WorldCity Business Magazine

Are remittances on the slide?

by WC

In the second quarter of 2006, financial transactions giant First Data Corp. announced that its Western Union subsidiary processed fewer-than-expected remittances to Mexico. The reaction was immediate: The Colorado company’s share price dropped 5 percent. First Data CEO Ric Duques said the crackdown on undocumented workers in the United States had made migrants fearful of sending money to their home countries.

The Inter-American Dialogue, a Washington, D.C.-based think tank focused on Latin America, assembled a high-profile panel to see what they thought of Ric Duques’ explanation. They included Manuel Orozco, executive director of the Remittances and Rural Development Project at the Dialogue; Beatrice Rangel, CEO of AMLA Consulting in Miami; Jorge Guerrero, CEO of Optima Compliance & Consulting, a regulatory compliance consulting company in Weston; Oscar Chacn, director of Enlaces Amrica, a Chicago-based advisory agency that works with Latin American and Caribbean immigrant organizations; and Kai Schmitz, the executive vice president and chief operating officer of financial services firm Microfinance International Corp., which focuses on Hispanic consumers. Their reactions first appeared in the Aug. 4 edition of the Inter-American Dialogue’s daily Latin America Advisor.

Q. Do you agree with First Data’s explanation that the highly publicized crackdown on illegal immigration has made migrants fearful of sending money? What other factors could be affecting the volume of remittance flows at the biggest money transfer companies like Western Union?

*Manuel Orozco: *The evidence is mixed. This period coincides with the heightened focus on the immigration debate and with immigration raids to deport undocumented migrants.

However, aggregate data from the Bank of Mexico does not show a decline in the volume of money sent or the total number of transfers; instead there is continued growth. However, it is possible, as previously predicted, that the real volume of transfers, at approximately $22 billion, is reaching its plateau this year.

There are other trends that emerge during this period which are worthy of attention. First, a look at unemployment rates for Latinos shows that Hispanic unemployment was at one of its lowest points in the past six years during the first half of 2006, suggesting a demand for Latino [native and foreign born] labor. Second, during that same period at least three of the major competitors in the U.S.- Mexico corridor suggested that they experienced positive growth, rather than declines. Third, the participation of banks in the money transfer industry also increased. Their market share has doubled from an estimated 3 percent in 2004 to 6 percent in 2006. Moreover, use of stored-value cards has slightly increased to 2 percent of the market for this corridor.

*Beatrice Rangel: *While I agree with Mr. Duques, there are other variables at play that are also negatively impacting the business. First comes the cost of transactions. While wire transfer outlets have substantially reduced such costs, they are still too high as compared with the fees charged by banks and other financial institutions.

Second, technology is pushing remittances into the domain of banks and mobile phones. Pan-regional banks are already issuing debit cards to relatives of migrants in home countries where they have operations. In Europe, cellular phones are being used as electronic wallets. Fears over security and privacy will push those technologies into the forefront of the remittance business. Those wire transfer companies that understand these changes could become very successful.

*Jorge Guerrero: *I tend to agree with the perspective that greater enforcement of immigration laws would trigger greater remittances. From a practical standpoint, those caught in an immigration raid do not get the chance to go back home to collect their belongings or savings before being deported. Consequently, it would appear that now they would have a bigger incentive to make that remittance as soon as they receive their funds.

However, I do believe that the immigration crackdown and recent legislative bills tend to generate a more pronounced concern for future remittances. For example, if it becomes a felony to enter the U.S. without legal documents, presumably the funds that are generated from the illegal employment of such immigrants will become subject to the anti-money laundering law. No financial institution, including banks or money transmitters, could process funds that are derived from criminal activity. That would cause an immediate 40 percent drop across the board if all financial institutions complied with those requirements.

*Oscar Chacn: *I believe the less-than-expected growth during the second quarter is due primarily to other factors such as competition by other remittance-sending companies, as well as an overall slowdown in the U.S. economy, especially in sectors such as construction and agriculture. Both of these sectors happen to employ a large percentage of immigrant workers.

The increased crackdown on illegal immigration may actually have the opposite effect on remittance volume. As continuity of life in the U.S. becomes less certain, migrants may find it more beneficial to send money home, rather than investing in the future in the U.S. If those flows are not going via Western Union, perhaps it is because the migrant community does not see the value proposition that Western Union offers as being the most attractive one.

If U.S. financial institutions such as First Data want to recapture those remitters, they should take several steps. First, they should strengthen their advocacy role in favor of a generous legal permanent residence program for all unauthorized, hard-working and taxpaying immigrant workers in the U.S. If the most extremist of our federal elected officials were to get their way, First Data and other financial institutions in the remittance-sending business would lose a significant percentage of their clients, as they would be deported. Second, they should make a long-term commitment to investments, both in migrant-led, self-help organizations in the U.S. and in communities where those remittances are sent.

*Kai Schmitz: *I do not see reasons why legal immigrants should change their remittance behavior. Illegal immigrants are likely to fear deportation. It seems likely to me that a natural reaction in this case would be to transfer funds to a safe haven, most probably the home country.

There are, in fact, indications that transaction amounts have increased shortly after publicity about raids and deportations. Undocumented immigrants may have chosen to transfer their funds through informal channels rather than large money transfer companies, but this assumption is contrary to the argument, which is often stressed by the industry, that immigrants in general are comfortable with money transfer companies. I suspect that one reason for reduced growth simply is increased competition. Some large banks in Mexico, in particular Bancomer and HSBC, have begun to offer their branch network as distribution [points] to smaller money transfer companies in the U.S. on a plug-and-play basis, thereby enabling much smaller companies to compete with Western Union’s extensive distribution network that has been a core advantage in the past. These banks have grown the volume they distribute on behalf of smaller money transfer companies substantially.