The United States is a country of immigrants. And many people making new lives in America also support people in their home countries. Because of this, the United States is the biggest country in the world when it comes to sending money abroad.
Immigrants in the United States sent more than $61 billion in remittances outside of the country in 2015, the World Bank estimates. Sending this money isn't free. People transferring money abroad pay an average of 7% of the amount sent.
This cost is far from uniform. So how can people pay less when sending money internationally?
Costs to watch for
Under current law, money transfer businesses must provide transparent pre-transaction costs, post-transaction receipts and processes for filing complaints, said Annette LoVoi, director of financial access and asset building for Appleseed, a nonprofit network of social justice centers that pushed for remittances to be treated like other financial services.
Because of this, anyone sending a remittance — the fancy word for money transfers — should be able to compare two costs: the fee and the exchange rate. The World Bank's Remittance Prices Worldwide website has a database that allows users to weigh these prices across a variety of services. It covers 365 "corridors," including 48 sending countries and 105 receiving countries.
For example, if you want to look at the cost of sending money from the United States to Mexico, the most popular destination for money leaving America, you can see the price charged by firms from Citibank to Xoom. There's a wide variety. Transferring money from one Citibank account to another is free, though the money comes in dollars, so the recipient bears the cost of converting the money into pesos.
In contrast, Sigue Money Transfers charges a 10% fee on the amount transferred and makes another 2.16% for converting the money into pesos. The lesson? LoVoi quoted the great Smokey Robinson: "You better shop around."
(Policygenius can help you shop around for life insurance.)
Other things to compare
Cost isn't the only factor to consider. For example, Citibank might cost the least, but both the sender and the recipient need to have accounts. In addition, transfers take two days, which doesn't help if the recipient needs the money immediately.
Other services may be able to transfer the money within minutes and allow recipients to receive it as cash. But convenience usually comes with fees.
As with any financial service, users have to vet the company itself. Dozens of banks and money transfer companies offer remittance services, and with your money at stake, you should pick one that's trustworthy.
One way to vet a remittance service is through the CFPB, which maintains a database of consumer complaints about financial services, including international money transfers. (Warning: This database is at risk of shutting down.)
Private companies like RemitRight also allow you to compare costs and customer reviews for various transfer companies.
Behind the fees
The United States is below average when it comes to remittance costs, with senders paying an average of 5.4% of the amount. But someone sending money abroad from Japan would pay nearly a tenth of the transferred amount in fees and exchange costs.
These costs are mainly driven by anti-money laundering rules, said Stephen G. Cecchetti, chair of international finance at the Brandeis International Business School.
It's important to stop money laundering, which can fund terrorism, human trafficking and other illegal, nefarious activity, but it's costly to make sure people aren't crooks.
"They have to establish that you're not a criminal and that's tough going," he said. "That's expensive."
Remittance prices have received international attention. The G-20, a group of leading rich and developing nations, has committed to reducing the global average cost of remittances to 5%. The average is just under 7%.
Reducing prices further could be tough. The cheapest way to send money abroad is from bank account to bank account, since banks already know their customers, Cecchetti said. But more than 30% of the world's population have no bank accounts.
"It's not an option for a lot of people," Cecchetti said.
One effective way to lower the fees people pay is to give them ways to compare costs. Particularly in the U.S., there are a lot of options for sending money across borders, and picking the right one can save a lot of money. Since the people sending and receiving remittances tend to be among the poorest in a country, any savings helps.
"They're sending the equivalent of $200 or $500 to their families," Cecchetti said. "If they have to pay $15 rather than $30, that's a big deal."
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