What is Remittance and How Does it Work?

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How Does Remittance Work?

Remittances play a massive role in the financial ecosystem today, and if your business needs to send or receive payments, it’s important to understand how they work. Here’s what you need to know:

A remittance is the transfer of money from one account to another, generally for services rendered. Pretty simple.

The amount of money being sent internationally has increased massively in recent years mainly due to more businesses working with customers and clients overseas. Another huge factor is economic migration. With the continuous increase in people working abroad, comes an increase in the amount of money people send back to their families and friends.

For some countries, remittances account for a sizable portion of their GDP. In 2018, expat workers worldwide moved the equivalent of a staggering $689 billion US dollars. This doesn’t even include 2018’s cross-border business payments which equated to around 124 trillion US dollars.

So How Do Remittances Work?

Let’s say you’re looking to send money from Canada to France. First of all, you will  need to pre-fund your bank account with your local currency. Basically, in order to send $5,000 from Canada, you will need to have at least $5,000 in your Canadian bank account. Pretty straightforward.

Once the funds reach the bank in France, the receiver needs to contact their local branch or the treasury department to obtain that day’s Euro-to-Canadian foreign exchange rate. This rate is then used by the recipient’s bank to convert the remittance you sent into local currency.

In most cases, especially when the money involved is a few thousand dollars or more, the bank will automatically apply a retail exchange rate. The drawback here is that retail exchange rates are designed to deliver maximum profits to the receiving bank, not the customer.

How Can You Send a Remittance?

Wire transfer is the most familiar method used to send a remittance.

This type of transfer can take anywhere from 3-5 business days or longer – especially with overseas payments. Funds are transferred using wire networks, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT). These networks act as a messenger between the sending and receiving banks. Sounds like a solid option, right?

But wait! Be sure to do some currency research before sending that international wire transfer. You’ll need to confirm whether your bank is able to send funds in the local currency of your receiver. This is especially important if you are sending money to a country using an exotic currency.

Wire transfers can also be quite expensive. Some banks charge very high fees for the service, which can increase even more depending on the currency and amount being sent. Along with all of these fees, you’ll have to keep in mind the foreign exchange conversion rates that will be applied by your bank. Banks don’t offer the real, live FX rate. Instead, they charge you a higher negotiated rate in order to make an above-average profit from your transaction. Remember we mentioned retail exchange rates earlier? It’s the same idea.

Sometimes, the destination bank won’t be able to receive the wire transfer directly. This is often the case with international payments, as certain banks may not have established banking relationships in certain countries. So your funds end up being routed through an intermediary bank, which may charge your recipient an additional fee. These receiving fees are rarely disclosed upfront and can lead to friction between you and your recipient who essentially ends up paying to get paid.

Is There a Better Alternative?

Wire transfers certainly have their legacy place in the payments ecosystem, but there are now more efficient options available to those wishing to send payments. The best alternative is probably an online transfer.

Online transfers are where the old-fashioned concept of wiring money meets the modern technology of electronic funds transfer (EFT). They are usually completed within one business day, and in some cases can be instant. With an EFT, you send payments online using any device with secure internet access. No points for guessing why they’re also known as Internet Money Transfers. 

However, there are also some downsides to online transfers. While it might be possible to send a speedy and free EFT to someone in the same country as you, things aren’t quite as smooth when it comes to international payments. Occasionally, they can take much longer than advertised, and can be quite expensive.

Many providers – both banks and money transfer companies – can charge high fees to send an EFT. Some of the larger providers charge their fees as a percentage of the amount being sent. And, remember we discussed unfair exchange rates when we spoke about wire transfers? Well it’s pretty much the same scenario here. Banks still charge unfair FX rates on online transfers that are sent overseas, while other providers disguise their own fx cost in their fees as well.

Great. Now What?

So far, we’ve established that wire transfers suck (sorry), and that some providers simply overcharge you to send online transfers. So far, we’ve established that wire transfers suck (sorry), and that some providers simply overcharge you to send online transfers. But, thankfully, you CAN send stress-free business payments, and we just happen to know a great provider… us! (Isn’t that convenient?!)

Trusted Money Service Businesses (MSBs) like REMITR offer very low and favourable flat fees, no matter how much money you want to send – or where in the world you need to send it. The most reliable MSBs allow you to do business worldwide thanks to comprehensive global networks, and don’t charge a huge markup when it comes to currency conversion – definitely something to look out for.

Not only can you send and receive one day payments to almost anywhere, but they make it super easy for you to do so. Top tier MSBs allow you to put your payments on autodrive*, freeing up cash flow and time that you can  put towards growing your business.


*With REMITR, you can schedule and tailor your global mass payments specifically to your unique needs, so you can send effortlessly, on time, wherever you do business.