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Remittances to Mexico
By
Dean Owens
Many immigrants remit a portion of their earnings to family members
that remain in their countries of origin. Remittances are common among
recent immigrants and tend to decrease after the first or second
generation (Meyers 1998). The dramatic growth of global
labor markets and technological innovations have make remittances
an increasingly important international economic phenomenon. A variety of methods are employed for remittance
including checks, money orders, electronic money transfers, couriers and
self-carry.
The greatest flow of remittances from the United
States goes to Mexico.
The annual amount remitted is immense with estimates ranging from $4 to
6$ billion annually (1996-97 figures). This makes remittances the third
largest source of foreign revenue for Mexico
(Welna 1998). In fact, remittances may
represent as much as 2% of the Mexican economy (Mexico’s
GDP is $250 billion). The principal destinations of remittance to Mexico
are the states of Puebla,
Veracruz, Guanajuanto, Nuevo Leon,
Coahuila and Tamaulipas
(CorpMex 1998a).
The most common methods of remittance among Mexican immigrants in the United
States are money orders and electronic
money transfers (Meyers 1998). Money orders represent the most popular
service. However, electronic transfers generate the most revenue due to
their substantially higher cost. Three companies control the market for
money orders: the United States Postal Service, American Express, and
Travelers Express (Meyers 1998). Western Union and
MoneyGram dominate the market of electronic
money transfers. Conservative estimates of their combined market share
are 90% (Welna 1998) and some estimates are as
high as 97% (Ferriss 1998; Meyers 1998). The
Data Service Corporation, who owned MoneyGram,
purchased Western Union, but the merger was
blocked by federal law. Data Service retained Western Union,
which had the larger market share; however, the company continues to
perform the electronic services for both companies.
Regardless of which service used to remit, some significant problems
are presented to consumers. Additionally, there has been little consumer
protection created through market competition since only a few major
corporations dominate the industry. This is particularly evident with
respect to electronic money transfers.
Electronic Transfers
Electronic money transfers are attractive to consumers remitting to Mexico
because they offer an extremely fast way to transfer money. However,
electronic transfers present a major consumer pitfall. They employ
confusing transfer agreements and the consumer ends up losing more money
in the transfer than anticipated. In fact, electronic transferring
companies often retain as much as 1/5 of the money remitted by their
service. These companies charge a flat rate for the service, usually
about 10% of the amount transferred (which is not unusual even when
transferring within the United States).
However, these companies have lucrative deals with companies in Mexico
who serve as their agents (Western Union with
Electra and MoneyGram with Banamex).
This allows them to set their own exchange rates, which run about 10%
below the interbank rate (Meyers 1998). The net
result can be a cost of up to 20% of the amount transferred. An example
to this process is given by Ferriss (1998).
For example, a Mexican who sent $500 to Mexico
via Western Union last October (1997) was told the
company’s commission would be $34. But Western Union
actually charged more than double that – a total of $95.82 –
because it converted dollars to pesos at only 7.30 pesos for each dollar.
That same day, the Wall Street Journal quoted a prevailing rate of
8.33 pesos for each dollar.
The United States Post Office entered the electronic transfer business
in 1996. In that year the corporation implemented an electronic money
transfer service called "Dinero Seguro." The service promised an improvement to
the security problems and slow delivery time of money orders (USPS 1997;
USPS 1996). The service transferred money to any of 1,300 Bancomer branches throughout Mexico
in fifteen minutes (USPS 1997a). Dinero Seguro has offered slightly lower transfer fees and
slightly higher exchange rates than its competitors. However, the service
has not provided substantially lower rates and its availability remains
limited.
Several pending lawsuits, involving the two leading electronic money
transfer companies, may change the way electronic money transfer
companies do business. One suit was filed in US district court in Chicago
against Western Union. Two suits were filed in US
District Court in Los Angeles
last November against Western Union and MoneyGram Payment Systems, Inc. Also named are the
National Bank of Mexico
and the Elektra department store chain (partner of Western
Union). The suits apply a California
consumer protection law to challenge the practices of advertising of one
fee for transferring money while not disclosing the cost of the exchange
rates (CorpMex 1998b; Ferriss
1998).
There has also been some congressional concern for the confusing
transfer agreements, spearheaded by Luis Gutierrez who represents Chicago’s
fourth district. He introduced legislation last year to require greater
disclosure by transferring companies. He and nine other representatives
have reintroduced the bill (HR 382) in January of this year and are
currently seeking support from other representatives. The Wire
Transfer Fairness and Disclosure Act of 1999 would require financial
institutions that initiate money transfers to disclose the exchange rate
of the foreign agency involved in the transfer, the rate of a major
financial institution of that country, and all commissions and fees. The
bill also requires that the consumer’s right to have this
information be displayed inside and outside the place of business as well
as disclosure in advertising.
