What is Remittance? Complete Guide to Remittance Today

The advent of remittance has made the world more financially connected than ever. Today, immigrants don't have to worry about sending money to their relatives in their home countries. The process of remittance has made it very easy to make seamless cross-border financial transactions. Despite its popularity, many still ask the basic question - What is Remittance?

In this guide, we’ll provide you with answers to the meaning of remittance, its types, how you can easily send a remittance, as well as other important aspects of the remittance process.  

Let’s dive in!  

What Is Remittance?

Before we talk about other aspects of the remittance process, let's answer the question “what Is a remittance?”. A remittance is any money that is transferred from one person to another. In the broad sense, any payment you make for products or services can be termed a remittance. However, nowadays most people use this term to describe an amount of money transferred by a person working in a foreign country to their relatives back home.,

The term remittance originated from the phrase “remit”, which basically means to send back. Generally, remittances can be used to make any kind of payment, including business purposes as well as other responsibilities like transfers sent to family and friends.  You can send remittances through a bank, wire transfer, mail, draft, electronic payment system, or even a cheque.

Key Remittance Terms Defined

Let’s take a look at some of the key remittance terms and what they mean:

a. Remittance address

A remittance address is an address an individual or business uses to receive payments. It may be the same as their general mailing address, or it could be a specific remittance address. For example, it could be a P.O. box or the recipient may use a bank or money transfer service, so it could be the address of those.

b. Remittance advice

Remittance advice is simply an evidence of payment document, generally sent to a business by one of their clients to notify them of the completion of invoice payment. Some businesses dedicate a section on their invoices for remittance advice only. This makes it easier for their customers to fill out the form and return it.

However, when you’re transferring money, it is not compulsory to send a remittance advice document with your payment. It is just seen as more of a courtesy and uses more often during customer-to-supplier transactions, instead of family remittances. Also, it is common for people to use remittance advice with some types of payment methods such as cheques.

c. Remittance float

The time it takes for remitted funds to be processed during the process of remittance payment is called remittance float. Essentially, it’s the time between when you send the remittance to when it gets to its destination country and is deposited directly into the receiver's bank account. The remittance ad

Examples of Remittances

To broaden your understanding of the word “remittance”, we've highlighted some of its examples below:

1. Sending money regularly to support your relatives back home while you work abroad. For instance, if you work abroad and send money to your family to pay rent, this money you transferred Internationally is called remittance.

2. Paying bills at home through cheques

3.  Paying invoices back in your home country for any product or services purchased while you’re away

4. Sending emergency cash onto a prepaid card so that your family and friends can use it in another country

5. Sending one-off money abroad to serve as a birthday or wedding gift.

6. Paying service providers who reside in another country on your family’s behalf.

7. International students making use of money transfer services to transfer cash between countries

Understanding Remittances

Although remittances can involve money transferred as payment for a specific bill, most remittances involve transferring cash to relatives. Generally, they are sent by expatriate workers to relatives residing in their home countries.

The most common method of remitting money is via an electronic payment system through a financial institution or any electronic money transfer service like Western Union. People who make use of these options are charged a specific fee for their transfer. Transfers done this way can take just ten minutes to get to the recipient’s bank.

Remittances play a major role in boosting the economy of developing countries. Also, they play a major role in providing disaster relief, often surpassing official development assistance (ODA). Lastly, they assist in raising the standard of living for individuals who reside in low-income countries and help battle global poverty.

Remittances also help in economic growth by encouraging people residing in the rural areas of developing countries to open active bank accounts for themselves.

What are the Types of Remittance?

Now that we provided an answer to the question “what Is remittance?”, let's examine the two major types of remittance, based on their transaction process.

1. Inward Remittance

Inward remittance is any money you receive from a foreign country. Essentially, when a person residing abroad transfers funds to your account, it becomes inward remittance for you. For instance, if a family in Canada receives money from a relative working abroad, the money received in Canada becomes inward remittance. Likewise, if the family transfers money to their relative abroad, the money becomes inward remittance for this relative.

2. Outward Remittance

Outward remittance is the transfer of cash out of the country. Essentially, when you send money overseas, it is called outward remittance. For example, if parents send money to the foreign account of their kids studying abroad, we can call this outward remittance for the parents.

Basically, outward remittance pertains to the countries that transfer the money internationally, while inward remittance pertains to the countries that receive the funds from abroad.

