Remittances are a huge part of the world economy and how it behaves, the levels, performance, etc. are closely studied by economists, bankers and political agents. Some like remittances, some hate it. For example, countries which receive remittances love it, but countries which are the source are not very enthused about it for a variety of reasons. Terrorism is one party anyway, but other than that, informal financial networks means that it cannot be taxed nor tracked. Also social benefits and other normal societal activities are heavily based around the banking system. So it is in the interest of the developed nations to get the informal financial networks to move into formal financial networks. So what gives? This paper is a good indicator of that struggle from the USA.
We find that apart from their income, language status, and education, two factors explain why recent Hispanic immigrants are often unbanked: (i) the requirement of identification is a barrier to opening a bank account (institutional or supply-side factor), and (ii) the relative attractiveness of the informal sector in providing apparently cheaper financial products, especially remittance savings (self-selection or a demand-side factor). Whereas some segment of the population will be excluded from the formal banking sector, the remaining population considers economic factors in deciding whether or not to open a formal account.
Clearly, as banks move to find innovative programs to attract the unbanked they must try to replicate some characteristics of the informal sector which have drawn people there. Urban areas such as those in this study house a greater, and perhaps more competitive, concentration of informal financial options. Our study did not focus on the effect of financial education (see Lyons & Scherpf, 2004) as a variable influencing banking habits; rather, our results, like those in Kim (2001), suggest that banks must provide more low-cost services, particularly of auxiliary financial products to attract customers. But beyond this, the role of transaction costs, informational asymmetries, and cultural barriers facing Hispanic consumers must be considered. Better publicity about actual bank account requirements and costs is needed. Replicating the flexibility of the informal sector in terms of its geographical coverage, communicational advantages with both educated and uneducated populations, and flexible hours of operation can help lower the implicit costs associated with formal banks. Hispanic consumers may perceive lower implicit transaction costs when dealing with foreign banks (such as Banco Popular) operating in the U.S. and see this as a logical intermediary step between the informal and formal U.S. banking sector.
Finally, expanding the savings programs offered to the poor in the U.S. could assist in this area. If remittances are viewed as a form of savings, encouraging migrants to hold savings in a U.S. account longer would be a win-win option which could reduce remittance fee charges and enhance the deposit creation role of banks. But this would ultimately require a perceived competitive return on a U.S. account compared to returns in the country of origin. Studies comparing the use, and returns to remittances abroad compared to returns on U.S.-based investments have not been undertaken. The expansion of remittance-linked savings programs, with flexibility in identification requirements through further use of Matricula cards or other forms of driver identification, could change the dynamics and debates about the unbanked in upcoming years.
Denise Stanley and Radha Bhattacharya, The informal financial sector in the U.S.: The role of remittances, The Quarterly Review of Economics and FinanceVolume 48, Issue 1, , February 2008, Pages 1-21.
Abstract: We investigate the interdependence between being unbanked and the decision to remit. Using data from our survey of the low-to-moderate-income (LMI) Hispanic community in a major U.S. metropolitan area, we find that higher income, more education, and greater proficiency in English decrease the probability of being unbanked. A key result is the positive correlation between latent factors that affect the decisions to remit money and to be unbanked. The presence of both institutional and self-selection factors in the decision to not open a bank account sheds light on the kind of policies that need to be implemented to bring the unbanked into the financial mainstream.Keywords: Unbanked; Remittance; Informal financial sector; Joint determination
All this to be taken with a grain of piquant salt!!!