The psychology of remittances

Unyo Rivero works as a seaman in an international cargo ship. Every month, he sends $500 of his salary to his family in Manila. However, due to the cost of cross-border and domestic money transfers, his wife receives only $475.

Unyo is just one of the nine million Filipinos driven by domestic hardships to seek work abroad as engineers, seafarers, nurses, entertainers, and domestic helpers. In fact, 44 percent of Philippine households are said to have a family member abroad.

In 2004 alone, overseas Filipino workers (OFWs) remitted $8.5 billion to their families and beneficiaries in the Philippines. For 2005, Bangko Sentral ng Pilipinas (BSP) financial experts are expecting a record-high of $9 billion in remittances – this despite a two-percent decrease in OFW deployments due to stricter post 9-11 immigration laws being imposed by other countries. The decrease was offset by an increase in the deployment of higher-paid skilled professionals. This then makes OFW remittances the nation’s second-largest source of hard foreign currency. Moreover, the Philippines is now the third-largest recipient of migrant remittances behind India and Mexico, according to the BSP. In the South Asian context, this puts the Philippines as the leading receiving country for remittances, accounting for $7 billion or 43 percent of the $16 billion remitted to the region.

All this liquid cash is used by OFW beneficiaries to finance education, home building or renovation, or as start-up capital for a small business. Properly used, it is a means of empowerment and upliftment – a path out of their poverty. This is what motivates OFWs in the first place. Dr. Elena Samonte-Hinckley, a retired University of the Philippines professor who has done extensive work with Filipino communities abroad and is now based in the United States, put it this way: remittances have become a means for OFWs and their beneficiaries "to realize their dreams and attain their goals." Dr. Hinckley even takes the truth further by stating: "being able to provide for the needs of their family and to save for their future gives OFWs a sense of empowerment."

The path out of poverty, however, is not an easy one. Remitting funds back home in the traditional ways can be cumbersome and expensive. Take the case of Unyo, for every $100 he sends home, he has to spend an average of $5 as service charge for the cross-border money transfer. For provincial beneficiaries, additional charges are also levied on the transaction for regional and domestic money transfers. Even as they are used as conduits for the remittance process, financial service institutions also make a bid to retain these funds as assets by offering savings products to the beneficiaries. However, what the banks have failed to understand is that the remitted funds are immediately withdrawn by the beneficiaries to pay for their day-to-day expenses and other financial obligations. OFW beneficiaries, on the other hand, can save on money transfer fees if they open and maintain an account with the bank they get their remittances from.

To avoid the charges, some OFWs have resorted to informal and even "underground" channels. The problem with these channels is that by their very nature, they are undercapitalized and unregulated. Cases of OFWs entrusting their hard-earned dollars to a kababayan scheduled to return to the Philippines are commonplace. Instances where the kababayan disappears (along with the entrusted cash, of course!) are well-documented.

Migration in search of jobs is not limited to overseas destinations. A large number of provincial folk move to the city for work or in some instances, higher education. Like the OFWs, the domestic migrant worker also remits his earnings to selected beneficiaries. Similar to OFWs again, these earnings are also earmarked for education, homes and business capital.

Aside from high service fees, there are a number of factors that make it difficult (to say the least!) for migrant workers to remit their earnings. There is the issue of accessibility: It makes better business sense for large commercial banks to cluster their branches in highly populated areas, and in areas where there is a perceived proliferation of high net worth (read: rich) individuals. However, this makes the banks less accessible to OFW beneficiaries.

The ease of use is also a problem: Financial services can be difficult to understand especially for an individual with limited education. Ideally, pro-poor financial services should be easy to avail of and capable of direct person-to-person money transfers, thus protecting users from complicated processes and costly, and sometimes hidden, service fees.

Limited options are also a factor. One option is to use the rural banking system, which possesses the services, expertise and the geographic location needed to handle low-income clientele. However, their liquidity and asset quality does not inspire client confidence. A second option is to avail of the services of microfinance cooperatives and NGOs which are even better placed geographically. In spite of this, these NGOs are not regulated by the BSP nor are these managed by financial experts, and lastly they are not capable of connecting to a national payment system.

It is therefore unfortunate that despite all the praise and honor our society has bestowed upon our OFWs, there is an absence of a custom-fit and unified money-transfer system for OFWs. Even as banks and non-bank transfer services have somewhat decreased their charges and improved service accessibility, the basic fact still rings true and true: an optimized and cohesive system for OFW remittances is unavailable.

A recent study by the Asian Development Bank identified the Philippines as "an ideal context for developing and refining a template for effective remittance optimization programs across the (Asian) region."

This is true not only because there is a void that needs to be filled, but also because the Philippines has the technical expertise to develop innovative remittance technologies. In fact, the Philippines is fast gaining global recognition for this capability.

This is not surprising given the importance of remittances for thousands of Filipino families. In fact, latest data show that approximately 44 percent of Filipino households are thought to have a family member abroad. Families of these migrants are fully dependent on remittances for their housing, livelihood, and education, on top of the day-to-day cost of living expenses. One study entitled "Migration and development: The Philippine experience" had found out that remittances are used by recipient families to pay back debts, including those incurred by migration (36 percent), for household expenses (32 percent), for household equipment and furniture (13 percent), for children’s education (10 percent), and others.