How to Send a Remittance

Generally, remittances are transferred via electronic payment services. You just have to go to a bank or credit union to initiate either a wire transfer or an Automated Clearing House Network (ACH) transfer. Note that while funds sent via ACH transfers can be reversed, it is impossible to reverse any money sent through wire transfers. So if you are initiating a wire transfer, be sure that you really want to send the money to the supposed recipient. During the remittance process, banks are likely to ask you to provide your intended recipient’s name, routing number, as well as their bank account number.

If you don’t want to go through the hassle of using banks or credit unions, you can opt for transfer apps or money transfer services. Transfer apps like PayPal and WorldRemit provide excellent transfer services. Examples of online money transfer services are SanaTransfer, Wise (formerly called TransferWise), Xe, and Western Union among others.

What is a Remittance Voucher?

A remittance voucher is a document that gives the Canada Revenue Agency (CRA) relevant information about a specific account and has to be attached to payments companies make to the CRA. To get a remittance voucher, you have to order one, either via the phone or online. It would take about 5 to 10 working days to get this slip through your mail. Note that this document cannot be photocopied or printed out. This is because they are specially made using magnetic ink, and banks will reject any adulterated copy.

What is Payroll Remittance?

After paying salaries or providing taxable benefits to your employees, you must deduct a specific amount of money from the remunerations and transfer it to the CRA. This is a specific amount you have to deduct and transfer to the CRA is called the payroll remittance. As an employer in Canada, the CRA has made it your duty to deduct some fees from the remunerations of every worker on your payroll and remit it to them. Alongside this deduction, you also have to send in your share of EI (Employee Insurance) premiums and CPP (Canada Pension Plan) contributions. All of these payments make up a payroll remittance.

Digital Remittance Explained

The process by which expatriates send money to their home country electronically is called digital remittance. Essentially, with this kind of remittance, you don’t need to transfer cash funds since everything is done electronically. Instead, you have to transfer via a digital wallet or bank account. There are different ways you can execute a digital remittance. You can do this using a mobile transfer app or just remit the money online. Here are some advantages of using digital remittance:

1.  It is faster than conventional remittance because most apps offer customers instant transfers.

2. Electronic payments offer customers lower exchange rates and transaction fees.

3. Free transfer tracking. When you send money electronically, the app will track the payment for you. So you will get notified once the recipient receives the money you sent.

4. You can make digital remittances at your convenience. You don’t need to visit any bank or stand in a queue to transfer or receive money.

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Meaning of Bank Remittance and How it Works

Any cash transfer from one person’s bank account to another person’s bank account is called a bank remittance. Usually, bank remittances are used as payment of bills and can be sent electronically, via wire transfer, check, draft, or mail.

To send a bank remittance to your recipient in another country, start by funding your account with the currency of the country you reside in. Thereafter, initiate a bank remittance and wait for a few days for the funds to get to the recipient.

When the remittance gets to the destination country, it will be received by your recipient’s bank. Your recipient will then have to contact their bank to get the current exchange rate. The funds will be converted using this exchange rate before it is finally delivered to your recipient.

Understanding Foreign remittance

The transfer of funds from people working abroad to their families or any other person in their home countries is called foreign remittance. Usually, these funds sent are the personal savings of foreign workers who left their country of origin in search of better opportunities in other countries. In most developing countries, foreign remittance contributes greatly to the rapid growth of their economy as estimated by their Gross Domestic Product (GDP).

Most times, people in rural areas use funds from foreign remittances are used to settle need-based expenses, like food, shelter, and clothing. Also, a major part of this money is invested in purchasing assets that can generate sustainable income and jobs.

Depending on the peculiar situation, foreign remittance tax could apply to inward or outward remittances.

Read Also - What is the Difference Between Swift Code and Routing Number?

What's the Difference between a Remittance and a Payment?

Although remittance can mean a payment sent for a bill, it is a term generally used to describe money sent abroad. When you hear people talking about remittances, they likely mean funds transferred overseas. For example, if you send money from Canada to a person living in Spain, this kind of transfer can be called remittance.

Understanding the financial impact of remittance in developing countries

Remittances contribute greatly to the reduction of the poverty rate in many developing countries. According to empirical evidence, financial inflows such as remittances help by boosting economic performance and serve as a major source of output shocks.

These countries are generally characterized by a limited supply of formal employment and an abundance of labour, so remittances help by initiating self-employment for the unemployed population. When there is an increase in the employment rate due to self-employment, the economy of the country thrives.

Generally, the total value of international remittance flow is huge, however, funds remitted individually aren’t huge. The total value of global remittances is expected to hit $5 trillion in 2030. More than ever, regular remittance transfers have become a lifeline to individual recipients in developing countries, as well as their communities at large.

