El Salvador is in the international spot light after introducing Bitcoin as legal tender a few weeks ago. One of the official reasons for this step was the reduction of remittance costs.
The president of El Salvador puts it that way:
Our People pay $400 MILLION a year in commissions on remittances.
That is a very powerful story: poor people vs. greedy banks.
But is it actually true?
Let’s try to find out.
Unfortunately, there is no explanation how the 400 million were calculated. The most likely way is the following:
- The personal remittances to El Salvador are given as 5.936 billion USD in 2020 by the World Bank.
- Sending remittances costs an average of 6.38 percent 21Q1 globally, according to the World Bank. This number is for USD 200 equivalents.
- Multiplying and rounding these numbers leads to the mentioned 400 million USD.
Note that the precision of the numbers is misleading. These are not derived from exact science but rather based on rough estimates. And, as we see later, these estimates are far too high.
The following implications of the story look strange:
- The story is about the poor. El Salvador is not a perfectly equal country. Should not be a large portion of the 6 billion target the rich?
- The 400 million are 8% of Western Unions revenue. Is such a small country really responsible for such a large share? Would not that imply that other countries are able to organise remittances much better?
- The $200 are below the minimum wages in El Salvador. Since nobody leaves the country for less, there must be money left on the table.
- The $200 and the 6.38% are averages. Since not all transfers are the same this implies that there must be people who send less and pay even more. Who would do that?
- There are not enough Salvadorian households in the US to send the 6 billion in $200 increments every month. So either one household is sending to multiple parties or they are sending with a higher frequency than monthly. Who would do that given that larger transfers are cheaper?
While these five points are probably not enough to dismiss the story, they should ring some alarm bells.
In the following I will try to estimate the size of the remittance market in El Salvador.
I argued in a previous article that the world average is a bad measure of remittance fees, since it significantly overestimates the amounts paid.
I think it is fair to say, everyone in the remittance industry knows about that. The World Bank figures are not weighted. — Faisal Khan
The costs are even lower in the US to El Salvador corridor. Since both countries share the same currency, no foreign exchange needs to happen. There is no FX risk and no FX spread. Just transfers of US Dollar across borders. Consequently, El Salvador has one of the lowest remittance fees in Latin America.
Unfortunately, nobody knows the exact amount people are paying:
- An upper bound are the 3% average given by the World Bank for a $200 transfer.
- Certain digital transfers are even free of charge. Moneygram for instance offers zero-fee transfers via App since 19Q2.
- Another value can be found in an older field study where people relied on larger transfers to pay just 2.2% on average.
There is no reason to believe that the average fee is higher these days, especially as the world-bank estimates dropped significantly in the last decade and is now down to 1.6% for $500 transfers.
Finally, there is the plane option everybody seem to miss. A flight from Miami, where a large Salvadorian community lives, to San Salvador takes less than three hours and costs less than $200 roundtrip. Given that it is legal to carry up to $10,000 without any restrictions, taking the money to El Salvador on a weekend trip can therefore be done for as little as 2%.
In summary, that Salvadorians pay around 2% for money transfers is a much more realistic assumptions than simply taking an inflated world-average.
The story assumes that all of the remittance money is send in small chunks through banks and money transfer services. But that is highly unrealistic as people have options. So how much goes through these channels?
A socioeconomic study from 2013 made the following points about remittances in El Salvador:
- only 18% of the households receive them
- on average they got $195 per month
With 1.5M households in El Salvador today this leads to $630 million — or barely a tenth of the official reported volume.
However, the study is a bit outdated as the official volume of remittances increased by 50% between 2013 and 2020. And the fraction of receiving households might have increased as well.
By correcting for these chances we can estimate that roughly one billion USD flows in small chunks through official remittance channels per year. The remaining money is either transferred in cash or through larger amounts.
A similar calculation derived from a Canadian study leads to 1.2 billion USD. That estimate is slightly higher probably due to the larger distance between El Salvador and Canada.
With only one billion flowing in small chunks through official channels and a two percent fee, only $20 million in remittance fees have to be paid by the poor. This is 20x less than what was previously claimed.
Thus the remittance argument - as made by the president of El Salvador - looks like a political cover for introducing Bitcoins as legal tender.
The future looks bleak if such moves are required to convince a majority of the benefits of cryptocurrencies.