short-term loan offered by banks and other financial institutions, commonly for credit cards. Cash advances often come with high fees and interest rates.

Chargeback

A chargeback is a way of disputing a card transaction. If a chargeback is successful, it will void the card transaction, and the bank will remove the funds from the merchant's account and credit them back onto the cardholder's account.

Clearing

Clearing refers to the processes and procedures that take place between requesting to wire money and the point when the transaction is complete.

Exchange rate

The amount that one currency is worth compared to another currency.

FCA

The United Kingdom's financial regulatory body. The FCA (Financial Conduct Authority) is an independent body that protects consumers and promotes healthy competition between the UK's financial service providers.

Financial institution

A financial institution is a company that provides financial services. Examples of financial institutions include; banks, building societies, mortgage companies, credit unions, investment banks, insurance companies, pension funds, and money transfer services.

Forex

Forex (foreign exchange market) is an electronic network of banks, brokers, institutions and traders exchanging foreign currencies.

IBAN

IBAN stands for International Bank Account Number. It is an internationally recognised way for banks around the world to identify an individual's country, bank, and account when money is being sent overseas. An IBAN consists of up to 34 letters and numbers. It can usually be found on your online banking or by contacting your bank.

Interchange fee

Every time a merchant takes a credit or debit card payment from a customer, they are charged an interchange fee by the card network.

KYC

A KYC (Know Your Customer) process is carried out by financial companies to verify the identity of their customers to prevent their services being used for money laundering and other illegal activities.

Limit

Most banks and money transfer services have rules in place that limit the amount of money that you can send in a single transfer or in a specific time. Limits are usually in place to comply with the laws and regulations of the countries you are sending money from and to.

Local agent

A small, local business that has partnered with a money transfer provider like WorldRemit to offer international money transfer services in-store.

Proof of deposit

A verification or an official confirmation proving that funds were credited to a bank account or received by a recipient.

Peer-to-peer service

A platform, like a website or money transfer app, that allows individuals to send money online to each other directly without a bank or foreign exchange provider being involved. WorldRemit is a peer-to-peer service.

Pre-authorisation

Pre-authorisation is a temporary hold of funds on a debit or credit card for a vendor to capture the funds. Money is not taken out of the bank account.

Prepaid card

A card that you deposit funds onto and then use in-store or online to make purchases as you would with a debit or credit card. Prepaid cards are a safer alternative to carrying cash, and you don’t need a bank account to get one. With WorldRemit, you can pay with a prepaid card as long as it's Visa, Mastercard or Maestro.

Recall

Trying to recall money is trying to reverse a completed transaction back to the sender. Funds have to be retrieved back via the same channels. This process is lengthy and not always guaranteed.

Recipient

The individual or business to whom the money is being sent.

Sender

The individual or business who is sending the money.

Wire transfer

An electronic money transfer sent through a network of banks and money transfer providers around the world.

Send money with WorldRemit

Sending remittances is simple when you use WorldRemit – almost like sending a text message.

Download our app and use our convenient service to transfer money to 150 countries around the world using your smartphone, laptop or tablet. It's so easy!

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