For example: take a look at those 18-seater jeepneys plying the Pasig-Quiapo route with the words Katas ng Saudi all over their stainless steel bodies; or maybe that low-cost housing subdivision in Cavite that is populated by the families of Japayukis. How about this small house in the province where the living room area boasts of, among others, a 29" flat screen colored television and a huge home-theater stereo-cum-videoke machine – the area is so stacked with various items such that there is no place to walk around anymore. Another example would be this mother and children at the grocery check-out lane with their shopping cart stocked to the brim with the provisions for a full three months. All these seemingly unrelated vignettes of Pinoy culture are intangible proof that OFW remittances are a direct way out of poverty for numerous Filipino families.

Investment instead of consumption

An optimized remittance system should not only make it easy for OFW families to receive their cash. But perhaps, it should also make it even easier for families to spend their cash. Moreover, spending will not be for the purchase of a large, flat screen television but for relevant expenses such as education, health care, housing, and small businesses.

In other words, a customized money transfer system should also make it easier for OFWs to actually invest their cash. One way to achieve this is to develop the capability for targeted remittances. For example, an OFW should be able to transfer funds from his payroll account directly to the account of his daughter’s school in the process, paying for the child’s tuition fee. Another example would be a direct payment to a hospital to pay for an ailing parent’s healthcare.

A foundation for building a pro-poor money transfer solution

The study entitled "Crafting a Money Transfer Strategy: Guidance for Pro-Poor FSPs," was conducted by the Consultative Group to Assist the Poor, a consortium of 29 development agencies that support microfinance. The study identified seven attributes sought by OFWs and their beneficiaries for money transfer services: accessibility, confidentiality, cost and transparency, ease of use, safety, speed, transaction convenience, and cost.

On the other hand, the intrinsic nature of Philippine wireless communications makes it an ideal foundation for a pro-poor money transfer system because it is capable of meeting the attributes important to beneficiaries:

• Accessibility: More than 20 million Filipinos have mobile phones and 98 percent of the Philippines is covered by GSM.

• Confidentiality: GSM communications is person-to-person (P2P).

• Cost and transparency: Voice and data tariffs for wireless communications are among the lowest in the world, and rates have been going down.

• Ease of use: transactions can be executed via SMS through SMS-style keypad strokes

• Safety: Voice or data transmitted "real time."

• Transaction convenience and cost: Since money transfers, and even micropayments, can be executed P2P, these are quicker and more cost-effective.

In addition, using a GSM network would not required setting up of new transmission infrastructure since existing ones will be used.

Smart Padala: ‘Mabilis, maaasahan’

In August 2004, Smart launched "Smart Padala" – a cash remittance service through SMS. Using the SMS language, OFWs can remit cash to an electronic wallet contained in the mobile phone of a beneficiary here in the Philippines. From the beneficiary’s mobile phone, the beneficiary then has the option of encashing the funds or purchasing goods and services through electronic payments.

Smart Padala is the world’s first international cash remittance service through text or short message service. It is an electronic money transfer service that allows OFWs to send cash remittances straight to the beneficiary’s cellular phone in the Philippines, and banks on three major selling points:

Since OFWs are usually the main provider of income for their families, regular and timely remittance is crucial. To send money through Smart Padala, the OFW simply has to drop by one of the service’s remittance partners in the country where he or she is based. Initially, these include Travelex/Asian FX, worldwide; CBN in Ireland, London, Spain, Greece, Hong Kong, and Japan; Forex International in Hong Kong; New York Bay in New York and New Jersey; Banco de Oro partners in Hong Kong; and DAX Remittance in Los Angeles. At the remittance center, he or she hands over the amount to be sent and a small service fee, as well as the cellphone number of the intended recipient.

The latter immediately receives a text message that his or her Smart Money account has been credited. He or she then proceeds to one of about 9,440 encashment centers nationwide to exchange the electronic money for cash. These centers include Smart Wireless Centers, Smart Money Centers, McDonald’s, 7-Eleven, Tambunting, Sea Oil, and Megalink and ExpressNet ATMs.

Smart Padala offers greater confidentiality than door-to-door services since cash is not physically delivered and the recipient has greater control over where to encash the money. It is also more secure since the recipient is immediately notified of the transaction and the value is stored in his or her Smart Money account.

Smart Padala also does away with door-to-door courier fees and offers lower service fees and a mere one percent encashment fee. This enables the OFW to remit more frequently and in smaller amounts, and to send money to the members of the family separately, giving them greater control of how funds are used and shared back home.

• Accessibility: More than 20 million Filipinos have mobile phones and 98 percent of the Philippines is covered by GSM.

• Confidentiality: Remittances and even micro-payments are done person-to-person.

• Cost and transparency: No more courier fees and lower transfer/transaction fees.

• Ease of use: Transactions are executed via SMS which everybody is familiar with.

• Safety: Aside from the encrypted SMS transactions, funds are transferred directly, eliminating the need to physically handle the cash.

• Speed: Cash is transferred as quick as a SMS message.

• Transaction convenience and cost: There are numerous nationwide channels to service cash requirements, and service charges are as low as one percent of total amount received.

Another upside of using Padala is that it gives the OFW more control of his remittances. He can, if he elects to, remit more often to targeted recipients in varying amounts. He can also send funds directly to each member of the family. A typical remittance can probably be spread out like this: a portion will be sent directly to the bank to pay for the monthly installment payment for the house, another payment for the son’s basketball uniform, and one more remittance to pay for his daughter’s tuition fee and school materials, and the final portion goes to the wife’s ATM for the family’s grocery shopping.

In the end, the more funds that the OFW can remit and share will bring that "dream" closer to realization. (Reprinted from Smart Connect Magazine)