Commonly used for international money transfers, remittance transactions are a popular mode of payment. The global economy’s rise in cross-border business triggers a significant demand for remittance payments worldwide.
According to the Pew Research Center, in 2017, over $148 billion was sent in remittance from the U.S. to foreign countries. The needs for remittance are numerous, as are the methods for executing these transactions.
Since each situation is unique, it’s beneficial to understand the details of remittance payments.
What is the meaning of Remittance?
Payment remittance is a money exchange using a transfer. One party will send funds to another individual or entity, typically using electronic transfer or wire submission.
Transactions of this kind are often done internationally and can be completed almost immediately. Many people use remittance to send money back to their home country to provide financial support.
Remittances are also used to aid developing countries and make up a portion of the gross domestic product (GDP). While convenient and not necessarily done through business transactions, fees apply for remittance.
How does a payment remittance transaction work?
There are different ways a remittance payment can work. Circumstances for choosing a payment path include bank account access, payment preferences, desire for quick transactions, or the cost of the transaction. No matter the method, transactions take a basic route to complete the payment cycle.
When executing a remittance, funds of the remittance amount must be present in the sender’s bank account. After the transaction has been issued, the funds will be transmitted to the recipient’s bank for processing.
Once the money is at the bank, a foreign exchange rate and banking fee are applied. The funds are now available as local currency, minus the fees, for the recipient to access.
Can remittances be taxed?
Yes, though different countries have different rules. This is especially true for trades, though individuals are also subject to taxation, cited as a “non-business tax remittance” according to the OECD.
Since the remittance is a form of income, whether compensation or a gift, it must be noted on federal tax returns.
The percentage and stipulations will vary between nations, so whether you’re transferring money or accepting the transaction, both parties are responsible for documenting the exchange. It’s important to keep up with current tax laws for countries involved in potential remittances to file appropriately.
How to remit payment and send money abroad?
Most remittance transactions are sent by wire transfer. However, an electronic transfer is standard as well. There are many wire transfer options, though Western Union and the Society for Worldwide International Financial Telecommunication (SWIFT) are popular.
Remittance senders must ensure their bank works with the same transfer companies as the recipient’s bank.
On occasion, the recipient’s bank cannot directly receive a transfer. In this case, an intermediary bank will accept the incoming funds and then deliver them to the recipient’s bank and, of course, change a fee for their service. Because of this process, wire transfers take up to 5 business days.
An electronic funds transfer (EFT) is an alternative to a wire transfer. This process is much more efficient, often completed in just one business day.
EFTs are done through phone and tablet apps and internet sites through a computer network, eliminating the paperwork that a wire transfer or other payment methods may require.
Money transfer services may have lower rates and faster transfer times, depending on your chosen service and the countries involved in the transaction. According to the U.S. Federal Trade Commission, this is an option best used for a person you know, as scam artists commonly use this system.
Reasons you might send money overseas:
A person or business may want to remit money overseas for many reasons. A common need is to support family in one’s home country financially. In this global economy, individuals will work abroad for better work opportunities to provide for their families.
Money is transmitted to loved ones through remittance payments. Fees can be pretty high for these transactions.
Other reasons include hiring a contractor abroad. Because business today is often internationally focused, many companies will hire a professional in a foreign country to assist on a temporary or project basis, and the best way to compensate the contractor is through a remittance payment.
This case typically involves a company issuing a remittance to a person.
It can come to pass that an individual will want to pay an organization through international remittance. This scenario typically comes as a charitable donation or gift for a purpose, like a disaster fund. Remittance payments are often made to developing countries through financial aid.
Which payment methods can I use for making a remittance?
There are several ways to send a remittance payment. The most popular method is through a traditional bank transfer. This simple process requires two bank accounts.
The transfer may necessitate a third party or partner bank, in which case an additional fee will be applied to compensate for their involvement. Bank remittance typically comes in the form of ACH payments and wire transfers.
Checks and money orders are a standard method of remittance. The process is slow and involves many steps for banks to complete.
Currency exchange rates and fees will apply with this type of transaction. However, this is likely the cheapest money transfer outside direct cash remittance.
As mentioned above, money transfer services are a great way to pay for a remittance electronically. Funds are exchanged through linking accounts, which includes options for credit card or debit card payments.
Credit cards are an expensive but reliable remittance method. If desired, it is possible to go to the service provider in person with cash or a card. This is a suitable method for those without bank accounts.
Other options include blockchain and remittance apps. Paying through an app is convenient and likely the way of the future.
Security is an issue for electronic exchanges. However, the processing is instant and can be confirmed through text messages and other immediate confirmation methods.
The five most common B2B payment methods
While checks are antiquated for B2C transactions, they remain a common form of payment in B2B sales. Bills do have many bonuses, the first being a clear paper trail throughout the payment cycle, which, in some ways, is why companies like them so much.
However, there are downsides. Human error in the check sometimes requires a new statement to be cut. Checks that bounce create a system of consequences to be handled. The amount of people involved in the process increases overhead. Finally, clearing checks takes a long time.
An ACH is essentially the electronic version of writing a check. In this transaction, the payment is pulled from the buyer’s bank account and deposited into the seller’s account. This works well with scheduled recurring payments between businesses.
Authorization must be obtained from the buyer to establish this system. However, not all businesses are willing to provide their bank information. That said, this is a one-time setup, and in the future, the payment will happen with little to no effort from either party.
ACH can be set up with companies who do not want scheduled payments but regular purchases on an as-needed basis.
3. Credit Cards
Charging a card is a long-standing method of payment. This payment method is a reliable way to ensure payment can be accepted. However, credit cards are notorious for high fees on both sides of the transaction.
Credit cards also have spending limits, which can be a problem for high-volume business sales.
4. Wire transfer
This standard payment system has been around for a long time. Wire transfers involve money moved from one bank account to another through a “wire.”
While safe, as far as ensuring sufficient funds are available, wire transfers require many steps to set up and execute. Wire transfers do not typically have currency limits on transaction exchanges.
5. Electronic Funds Transfers
A growing payment method, electronic funds transfer (EFT), is a digital payment. The function is not different from an ACH or wire transfer – in fact, those two payment options are forms of an EFT.
EFT is a payment solution that efficiently transfers funds at a lower cost and a faster rate than wire or ACH transactions because it is entirely digital. As automation rises, payment solution providers favour EFT. According to stats, 59% of 2018 payments among three global regions were made electronically.