Alex is a Principal Researcher in the International Innovation team at Nesta.
Around the world on June 16th, there will be a celebration of the second annual International Day of Family Remittances – an initiative developed by the International Fund for Agricultural Development to recognise the contribution that migrant workers make to their families and communities through the money they send back home. More than 70 money transfer operators have issued statements of support for the global initiative, with some having pledged to remove transfer fees on all money transfers made today to mark the occasion.
The transformative development impact of remittances has long been acknowledged. The latest estimates suggest that recorded remittances sent home by international migrants from developing countries reached $432 billion in 2015: around three times the amount spent on overseas development assistance (ODA) in the same period. They are a literal lifeline for many of the world’s poorest citizens, including large numbers of refugees displaced from their homes by conflict or natural disasters, as well as those left behind. As well as providing a safety net for individual families in countries with inadequate or non-existent welfare systems, remittances can also be a tool for the longer term development of entire communities. They are frequently invested in human capital (in the form of spending on education or health), physical capital (if spent on the equipment or property needed to start an enterprise, say) and financial capital (if put into savings or other investments).
The high costs of sending money overseas have long been regarded as one of the main barriers lowering the potential development benefits of remittances. Data compiled by the World Bank suggests that the average cost of sending $200 (including all fees and transfer costs) is currently around 7.5% – lower than it used to be, but still well above the targets set in the Sustainable Development Goals recently negotiated and adopted by the UN. This average also hides considerable regional variations. Sub-Saharan Africa remains one of the most expensive places to send money, with costs reaching 18-20% in some remittance corridors between South Africa and its neighbours.
In response to this challenge, a range of digital tools and services have been created to help reduce the costs and the difficulties associated with sending money overseas. These include new mobile banking and money transfer systems – such as the well-known M-Pesa service developed in Kenya which allows users to store and transfer money securely using their mobile phones, and to use these funds to pay for goods and services. Entrepreneurs are also experimenting with the use of ‘crypto-currencies’ – such as Bitcoin – as a means of sending remittances more securely and cheaply, although this approach has experienced a number of challenges.
Despite the role played by remittances in meeting financial and social needs in developing countries, they are primarily private transactions between individuals. As such, there is a limit on the extent to which policymakers can track these flows and intervene to direct them in ways that might improve development outcomes. Yet the innovative activity taking place in relation to remittances has a great deal of relevance in relation to an area where there is scope for much more policy focus: the delivery of humanitarian assistance via direct cash payments.
At present, cash transfers only account for 6 per cent of total humanitarian aid, despite a large and growing body of research evidence demonstrating the effectiveness of giving recipients direct control over how they allocate the capital and other resources they have access to. A number of large donor organisations and governments have taken this approach in response to specific crises. For example, refugees in Lebanon now use a smartcard or electronic vouchers to buy goods in shops or withdraw cash from an ATM, rather than being given in-kind resources such as food and blankets. However, this system is far from optimal at present. In Lebanon in 2014, more than 30 aid agencies were providing cash transfers and vouchers for many different purposes.
Better coordination of the use of cash transfers is one of the key issues facing the donor community. But there are many other questions (as discussed by colleagues in a recent blog) that require more thought and attention if their use as a tool of development assistance is to become more widespread. Over the next few months, Nesta will be exploring these issues in more detail by investigating whether a challenge prize model could unlock new ideas and innovations in this space, including by holding an expert workshop on the 29th June. Look out for further updates from the Challenge Prize Centre over the next few weeks, and do get in touch with your ideas and thoughts.
Image credit: Creative Commons image via Flickr