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International remittance: What it is and how it works

International remittance: What it is and how it works

Bailey Schramm
Contributor
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An international remittance – is that just the same thing as international payment processing?

While the terms may sound largely interchangeable, international remittances often describe payments sent by individuals across borders for the purpose of economic support. 

In this article, we’ll explore what international remittances are in closer detail, how they work, and the wide-reaching impacts they provide on the global economy. 

Key takeaways

International remittances are made between two parties across international borders, and can be initiated by an individual, a business, or a government entity.

Foreign remittances can be made using a variety of payment methods, impacting the cost and speed of the transfer.

An international remittance is a type of payment, though not every type of international payment is a remittance.

What is international remittance?

International remittance is the process of electronically sending money from individuals in one country to recipients—whether people or businesses—in another country. These transactions are often referred to as international money transfers, international wire transfers, or simply remittances.

This term is often used in the context of a foreign worker who sends money to friends or family members living abroad, usually in the worker’s home country. However, international remittances may also be made by domestic companies paying international suppliers or governments in the form of foreign aid. 

Remittances may be made using a number of payment methods, including money transfer services, mobile apps, or directly through a bank. 

International remittances can provide substantial economic support to recipients and their communities. These funds can be used to purchase everyday goods and services as well as fund entrepreneurship and other projects.

Key aspects of international remittances

To get a better understanding of what an international remittance is and how it works, here are some of the main aspects and characteristics of this type of payment: 

  • Purpose: The main purpose of an international remittance is so that senders can transfer money to recipients who reside in a different country, whether for personal or business-related purposes.

  • Significance: Foreign remittances hold important significance for recipients and communities around the globe. It’s estimated that remittances directly support one billion people worldwide, allowing them to purchase basic essentials while also stimulating the local economy. In fact, data shows that over 77 countries rely on remittances for at least 3% of their GDP.
  • Methods: International remittances can be made with a number of payment methods, including international wire transfers, money transfer services, mobile apps, and other financial services.
  • Regulation: Both the sending and receiving countries can regulate international remittances. This may involve taxation, reporting, and more to ensure these payments are both legal and secure. Domestic and foreign government entities may have a legal obligation to prevent fraudulent payments and terrorist financing, such as meeting anti-money laundering (AML) laws in the United States.
  • Costs: The exact cost of a foreign remittance depends on the payment method used. However, these types of payments typically involve transaction fees, exchange rate fees, and other platform-specific fees. According to data from the World Bank, the average cost of sending remittances is 6.26% of the payment amount. 

How much time does an international remittance take?

An international remittance can take upwards of five business days to reach the intended recipient, depending on the exact payment method used. 

Additional factors like the countries where both parties are located and the currency of the payment can also influence how long a remittance takes to process. 

While senders can’t control much of this processing speed, verifying payment details for accuracy and sending the payment during business hours where the recipient is located can help speed up the process. 

The different types of international remittance 

There are two different categories of international remittances. Here’s a quick overview of each: 

  • Inward remittance: Describes an international payment when funds are sent from someone or a business in a foreign country to a person in their home country. For instance, if a worker in the United States is doing freelance work for a Canadian company, the payment they receive from the foreign client would be an inward remittance.

  • Outward remittance: A payment that is sent from an individual in one country to a person or business in another country. Let’s say a US-based business procures goods from a foreign supplier. When the domestic company needs to pay the supplier overseas, this is referred to as an outward remittance. 

What is the difference between payment and remittance?

It makes sense why international payments and remittances appear to be synonymous. In many ways, they are. 

A remittance is a type of payment with a specific purpose, often used to send funds to individuals abroad. However, other types of international payments are not typically referred to as remittances, like B2B payments.  

Thus, the main difference between the two is that a remittance is typically made between individuals for personal financial support, while international payments are a broad category of monetary transactions across borders. 

Benefits of foreign remittances

Even though the typical foreign remittance tends to be about $200-$300, they still play an important role in the global economy:  

  • Meeting basic needs: Whether funds are being sent to international suppliers, contractors, or workers’ friends and families, the funds being sent abroad are often used by recipients to cover the cost of everyday expenses like groceries, housing, and clothing.

  • Community economic support: Beyond the direct impact on individual recipients to purchase basic necessities, remittances can also provide a wider boost to the local economy. By giving them the opportunity to make purchases for goods and services, they are providing further economic stimulus as the funds flow through to local merchants and service providers.

  • Stability: Data from the International Fund for Agricultural Development (IFAD) indicates that the volume of remittances being sent has quadrupled over the past 20 years. This steady growth indicates that these types of payments tend to provide economic stability and resilience to communities abroad. Even in the event of an economic downturn, conflict, or natural disaster that prevents individuals from being able to generate their own income, foreign remittances provide a sort of financial safety net that isn’t reliant on the local economy. 
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Cons of foreign remittance 

Despite the important role of international remittances in supporting people around the world, there are some drawbacks to the current system that are worth mentioning: 

  • High costs:  As mentioned above, remittances are subject to a number of fees, reducing the amount of money that the recipient ends up with. According to the World Bank, even cutting the cost of foreign remittances by 5% could result in savings of $16 billion per year, resulting in more cash flowing through to the intended recipients.

  • Dependency: The IFAD notes that remittances make up more than 10% of the GDP for 30 countries. While this represents substantial support to global communities that otherwise may not exist, it also creates a dynamic where recipients are dependent on these payments to sustain themselves. Thus, these communities become increasingly affected by changes in foreign policy and fluctuations in the global economy.
  • Fraud risk: While countries continue to tighten regulations on foreign remittances to counter fraud, money laundering, and other illicit activities, there is still fraud risk associated with these payments. 

Manage and automate international payments

International remittances are just one way for individuals, businesses, and governments to send money across borders. 

From paying foreign suppliers to offering economic support to global communities, international remittances are an important aspect of the modern global economy.

With a platform like BILL, teams can make international payments to recipients in more than 130 countries with the same tool they use to make domestic payments.

BILL provides better transparency, security, and control over international payments, with automatic syncs to your accounting software for streamlined record-keeping.

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Frequently Asked Questions (FAQs)

What is the difference between an international money transfer and remittance?

Oftentimes, the terms money transfer and remittance are used interchangeably. However, there are some nuances to keep in mind. A transfer usually refers to any money that’s sent across international borders; however, the term remittance is typically used in cases where an individual is sending money internationally to friends and family in their home country. 

Why would I receive a foreign remittance?

You might receive a foreign remittance if a person or entity in a foreign country needs to send you money. A common scenario where this may occur is if you have a close friend or family member working abroad who is sending you money. This may also be the case if you’re a contractor working for a foreign employer, and they need to pay you for your work. 

How do I receive money from an international remittance?

If you need to be paid by a foreign individual or entity, you may receive the remittance using a few main payment methods. The exact method used depends on which one the sender selected. For instance, if you’re being paid with a bank remittance, you’ll typically see the money appear directly in your bank account. If sent by a money transfer service, you may need to go to a physical location to pick it up in cash. 

Author
Bailey Schramm
Contributor
Bailey Schramm is a freelance writer who creates content for BILL. She graduated summa cum laude from the University of Wyoming with a B.S. in Finance. Bailey combines her expertise in finance and her 4 years of writing experience to provide clear, concise content around complex business topics.
Author
Bailey Schramm
Contributor
Bailey Schramm is a freelance writer who creates content for BILL. She graduated summa cum laude from the University of Wyoming with a B.S. in Finance. Bailey combines her expertise in finance and her 4 years of writing experience to provide clear, concise content around complex business topics.
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