Three steps to reduce the cost of remittances to Africa

Reducing Remittance Costs: Empowering the African Diaspora for Economic Growth

For Africans living in the diaspora, sending remittances back home is more than a financial transaction—it's a proud commitment, a heartfelt expression of gratitude, and a sacrifice made for the well-being of loved ones. These remittances are a lifeline for many families and a crucial source of foreign income for African economies.

Every year, Africans abroad send over $40 billion back home. However, these vital contributions come at a steep cost. According to the World Bank, Africans pay the highest remittance fees globally, with transaction costs averaging 9.5% and reaching up to 20% in certain corridors. Such exorbitant fees not only place an unnecessary burden on senders but also hinder productive investments that could accelerate economic development across the continent.

---

Addressing the Challenges: The Nairobi Action Plan on Remittances

Recognizing these challenges, leading African diaspora organizations, in collaboration with the IMF, World Bank, and the Africa Institute for Remittances, launched the Nairobi Action Plan on Remittances. Unveiled at the ADEPT Fifth Diaspora Development Dialogue (DDD5) in Nairobi, the plan sets an ambitious goal: reduce remittance costs to Africa to less than 3% by 2020, a full decade ahead of the 2030 Sustainable Development Goal (SDG) target.

WorldRemit, a global money transfer service committed to lowering remittance costs, participated in this dialogue, highlighting actionable steps to achieve these targets.

---

Key Strategies to Reduce Remittance Costs for Africans Abroad

1. Transition from Cash-Based to Digital Transfers

Traditional cash-based remittance models come with high overhead costs due to extensive agent networks and commissions. Additionally, cash transactions are more susceptible to fraud and money laundering, as they lack real-time monitoring capabilities.

Digital and mobile money transfers offer a solution. By eliminating cash on the sending side, online platforms can provide lower fees, enhanced security, and real-time transaction tracking. This digital shift can drastically reduce operational costs and risks, translating into cheaper, safer transfers for the diaspora.

---

2. Address Indirect Costs Beyond Transfer Fees

While policymakers often focus on direct transfer fees, indirect costs—such as travel expenses to agent locations, opportunity costs from time off work, and security risks associated with carrying cash—are frequently overlooked.

Online transactions eliminate these hidden expenses. On the receiving end, enabling direct transfers to Mobile Money wallets ensures recipients don’t need to travel long distances for cash pickups, further minimizing costs and improving convenience.

However, despite these benefits, cash-based models still dominate over 90% of the global remittance market. A concerted effort is needed to drive adoption of digital solutions, ensuring that more Africans abroad can enjoy these cost-saving advantages.

---

3. Foster a Competitive and Transparent Remittance Market

Monopolistic practices and restrictive regulations have historically stifled competition in the remittance market. In some jurisdictions, quasi-exclusivity agreements prevent new entrants, while in others, strict licensing requirements create barriers for innovative startups.

Encouraging competition is key. Governments and regulators must create open markets, allowing digital-first remittance companies to operate freely. This will foster innovation, reduce costs, and improve service delivery for consumers.

---

Collaborative Action: The Path Forward

The path to lowering remittance costs requires collaborative efforts from all stakeholders:

• Policymakers should leverage data from institutions like the World Bank to craft inclusive regulations that support digital remittance solutions and foster competition.
• Diaspora organizations must educate and build trust within their communities about the benefits of online transfers, dispelling fears around digital transactions.
• Money transfer companies have a responsibility to embrace transparency, adopt new technologies, and prioritize customer needs, ensuring the industry evolves to meet modern demands.

---

Unlocking the Potential of Diaspora Contributions

Lowering remittance costs is more than an economic issue—it’s about unlocking opportunities. With reduced fees, Africans abroad could invest more productively in their home countries, funding businesses, education, and community development projects that stimulate sustainable growth.

By transitioning to digital remittance models, addressing hidden costs, and fostering competition, we can create a remittance ecosystem that not only supports families but also drives economic progress across Africa.

The journey is long, but with collaborative action, the African diaspora’s contributions can become a powerful catalyst for transformative change, fueling prosperity for generations to come.