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© 2021 International Monetary Fund
WP/21/175
IMF Working Paper
Western Hemisphere Department
Fintech Potential for Remittance Transfers: A Central America Perspective
Prepared by Julia Bersch, Jean François Clevy, Naseem Muhammad, Esther Pérez Ruiz, and Yorbol Yakhshilikov1
Authorized for distribution by Patricia Alonso-Gamo
June 2021
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
This paper analyzes the potential for fintech to facilitate cheaper and more efficient remittances, and to enhance financial inclusion in Central America. Digital remittances remain nascent in the region, primarily reflecting behavioral inertia, small cost advantages of digital over traditional channels, and inadequate financial literacy. Through expanded alliances between traditional and fintech operators, digital remittances can further reduce transaction costs and reach those remote, low-income households in a timely and secure manner. A meaningful expansion of fintech remittances necessitates an enabling regulatory environment for digital financial services, and KYC and AML/CFT requirements proportionate to the value of transfers.
JEL Classification Numbers: E42, F24, G23, G28, G53, L11, O54.
Keywords: Central America, fintech, remittance transfers, cross-border payments, mobile money, financial inclusion, financial regulation, financial integrity, digital uptake, competition.
Authors’ Email Address: jbersch@imf.org; jclevyaguilar@imf.org; muhammad.naseem@etu.uca.fr; eperezruiz@imf.org; yyakhshilikov@imf.org;
Contents
ABSTRACT
I. EXECUTIVE SUMMARY
II. INTRODUCTION
III. WHAT ARE FINTECH REMITTANCES?
IV. U.S. TO CA REMITTANCES CORRIDOR: STYLIZED FACTS
A. Operators
B. Modes of Transfer
C. Remittances Costs
V. EMPIRICAL ANALYSIS OF REMITTANCE FEES’ DRIVERS
VI. REMITTANCES AND FINANCIAL INCLUSION IN CA
VII. REMITTANCES DIGITALIZATION IN CA: COUNTRY CASE STUDIES
A. Remittances Digitalization: Supply, Demand, and Regulatory Conditions
B. Country Case Studies
C. COVID-19 Pandemic Reshaping the Digital Remittance and Payments Landscape
VIII. CONCLUDING REMARKS: PERSPECTIVES FOR PAYMENTS AND REMITTANCES DIGITALIZATION IN CA
BOXES
1. Mobile Money Providers and Remittances Costs
FIGURES
1. Cross-Border Money Transfer Volume by Category
2. Supply, Demand and Regulatory Conditions of Remittances Digitalization in CA
ANNEXES
I. Impact of Remittances on Households’ Income
II. Probit Models: Data and Regression Results
III. Mobile Money Remittances: Regional Coverage
IV. Key Drives of Remittances’ Fees: A Firms Perspective
REFERENCES
List of Acronyms
| AI | Artificial Intelligence |
| AML | Anti-Money Laundering |
| API | Application Programming Interface |
| ATM | Automated Teller Machine |
| CA | Central America |
| CFT | Combating the Financing of Terrorism |
| CPMI | Committee on Payments and Market Infrastructures |
| DLT | Distributed Ledger Technology |
| EAP | East Asia and Pacific |
| ECA | Europe and Central Asia |
| EMDE | Emerging Market and Developing Econonomies |
| GSMA | Global System Mobile Association |
| KYC | Know Your Customer |
| LAC | Latin America and the Caribbean |
| LIC | Low Income Countries |
| MENA | Middle East and North Africa |
| MMRI | Mobile Money Regulatory Index |
| MNO | Mobile Network Operator |
| MTO | Monetary Transfer Operator |
| NA | North America |
| P2P | Person-to-Person |
| SA | South Asia |
| SSA | Sub-Saharian Africa |
Prepared by the Western Hemisphere Department Fintech working group, led by S. Pelin Berkmen and under the guidance of Patricia Alonso-Gamo. The authoring team gratefully acknowledges comments from Alejandro Werner and IMF reviewing departments. We would like to thank the participants of the XVI Regional Conference for Central America, Panama, and the Dominican Republic (especially panelists from Western Union and Mc Kinsey) for fruitful exchanges. Finally, we are grateful for the excellent research assistance provided by Cristhian Vera and wishes to thank Anaysa Delsid for her excellent administrative support.