Money Orders
Money orders are far cheaper than electronic transfer and thus provide
a far more cost-effective means of remittance. The major drawback is that
they take much longer than electronic transfers, getting to the recipient
in about three weeks [and sometimes twice as long](Welna 1998). Another problem exists for the recipient
of such transfers. For those without accounts, Mexican banks charge fees
for cashing checks and money orders. Many recipients simply do not
satisfy this requirement (Meyers 1998).
Theft continues to be a major problem with remitting by money order.
With so much money being transferred, criminals have learned that
stealing money orders is a low-risk business. A major reason is that it
takes such a long time for the money order to reach the recipient. The
time period can be several weeks, and by the time the money orders are
determined missing it has already been cashed for some time, severely
limiting any investigation. This created a significant problem for the
United States Postal Service in 1997. In November of that year, several
major Mexican exchange houses refused acceptance of all postal money
orders. This was in response to the increasing demands by the United
States Postal Service to reimburse for these fraudulent transactions. The
Postal Service by itself paid an estimated $18 million in fraudulently
cashed money orders over 1996 and 1997 (Ferriss
1998).
If a money order has been stolen, there can be a long process for
recouping the loss. For postal money orders, there is a form that must be
filed. If the money order has not been cashed, the payment is stopped and
a new one is issued. But, if the money order has already been cashed,
there is a verification process and another form to be filed. It can take
an appreciable time after filing of a claim to recover for a stolen money
order. The purchaser simply has to bear the loss until the claim is
resolved.
In response to its own losses and consumer concerns, the US Postal
Service has shown an increased interest in improving money-transferring
systems. One such effort, by the United States Postal Service, was to
initiate a cooperative effort with the Mexican Postal Service (CorpMex 1998a). A result of this cooperative effort,
a new service is being implemented to increase the speed and security of
the current money order service. It employs updated technology at the
United States Postal Service computer center in St.
Louis as well as the Mexican Postal Service in Mexico
City. A remitter in the United
States will purchase the money order
and a voucher is sent to St. Louis.
The money order can then be transferred electronically from St.
Louis to Mexico City.
A Mexican postal carrier will then deliver a notice to the recipient who
can pick up the money order. The exchange rate is calculated by the
current rate posted by the National Bank. The entire transfer still takes
up to a week; however, security is much greater than sending the hard
copies. The cost for the service is $7.50 for a transfer up to $700,
which is substantially better than the fees charged by electronic transferring
companies (Levander and Sandoval 1998). The
service has not been fully implemented nationwide, but it is hopeful that
it will be in 1999.
Conclusion Consumer Protection in money
transfers to Mexico
is severely lacking. Electronic transferring companies take advantage of
confusing transfer agreements and often retain as much as 1/5 of the
intended transfer. There is a growing governmental interest in these
issues. The Mexican Government and the Democratic Revolution Party (PDR)
in particular has demonstrated concern about problems surrounding
remittances. In the US
there is advocacy in Washington
by Representative Luis Gutierrez. The most promising avenue for change,
however, are the pending lawsuits. A favorable
resolution of these claims could present a new standard of disclosure for
electronic transfers that presents consumers
with the information necessary to make wise business decisions.
Money orders are a much more cost-effective means of transfer.
However, they are much slower and have been much more vulnerable to
theft. This should show dramatic improvement in the near future due to
the increased security, cooperative, and technological efforts of the
United States Postal Service and Mexican Postal Service.
REFERENCES
CorpMex 1998b Money Transfer Companies Sued
in Californian Courts. Corporate Mexico.
January 27, 1998.
1998 WL 8430828.
CorpMex 1998a Mexico-U.S. System to Reduce
cost of Money Transfers Slated to Begin in March. Corporate Mexico.
January 5, 1998. 1998
WL 8430828.
Ferriss, Susan 1998 Immigrants Send Billions
to Relatives but say Much is Lost to Thieves and Expensive Wiring
Charges. Cox News Service.
H.R. 382
1999 Wire Transfer Fairness and Disclosure Act of 1999. H.R. 382. http://thomas.loc.gov/
Levander, Michelle and Ricardo Sandoval 1998
Postal Services in Both Nations to try Sager Electronic Method. San
Jose Mercury News. Posted Saturday, April 11, 1998. http://www2.mercurycenter.com/world/mexico_story2.shtml
Meyers, Deborah Waller 1998 Migrant Remittances to Latin
America: Reviewing the Literature. Inter-American
Dialogue and The Tomas Rivera Policy Institute. http://www.iadialog.org/meyers.html
United States
Postal Service 1997b Dinero Seguro
Easy, Fast and Affordable Plus a Free Three-Minute Call. Weekly News, July 21, 1997.
United States
Postal Service 1996 USPS Tests Money Transfer. Postal News: Memo to Mailers, highlights.
United States
Postal Service 1997a Creating Unique Customer Value in a Changing
Communications World. Remarks by Postmaster General Marvin Runyon.
International Postal Summit, Tokyo,
Japan. May 12, 1997.
Welna, David 1998 All Things Considered.
Friday, December 11, 1998.
1998 WL 36471519.
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