Search
LearnBlogCareersHelpLog InSign Up

What is a Remittance?

definition

A remittance is a transfer of funds from one party to another — the term is often used in the case of individuals sending money to family in another country.

🤔 Understanding a remittance

A remittance is money sent to another party. The term remittance is commonly used to describe the payments that an individual who has moved to a different country for work sends to family in their home country via wire transfer, check, or some other means. These transfers are most commonly done through a bank or money transfer service. Remittances play an essential role in the economies of developing countries and the livelihoods of individuals in those countries. Remittances can apply to other situations as well. For example, a remittance can be used to pay a bill or satisfy an online payment, either between individuals or between businesses.

example

Let’s say Joe has decided to move overseas for a new job opportunity. He helps to support his family back home financially and wants to continue to chip in when he’s living abroad. Every month, Joe sends a wire transfer (a remittance) to his home country with a portion of his income for his family to use for their living expenses.

Takeaway

A remittance is like a benefit check…

Just as a government benefit check may help a struggling family survive, for many people around the world, the remittance received from family overseas is a significant part of their household income.

illo-remittance-desktop mobile

Tell me more...

How does remittance work?
Remittance vs. payment
What is a direct remittance?
How to send a remittance
What is a foreign remittance?
How do remittances affect the economy?
What are the remittance flows by country?

How does remittance work?

A remittance is a transfer of funds from one party to another. It could come in the form of cash, check, or electronic payment. A remittance could be used to send money from one person to another, or it could be used to make a payment to a business in exchange for goods and services.

Remittance vs. payment

A remittance is a transfer of money, and payment is an exchange of money in exchange for a good or service. The difference between the two comes down to how the two terms are used colloquially.

The term remittance is most often used to describe a situation in which a foreign worker is sending money to an individual in his or her home country. The person they’re sending it to is most often a family member.

The term payment is most often used to describe money paid in exchange for a good or service. By definition, a payment is a type of remittance.

What is a direct remittance?

A remittance could be in any form of payment: bank transfer, check, cash, etc. A direct remittance describes an electronic transmission that goes directly into the bank account of the person who is receiving the money. Think of a direct remittance in comparison to a direct deposit you might have set up with an employer — When they pay you, the money goes right into your bank account.

How to send a remittance

There’s no one way to send a remittance, but there are certainly ways that are easiest and most secure. First, check with your bank or credit union to see if they will allow you to make ACH payments (electronic payments that go through the Automatic Clearing House Network) or wire transfers (an electronic transfer of money from one bank to another). In the case of a remittance being sent to a foreign country, you’ll need to ask about international transfers specifically.

Another way to send a remittance is through a money transfer service. These services are often used by foreign workers who are frequently making these transfers of money. Services like Western Union (perhaps the most well-known) allow individuals to send money transfers either online through a bank account, debit card, or credit card, or in-person through a bank account, debit card, credit card, or even cash. The downside of these transfer services is that they usually have fees associated with them.

While the electronic payments listed above are the quickest and most secure ways to send a remittance, they aren’t the only way. Someone could send remittance in the form of a check, money order, or even a prepaid card in the mail. These methods all have significant downsides. First, they take longer. Depending on the speed of the postal services in the country you’re sending the payment to, this type of transfer could take significantly longer than electronic payment. These methods also aren’t as secure, since there’s no guarantee the remittance will end up in the hands of the person for whom it is meant.

What is a foreign remittance?

As we have said, the term remittance is most often used in the case of international transfers of funds from a foreign worker in one country to family in his or her home country.

There are many countries, especially developing countries, where the head of a household might have a hard time finding a job that can support their family. That individual might migrate to a country where they can find a better-paying job. This trend can be seen historically in the United States, as individuals have moved here to find a well-paying job to send remittances home to their families.

As technology advances and the world becomes more globally connected, people might have an easier time moving internationally. In this example, you might see a young student moving to a foreign country to attend a university or live abroad temporarily. In this scenario, rather than the individual moving abroad sending money home, you might see a family member back home, perhaps the person’s parents, sending them money to help pay for their living expenses.

While the example above about the student moving abroad and receiving remittance from their parents is a scenario that unquestionably happens, most foreign remittances occur in those situations where a foreign worker is sending money home to their family.

How do remittances affect the economy?

For those living in developed countries without family living internationally, it might be challenging to grasp just how vital these remittances are to the economy of developing countries. For a family in a country with a low standard of living, a foreign remittance could be a huge factor in bringing them out of poverty. Once they can rise out of poverty, these families are more likely to have more access to health and education and are more likely to spend money, which contributes to the developing country’s economy.

And the remittances don’t just have an impact on an individual level. Remittances received from other nations are equal to more than a quarter of the developing country’s Gross Domestic Product (GDP) in some countries. In about 25 countries, foreign remittances equate to 10% of the country’s GDP. And in many developing countries, it amounts to several times more than money received from developmental aid. According to a 2005 paper published by St. Cloud State University, these transfers of funds tend to be more stable than other types of assistance, perhaps because the senders are personally connected to those receiving the money.

What are the remittance flows by country?

According to the Pew Research Center, nearly $150 billion in remittances was sent from the United States to other countries in 2017, the most recent year for which they have data. And that is only a portion of the $625 billion that was sent across borders worldwide in that year.

When it comes to funds sent from the United States, Mexico receives by far the most money in remittances. Receiving over $30 billion from individuals in the United States, Mexico received nearly double any other single country. It should not come as a surprise that Mexico receives such a large portion of remittances from the United States since more than 80% of Latin American migrants currently reside in the United States.

The next biggest recipients of remittances from the United States are China, which received over $16 billion, India, which received over $11 billion, and the Philippines, which received over $11 billion.

Most foreign remittances are sent from high-income countries. The United States is the largest source of foreign remittances, followed by Saudi Arabia, Russia, Switzerland, the United Arab Emirates, and Kuwait, according to the World Bank Group’s Migration and Remittances Factbook, 2016.

20200220-1095388-3297723

Related Articles

What is a Security?

Updated April 29, 2020

What is the Stock Market?

Updated January 10, 2020

What is a Dividend?

Updated April 29, 2020

What is a Bond?

Updated May 11, 2020

What is a Mutual Fund?

Updated May 12, 2020

What is an Index Fund?

Updated April 29, 2020

You May Also Like

What is a Quota?

April 8, 2020

A quota is a limit placed on the amount or value of a good that a country imports or exports for a given period.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.
Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. Robinhood U.K. Ltd (RHUK) provides brokerage services in the United Kingdom. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').
© 2020 Robinhood Markets, Inc. Robinhood® is a trademark of Robinhood Markets, Inc.