If you are a global company, or one that does business with global companies, then “remittance” is a term you should know.
The term ‘remittance’ derives from the word ‘remit’, which means ‘to send back’. A remittance is the transfer of money from one account to another, generally for a bill or invoice for services rendered. It is most commonly used when discussing funds sent across international lines and currencies.
With the growth of both online and global enterprises, and the number of people who now live and outside of their home countries (and send money back), more remittances than ever are being sent, both for personal and business reasons.
The process of sending remittances can become complex, which is why a clear understanding of the process is important if you are doing business overseas. Here’s an example of how sending a remittance works:
You are in Canada, paying for services rendered by a company based in France. They have sent you an invoice for the services and now you must remit payment. You choose to transfer money from your bank account to the vendor’s bank in France. To successfully complete this:
- Your bank account must have the right amount of local currency
- You must confirm the receiving bank will accept a remittance (not all banks do)
- Using bank to bank transfer often means using the SWIFT network (SWIFT is an acronym for Society for Worldwide Interbank Financial Telecommunication and is a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions)
- The sending bank alerts the recipient’s bank about the impending transfer
- Funds are sent to the central bank for exchange to the local currency
- Upon funds transfer, settlement occurs with both banks to adjust for the exchange rate (often the retail exchange rate)
- The recipient is notified that funds are available in the local currency
Ways to send a remittance
If you need to pay a remittance, there are several different methods for doing so, including:
- Wire transfer
- Cash pick up
- Mobile money
- Electronic payment
- Bank draft
- Postal service
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 SWIFT. These networks act as a messenger between the sending and receiving banks.
Wire transfers can 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.
Electronic payments are where the concept of wiring money meets the modern technology of electronic funds transfer (EFT). A typical EFT is 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. This payment type is also referred to as Internet Money Transfers.
However, 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 – charge high fees to send an EFT. Some of the larger providers charge their fees as a percentage of the amount being sent. And, some banks still charge high exchange rates on online transfers that are sent overseas, while other providers disguise their own exchange cost inside their fees.
However you choose to manage your remittances, the key is understanding the process and the financial implications. Research the fees, the applied exchange rates and the timing that each payment channel offers, and select the one that is more beneficial to your business and to maintaining your customer relationships.
Terms to know when you’re working with remittance
ABA Number: Also known as a bank routing number, an ABA number is a nine-digit code used to identify banks in the USA.
ACH: Automated Clearing House payments are made through the USA’s ACH network. It’s a network that provides bank transfers between bank accounts in the USA.
AML: Anti-Money Laundering processes are used by financial institutions to detect and prevent illegal money laundering activities used by criminals to disguise money they have gained illegally as lawful income.
Cash advance: A short-term loan offered by banks and other financial institutions. Cash advances often come with high fees and interest rates.
Cashier’s check: A check written and guaranteed by a financial institution, usually a bank. Cashier’s checks are popularly used to make large payments where extra security and protection may be required as they guarantee that the funds will be available when the check is cashed.
Clearing: Clearing refers to the processes and procedures that take place between requesting to wire money and the point when the transaction is complete.
Electronic wallet: Sometimes referred to as a digital wallet, mobile wallet, or eWallet, this is a virtual system that stores payment cards or money on a mobile device. An electronic wallet can be used to make payments to participating merchants quickly and easily using a mobile device.
Exchange rate: The amount that one currency is worth when compared to another currency.
FCA: The United Kingdom’s financial regulatory body. The FCA (Financial Conduct Authority) is an independent body that protects consumers and promotes healthy competition between the UK’s financial service providers.
Forex: Foreign Exchange Market is an electronic network of banks, brokers, institutions and traders exchanging foreign currencies.
IBAN: International Bank Account Number, an internationally recognized way for banks around the world to identify an individual’s country, bank, and account when money is being sent overseas. An IBAN comprises up to 34 letters and numbers and can usually be found on your online banking or by contacting your bank.
KYC: A Know Your Customer process is carried out by financial companies to verify the identity of their customers to prevent their services being used for money laundering and other illegal activities.
Limit: Most banks and money transfer services have rules in place that limit the amount of money that you can send in a single transfer or in a certain time period. Limits are usually in place to comply with the laws and regulations of the countries you are sending money from and to.
Local agent: A small, local business that has partnered with a money transfer provider like WorldRemit to offer international money transfer services in-store.
Money order: A paper document that can be used as a form of guaranteed payment. A money order can be bought or cashed at a variety of locations including banks, post offices, credit unions and some retail stores.
Proof of deposit: A verification or an official confirmation proving that funds were credited to a bank account or received by a recipient.
Peer to Peer service: A platform, like a website or money transfer app, that allows individuals to send money online to each other directly without a bank or foreign exchange provider being involved.
Real-time payments: electronic payments that can be made 24/7 and are available to the payee immediately, or within seconds.
Recall: Trying to recall money is trying to reverse a completed transaction back to the sender. Funds have to be retrieved back via the same channels. This process is lengthy and not always guaranteed.
Recipient: The individual or business to whom the money is being sent.
Sender: The individual or business who is sending the money.
Wire transfer: An electronic money transfer sent through a network of banks and money transfer providers around the world.