What Is Remittance: Definition, Types, and Components

ACTIVELY SHARE — You really need to know what remittance is , you could be one of the many people who need this service in the future. So that you don’t wonder what remittance is ? Read the full explanation.

In summary, remittance or remittance is a service for sending or transferring funds across countries through financial institutions, whether bank or non-bankRemittance services can be used by bank customers and non-bank customers who provide remittance services.

In general, remittances are used by workers abroad to send money to relatives at home. Remittances are also widely used by local people to send some money to their children or relatives who are studying abroad. So it is important for us to know what remittance is .

The presence of remittance facilitates cross-border fund transfer transactions, of course the currencies of the sender and recipient of funds are different. In addition to providing convenience in terms of cross-border money transfer transactions, remittances also have an influence on the economic development of a country.

What Is Remittance Definition?

Remittance is a transfer service provided by banks to send money in foreign currency (foreign currency) abroad.

Not only as a means of sending money, remittance is also the main source of forex trading in developing countries.

There are all kinds of reasons why someone would do this transfer service.

Some of them are Indonesian Migrant Workers (TKI) who send money to their families, students waiting for a monthly snack, or to send donations to help victims of natural disasters.

Times have changed, banking technology has developed and made it easier for people to send money in foreign currency.

Remittances cannot be done as simply as making transfers between banks within the country. Of course, because the banking system in Indonesia applies a different system for this service.

For example, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system.

Meanwhile, most banks overseas use an International Bank Account Number (IBAN). So, there will be some adjustments in the transfer process.

Several Money Transfer Systems in Indonesia

Before knowing more about remittance. It is better if you know in advance some of the ways to send money in Indonesia.

Although not as easy as remittance , some of these methods are still in demand today. The following are examples:

Real Time Gross Settlement (RTGS)This type of money transfer only applies to Rupiah. Bank Indonesia (BI) named the system BI-RTGS. The Real Time Gross Settlement delivery system has advantages in efficiency, speed and security.

Like money transfers in general, BI-RTGS is conducted between the individuals concerned and is usually used for remittances in large amounts.

National Clearing System (SKN)The Bank Indonesia National Clearing System (SKNBI) is the clearing system (debit and credit clearing) adopted by BI and its final settlement will be carried out nationally.

The clearing process itself is not fast and can take several hours and usually the system will charge a fee of only IDR 2,900.

SWIFTAs previously explained, the SWIFT method is a system used in remittance transfers Although it is rare, there are still some countries that also implement this SWIFT transaction system.

Sending money to banks adhering to the SWIFT system will be much easier, when compared to banks adhering to other systems. The sender only needs to provide the name and bank code used along with the name and bank code to be addressed.

The sender can then immediately state the nominal amount to be transferred. When a remittance transfer is made, the bank will usually select several preset codes . This code is chosen to give a message to the recipient bank regarding the amount transferred.

Every SWIFT number can be used worldwide. Because SWIFT has an Identifier Business Entity (BEI) which is able to recognize all SWIFT codes around the world.

Types of Remittance

If differentiated based on the delivery destination, remittances are divided into two types, namely:

1. Outgoing / Outward Remittance

Outgoing / outward remittance is a service to transfer or send money from within to overseas.

Money transfers are made in Rupiah currency and received in foreign currency. Usually this type of transaction is used by parents whose children go to school and live abroad.

Not only benefits customers, outgoing / outward remittances actually also benefit the bank.

Given the sender will be charged each time using this service.

It is not imagined, if many of the banks are competing. Various kinds of offers are also given to customers and non-customers. Starting from speed, competitive exchange rates, to lower costs.

2. Incoming Remittance

Contrary to outgoing / outward , incoming remittance is a transfer service from abroad and makes people who are in the country act as recipients.

This transaction is usually carried out from foreign currency to Rupiah. Migrant workers usually use this service to send money to their families.

Broadly speaking, there are several parties that benefit from this transaction, from the recipient to the country. Incoming remittance is a source of income for the state.

The higher the incoming remittances, the healthier the country’s economy will be.

This service is also one of the largest sources of income for a country. Especially developing countries like Indonesia.

How Are Remittances Developed ?

The turning point for the increasing role of remittance occurred in the 2000s.

Many developing countries are supported by their economies from the large amount of remittances they receive. Nepal and Maldives for example, their remittance income reaches one third of GDP.

You could say, the entry of remittances will be a big contributor to the country’s development.

Especially in developing countries, which supply a lot of labor.

In 2014, it was recorded that USD 583 billion was obtained in transactions between countries.

Of this amount, 436 billion USD of which went to developing countries around the world.

China and India are ranked number one in the category of largest remittance income . In 2013 alone, for example, China received 69.97 billion USD. Meanwhile, India received 49-59 billion USD.

Not only used for personal gain. Remittances are also commonly used to provide assistance to a country.

Usually this kind of motive arises when a country is hit by a disaster and it has a negative impact on their economy.

Thus, these countries need financial assistance from other countries.

Remittance component

Unlike ordinary transfers that only involve one individual to another. Remittance involves more than one party.

The following are some of the components that are usually included in remittance services :

  • Beneficiary is the party whose name is listed on the service application form and is entitled to receive money from the sender (must be in accordance with the instructions from the sender).
  • Beneficiary Bank is a bank that receives money from other banks. The bank has been determined and appointed by the sender to forward it to the receiving party.
  • Remitting Bank is a bank that has a remittance service This bank is responsible for sending money directly to other banks based on instructions from the sender.
  • Correspondent Bank is a bank that is used as an intermediary or liaison between Remitting and Beneficiary Bank .

Not Always Good, Remittance Can Also Be Abused

As already explained, remittance services are usually used for various transactions.

Starting from migrant workers, parents, to parties who wish to provide assistance in the form of money to other countries.

The sender only needs to know the SWIFT code from the bank that will be used to make transactions.

They can even make these transactions with banks that do not have a remittance connection .

The process is a bit difficult and somewhat complicated, making remittance transactions difficult to track. Because funds are transferred from one bank to another. Sometimes it can even be more than two banks.

This becomes a loophole, where this service can be misused. Such as funding terrorism, money laundry , or crimes committed between countries.

Trending in Banking and Finance

Leave a Comment