The financial impact of remittances during the 2020 pandemic

The 2020 economic crisis caused by the COVID-19 pandemic had a major negative impact on foreign workers and their families in their home countries. In 2020, the flow of remittance dropped drastically compared to the previous pre-pandemic years. This is because the pandemic year marked an increase in the rate of unemployment among migrant workers, slowed down new migrations, and increased the return rate of migrants back to their home countries.

The pandemic delivered a huge blow to the economy of developing countries due to the drop in the inflow of remittances. Since remittance makes up the income and tax revenue of many of these countries, their economy struggled during this downtime.

As for developed countries, the pandemic rendered many of their foreign workers jobless. Most of these out-of-work foreigners were forced to move back to their home countries, thereby affecting the labour force in developed countries. For instance, the economy of Golf states such as UAE (that rely heavily on foreign workers in their labour markets) was adversely affected by these workers returning home. The bottom line is, the pandemic reduced remittances and these affected the economies of both developed and underdeveloped countries.

Payment Methods for making a Remittance

There are several channels through which you can make a remittance. Here is a review of the different payment methods for remitting funds:

1. Cheques or money order

It is easy and cheap to write a cheque and send it yourself as a remittance. However, this method is not secure, since there can be a mixup at any time. Another downside of this method is that it relies on the intended recipient having access to a functional bank account.

2. Money transfer services

Money transfer services are one of the fastest and safest ways to send your remittance. Services like WorldRemit provide you with a way to transfer money to many countries conveniently. Also, it will be very easy for the recipient to receive the funds. The recipient can decide to collect the money via cash pick-up or a bank transfer. Remittance platforms like SanaTransfer even offer users a mobile money option.

3. Banks or credit unions

If you have a bank account and your recipient also has a functional bank account, this may be a good remittance transfer option. As stated earlier, you just have to fund your account and then initiate a remittance transfer to your supposed recipient. It may take a few working days for your money to be processed and delivered to the recipient in another country.

4. Credit cards

Although most credit card service providers offer instant payments to your recipients, the cost of transactions may be higher than average. If you want your money delivered on time and are willing to pay an extra fee for it, this option can come in handy.

5. Prepaid cards

Prepaid debit cards permit you to fund the card with any amount of money so that your family can use it. Essentially, your family will have to use the prepaid card to pay for anything they want. Also, they can decide to withdraw the funds until it gets exhausted.

Money transfer services offer the best blend of convenience, affordability and speed of delivery among the 5 options above. Try out our money transfer services. Download the app for Android or iOS to get started today.

Is a Remittance the same as a Bank Transfer?

Remittance is entirely different from bank transfers. While remittances generally refer to transferring funds from one country to another, bank transfers are mostly done within a country. You can send remittances via bank transfers and several other kinds of payment methods such as wire transfers, mobile transfer apps, or money transfer services.

How Long Does a Remitted Payment Take?

Usually, the time it takes to process remittance payments differs depending on the kind of payment method you use and the service provider you choose. While digital remittances can be delivered in under 24 hours, wire transfers can take up to 3-5 business days.

How Can I send a Remittance?

It's no news that you can barely count the number of options for making remittances today. From transfer companies to banks, cheques and more, these institutions operate different transfer methods and have varying cost as a result.

The different methods have their advantages and disadvantages. For instance, sending money via cheque or cash could take days or weeks and credit card remittance services often come with additional fees and a charge for cash advance by the credit card company. Other factors to keep an eye out for include transfer fees, exchange rates, remittance float (the time it takes) and more.

Traditional financial institutions like MoneyGram and Western Union are very popular options because the sender and receiver do not require a bank account. However, their prices could be really high. This is why digital remittance is the best option.

SanaTransfer offers digital remittance options to help you avoid the high fees of traditional financial institutions and the delays of cheques and cash while offering faster delivery time. An extra benefit is found in our affordable exchange rates ensuring that you do not have to lose the bulk of the money as you try to support your family back home.

SanaTransfer offers easy, fast and secure payment services with better rates and faster payouts for international remittance. Sign up now to get started.

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Closing Thoughts

The detailed review above has given an adequate answer to the question - what is remittance - discussing some other important aspects of remittance, including how to send remittance. The bottom line is that remittance is an important booster of the economy of many developing countries. Therefore, government policies around the world should promote the flow of remittance by reducing the transaction cost charged during the remittance process.