Remittances, from wealthier countries to low- and middle-income countries (LMICs), account for far larger financial flows than either Official Development Assistance (ODA) or Foreign Direct Investment. A 2021 study produced by the World Bank’s Global Knowledge Partnership on Migration and Development (KNOMAD) found that remittances are three times greater than ODA and, if China is excluded, 50 percent higher than FDI. These flows are particularly useful in smoothing consumption in poorer countries.

A major concern however has been the transaction costs of sending remittances. A 2022 IMF study found that remittances to poorer countries were worth US$559 billion in 2019 but that the cost of sending these remittances had remained stubbornly high. According to the World Bank, the average cost of remitting US$200 to sub-Saharan Africa was 7.8 percent (i.e. US$15.6) in 2022 compared to a global average, for LMICs, of 6 percent.

This may not appear to be an especially large margin. But it is a crude metric and matters are of greater concern when transactions costs of intra-African corridors are considered. According to Statista, summarising figures from the World Bank’s extensive data base, the average cost of sending US$200 in 2021 from Tanzania was 27 percent, from Nigeria, 19 percent, from South Africa, 14.7 percent, from Angola 14.3 percent and from Kenya 13.9 percent.

The World Bank has collected and published remittance prices since 2008. It covers the major money transfer operators (banks, Money Transfer Operators [MTOs], mobile operators and post offices) across 367 corridors. The costs are expressed as a percentage of the funds received by the remittance recipient and are made up of two components; the transfer fee and the exchange rate margin. The World Bank says its figures are weighted averages which take into account different categories of remittance service providers. They do however miss informal (cash) transfers which the IMF has argued could account for up to 50 percent of intra-African remittances.

The United Nations 2015 Sustainable Development Goals call for remittance costs to be reduced to 3 percent by 2030 (Goal 10). In 2011, G20 leaders agreed to a ‘stretch target’ of 5 percent by 2014. Although this target was largely missed, remittance costs have been a considerable focus of attention for more than a decade. The figures captured by Statista suggest these targets are being missed by a wide mark. But focussing solely on these few cases is misleading.

It turns out that there is a clear distinction between the cost of transfers from the main developed world remittance-sending countries and the cost of intra-African transfers. Transactions costs from developed countries, on all the bigger volume remittance corridors are not high. The cost of transferring US$500 from the UK to Nigeria, in the third quarter of 2022, was 3.6 percent, which compares reasonably well to the cost of sending the same amount from the UK to India (2.83 percent).

The cost of remittances on Sub-Saharan Africa’s (SSA) largest remittance corridor, from the US to Nigeria, is 2.94 percent, cheaper than the 4.45 percent average for the world’s largest remittance corridor, US-Mexico. A 2021 background paper, prepared for the African Union’s (AU) African Institute for Remittances (AIR), found that the average cost of sending US$200 from the European Union to AU countries was 5.68 percent and, moreover, had fallen from 8.08 percent in 2015.

The AIR paper identified a number of EU-SSA Corridors where average remittance costs were under five percent in 2021, including France-Cameroon (3.5 percent), Portugal-Mozambique (4.11 percent), Spain-Nigeria (3.52 percent) and France-Senegal (3.83 percent).

Intra-African remittances tend however to be much more expensive. The World Bank’s data base suggests that sub-Saharan Africa has some of the world’s most expensive corridors. The most expensive appears to be the Tanzania (sending country) to Uganda (receiving country) corridor, where a US$500 transfer costs an average of 33.58 percent (i.e. US$167.90). The average cost on South Africa’s largest sending corridor (to Zimbabwe) – over US$700 million – was still a high 14.95 percent for the second quarter of 2022, despite considerable competition (the World Bank lists 18 different remittance service providers).

But the World Bank database gives considerable detail and when this is factored in, a more varied picture emerges. On the Tanzania-Uganda corridor, cost vary considerably between the banks (NBC Bank charges 47.34 percent and Stanbic charges 42.16 percent on this corridor), and the Money Transfer Operators, Western Union and MoneyGram, which are much cheaper (at 2.28 and 5.61 percent respectively).

It turns out that banks charge much more to remit sums in the US$200-500 range across the continent. Between Kenya and Tanzania, Ecobank charges 28.43 percent while the M-Pesa charge is only 5.86 percent (and Western Union only 4.14 percent). The price range for a US$500 remittance between South Africa and Lesotho varies from the 1.46 percent charged by supermarket chain Shoprite to 31.75 percent charged by South African bank ABSA.

The reason bank transactions prices are so much higher than other operators is that they charge a flat fee. First National Bank, for instance, charges R550, for a transfer to a Lesotho account, which contributes a large portion of its 20.31 percent total charge. Brick and mortar banks are also affected by low branch coverage in remittance receiving countries, which pushes up costs.

It is not unreasonable to suggest that intra-African remittances are not a major business focus for most banks. There are however some very viable alternatives. A paper written for the Finmark Trust observes that the key reform in the South African remittance sending market was the introduction of the category of Authorised Dealer with Limited Authority (ADLA), essentially non-bank remittance service providers.

Regulatory reforms of this sort, making it easier for non-bank players to enter remittance markets, open the field to digital players who are already making considerable progress in SSA. Fintech revenues have the potential to reach US$230 billion for the continent 2025, according to consultancy McKinsey. Much of this growth will be Africa’s domestic markets but the potential to impact the continent’s US$53 billion remittance market is considerable.

Lower remittance costs are associated with higher volumes and greater competition. The latter is determined by regulations in both sending and receiving countries. There are of course other relevant factors too – whether exchange rates are fixed or fluctuating, the availability of foreign exchange (a key issue, at times, in remittances to Zimbabwe) and political (money laundering) risk, especially for banks.

The challenge for SSA is to use emerging technologies and new business models to lower the costs of remittances within the continent.