How does international remittance operate step-by-step, such as sending money from the U.S. to Europe?
Cross-Border Payments
Asked by Question Bot10/Apr/20131 answer
1 Answer
F
Faisal Khan
Answered 10/Apr/2013
It depends on what sort of arrangement the remitting (remitter) agent has with the beneficiary agent or bank. The tie-up as it is called in the remittance world works on three methods:
Pre-Fund Model
The pre-fund model is usually the most common one and is typically used on a per corridor basis. A corridor is defined as for example: USA-France, or USA-Germany. In such the sending agent (this could be a money transfer business or a bank, etc.) keeps a certain amount of money with the beneficiary agent (or bank), so that payout can be made instantaneously (or nearly instant +/- few hours).
The pre-fund model allows the sending agent to quickly be able to settle the net amount with the beneficiary agent/bank, so that their customers can get the money quickly.
Most of the agent networks are essentially trying to compete with the likes of Western Union and/or Moneygram. Hence, the need to find a balance on speed (i.e. how fast will the money arrive in beneficiary's account).
As Sandeep Chandalia correctly points out, the top-up or replenishing of the account in the beneficiary's country is then done via Society for Worldwide Interbank Financial Telecommunication (SWIFT) (or SWIFT).
So fro example if 100 transactions are made by the Sending Agent Bank for lets say the US-Germany corridor and these transactions amount to say US$ 25,000 - then rather than sending 100 SWIFT transactions, the Sending Agent/Bank simply lets the Beneficiary Agent/Bank know about the details (breakdown) of the transactions (a matter that can best be described as trivial as emailing or passing a file) and then the Beneficiary Agent/Bank can simply deduct this money from the pre-funded money already with them.
Then later on that day, via SWIFT, the Sending Agent/Bank will send across the US$ 25,000 to the Beneficiary Bank/Agent, thereby replenishing their pre-funded account.
The money at the end of the day is transferred via SWIFT. In many countries for example the UK, the financial regulator, FSA does not allow net-off of remittance payments.
This means, if as a Sending Agent/Bank you have to send US$ 25,000 over to Germany and someone from Germany sends you US$ 25,000 you cannot net-off. The US$ 25,000 must channel through to the German Banking system and vice versa.
Post-Fund Model
The post-fund model is essentially the same as pre-fund (operationally), with the only difference being the credit risk. In this case, the Beneficiary Bank/Agent extends credit to the Sending Bank/Agent for all the remittances in a given remittance corridor.
Such relationships are usually bank-to-bank and very few examples exist of agent-bank (except perhaps say Western Union-and-Bank for smaller countries).
If the Sending Agent/Bank were to default on the remittance money (advanced) by the Beneficiary Bank/Agent, the Beneficiary Bank/Agent would have to absorb the loss on this one, pending recovery of dues.
Subsidy Model
The subsidy model is essentially the pre-fund model, but with a slight difference on the income for both the Sending and Receiving Agent/Bank.
The whole model of a subsidy model is known as the free-send model, i.e. where neither the sender nor the receiver have to pay any money for the remittance and the exchange rate offered at the beneficiary Bank/Agent is as close to the Official Bank rate as possible.
Countries that rely on foreign exchange remittances, such as Pakistan, The Philippines, India, Bangladesh etc. have recently started exploring this option.
For every remittance brought in to the country, on the free-send model, the government pays a subsidy to the Beneficiary Bank/Agent. Typically between US$ 5 to UD$ 8. This subsidy is then split between the Sending Bank/Agent and the Receiving Bank/Agent. Most of the developing world countries are now seriously looking at the free-send model to see how they can incorporate the same into their economies, without impacting the existing remittances.
For further reading you may want to look at this Question as well: What exactly happens when money is sent via Western Union versus a company like XOOM? What is the difference?
- Pre-fund model
- Post-fund model
- Subsidy Model
Pre-Fund Model
The pre-fund model is usually the most common one and is typically used on a per corridor basis. A corridor is defined as for example: USA-France, or USA-Germany. In such the sending agent (this could be a money transfer business or a bank, etc.) keeps a certain amount of money with the beneficiary agent (or bank), so that payout can be made instantaneously (or nearly instant +/- few hours).
The pre-fund model allows the sending agent to quickly be able to settle the net amount with the beneficiary agent/bank, so that their customers can get the money quickly.
Most of the agent networks are essentially trying to compete with the likes of Western Union and/or Moneygram. Hence, the need to find a balance on speed (i.e. how fast will the money arrive in beneficiary's account).
As Sandeep Chandalia correctly points out, the top-up or replenishing of the account in the beneficiary's country is then done via Society for Worldwide Interbank Financial Telecommunication (SWIFT) (or SWIFT).
So fro example if 100 transactions are made by the Sending Agent Bank for lets say the US-Germany corridor and these transactions amount to say US$ 25,000 - then rather than sending 100 SWIFT transactions, the Sending Agent/Bank simply lets the Beneficiary Agent/Bank know about the details (breakdown) of the transactions (a matter that can best be described as trivial as emailing or passing a file) and then the Beneficiary Agent/Bank can simply deduct this money from the pre-funded money already with them.
Then later on that day, via SWIFT, the Sending Agent/Bank will send across the US$ 25,000 to the Beneficiary Bank/Agent, thereby replenishing their pre-funded account.
The money at the end of the day is transferred via SWIFT. In many countries for example the UK, the financial regulator, FSA does not allow net-off of remittance payments.
This means, if as a Sending Agent/Bank you have to send US$ 25,000 over to Germany and someone from Germany sends you US$ 25,000 you cannot net-off. The US$ 25,000 must channel through to the German Banking system and vice versa.
Post-Fund Model
The post-fund model is essentially the same as pre-fund (operationally), with the only difference being the credit risk. In this case, the Beneficiary Bank/Agent extends credit to the Sending Bank/Agent for all the remittances in a given remittance corridor.
Such relationships are usually bank-to-bank and very few examples exist of agent-bank (except perhaps say Western Union-and-Bank for smaller countries).
If the Sending Agent/Bank were to default on the remittance money (advanced) by the Beneficiary Bank/Agent, the Beneficiary Bank/Agent would have to absorb the loss on this one, pending recovery of dues.
Subsidy Model
The subsidy model is essentially the pre-fund model, but with a slight difference on the income for both the Sending and Receiving Agent/Bank.
The whole model of a subsidy model is known as the free-send model, i.e. where neither the sender nor the receiver have to pay any money for the remittance and the exchange rate offered at the beneficiary Bank/Agent is as close to the Official Bank rate as possible.
Countries that rely on foreign exchange remittances, such as Pakistan, The Philippines, India, Bangladesh etc. have recently started exploring this option.
For every remittance brought in to the country, on the free-send model, the government pays a subsidy to the Beneficiary Bank/Agent. Typically between US$ 5 to UD$ 8. This subsidy is then split between the Sending Bank/Agent and the Receiving Bank/Agent. Most of the developing world countries are now seriously looking at the free-send model to see how they can incorporate the same into their economies, without impacting the existing remittances.
For further reading you may want to look at this Question as well: What exactly happens when money is sent via Western Union versus a company like XOOM? What is the difference?