Remittances, or the money sent by migrants to their home countries, have always played a crucial role in the economies of Latin America and the Caribbean. That became particularly clear during the COVID-19 pandemic, with much of the region’s economies on life support in mid- to late 2020. Against this backdrop, remittances acted as an automatic stabilizer, supporting local economies and financing essential services.
This was unexpected, since remittances typically dry up in economic recessions. And it was especially surprising given that common remittance channels were obstructed due to the suspension of cross-border travel and the closure of cash-based transfer stores like MoneyGram and Western Union. What seems to have made the difference was the outsized role of technology, and specifically digital transfers, in mitigating the impact of the pandemic on the flow of money from migrants abroad. This offers policymakers an opportunity to ensure that migrants can continue using digital finance channels to help remittances flow more efficiently in the future.
Remittances initially recorded a marked decline in April 2020, shortly after the pandemic hit, according to central bank data, but the magnitude of the impact varied across countries. El Salvador and Colombia were among the hardest hit, with a 40% decline relative to April 2019, while Mexico experienced the smallest drop. A quick rebound began in May, with an increasing trend afterwards. An IMF research article aptly titled “Defying the Odds: Remittances during the COVID-19 Pandemic” found that remittances responded positively to COVID-19 infection rates in the home country. In effect, as the pandemic hit developing countries, migrants sent more money back home to support their families and communities.
Digital Technologies for Financial Services
New digital finance tools made this possible. The share of registered in-person cash remittance transfers declined by about 5% for the region. But this decline was compensated for by transfers through financial institutions. There was considerable variation among countries, with the largest switches recorded in the Dominican Republic and Honduras, where it registered about 10%, compared with about 3% in Guatemala and negligible changes in El Salvador. Overall, however, electronic transfers rebounded, with growth in the use of bank transfers more than double the growth in other remittance modes. Similarly, fintech remittances accelerated.
Digital payment channels, such as mobile money and online transfers, became more important as traditional channels were disrupted. For example, in Mexico, the government launched a mobile app called “Cobro Digital” to facilitate digital payments and reduce the use of cash. This app allowed users to make payments and transfers without the need for a bank account, making it easier for migrants to send money to their families.
With cash transactions constrained by lockdown measures and travel bans, digital payments appear to have filled an important gap. According to a World Bank study, leading money transfer operators during the pandemic recorded double-digit growth in digital services that supported remittance flows. European fintech startup TransferWise reported a 43% increase in transfers in April 2020 compared to the same month in 2019, while US startup Remitly reported a 200% increase in transfers in comparisons of those same time periods. Meanwhile, fintech platforms proliferated in Latin America and the Caribbean itself, an IDB report found.
Remittances: Faster, Safer, Cheaper, Easier
These examples suggest that digital remittance services that offer low fees, fast transfers, and easy accessibility through mobile apps were popular during the pandemic. The changes in the technology for sending remittances not only allowed for the continuation of financial flows to Latin America during the pandemic. They also contributed to a reduction in transaction costs and facilitated financial inclusion. With the closure of physical stores and the disruption of traditional payment channels, transaction costs initially increased, making it more expensive for migrants to send money home. However, market competition among digital payment providers helped to reduce those costs.
In some countries, government policies have also played a role, helping to reduce the costs of remittance transfers and support formal channels. For example, in Mexico, the government has implemented a program called “Paisano” that provides information and support to migrants sending remittances. The program includes a website that provides information on exchange rates and fees, as well as a hotline that migrants can call for assistance. Government use of electronic bank payments to disburse pandemic social assistance in several countries has further facilitated the switch to digital transfers.
An Opportunity for Policymakers
Some data suggests that the adoption of digital finance channels may be temporary, an IDB study found, implying that pre-pandemic informality in remittance transfers will return. But policymakers can capitalize on the positive developments in the remittance ecosystem brought about by the pandemic and take additional measures to reduce the cost and increase the speed of remittance transfers. To start with, initiatives to onboard migrants digitally, particularly those whose wages are paid into bank accounts, may alleviate status quo bias and build trust among migrants. This group, while smaller than the broader community of migrants sending remittances through physical locations, could benefit from the convenience and, in some cases, lower cost of digital transactions. However, caution should be exercised to prevent migrants from being steered into adopting digital channels that are less convenient or more costly. A client-centric approach is paramount.
Efforts should also be made to promote the financial inclusion of migrants and their recipients by incentivizing them to open accounts in the United States as well as in the migrants’ home countries. This would further facilitate access to digital financial services and lower transaction costs. Policymakers should encourage competition among financial institutions by reducing barriers to entry into the market for new players, update the regulatory infrastructure of the financial industry to the realities of the new digital environment, and improve transparency around fees and exchange rates. Finally, they should ensure adequate consumer protection—a key consideration given the rapid changes in technology. Digital financial services that prioritize dependability, safety, and privacy will increase consumer confidence. It will also boost reliance on affordable formal channels for sending hard-earned money to family members at home.