How do formal remittance channels and informal cash couriers differ, and why do people use both for sending money abroad?
Executive summary
Formal remittance channels—banks, licensed money transfer operators (MTOs), postal services and regulated mobile wallets—operate inside the banking and regulatory system and offer documented, trackable transfers but typically charge higher fees and require identification and account access [1] [2]. Informal cash couriers and informal value transfer systems (IVTS)—including hawala, hundis, friends or couriers who carry cash—operate outside or alongside formal systems, are often faster, cheaper, and accessible where banking is weak, but lack paperwork and can raise regulatory and money‑laundering concerns [3] [4].
1. What makes a channel “formal” versus “informal”
Formal channels are those run by officially registered or licensed entities—banks, regulated MTOs like Western Union and MoneyGram, post offices, credit unions, and newer digital/mobile wallets—that record transactions and report them to authorities, making them part of official balance‑of‑payments statistics [1] [5] [6]. Informal channels comprise everything else: personal couriers, family or friends carrying cash, merchant or trader networks, and IVTS such as hawala that settle obligations through trust and reciprocal ledgers rather than immediate cross‑border bank settlement, and therefore often go unrecorded in official statistics [3] [7] [5].
2. Cost, speed and access: the practical tradeoffs
Across multiple studies and institutional reviews, formal transfers are described as the least risky option but also generally more expensive—fees and foreign‑exchange margins plus compliance costs often push formal prices higher—whereas informal methods are frequently cheaper and can deliver funds quickly to cash‑only recipients or into countries with limited banking infrastructure [7] [1] [2]. Digital formal services and mobile money have narrowed this gap in some corridors—pandemic‑era shifts and mobile networks have expanded cheaper digital options—but important frictions remain, especially where recipients lack bank accounts [8] [4].
3. Why senders and recipients still use both channels
Users choose channels based on a mix of cost, speed, convenience, trust and local context: migrants favor formal MTOs or bank transfers when they value traceability, larger amounts, or financial integration; they rely on informal couriers, IVTS or personal delivery when fees, absence of recipient bank accounts, cultural trust networks, or restricted corridors make formal routes unattractive or unavailable [9] [10] [4]. Empirical work finds heterogeneity by corridor—informal shares can be small in some Latin American links and dominant in parts of sub‑Saharan Africa—and by sender characteristics such as financial literacy and regular use of internet banking [7] [10] [11].
4. The regulatory and policy tensions underneath the choices
Policymakers and regulators seek to expand formalization to increase transparency, reduce illicit finance risks, and bring migrants into the formal financial system, yet compliance costs, anti‑money‑laundering rules and correspondent‑banking frictions raise prices and can push people back to informal methods, meaning policy goals can collide with reality [2] [4]. International agencies warn that a substantial volume of flows remains unrecorded—sometimes estimated as large relative to recorded remittances—so measurement biases and enforcement choices influence both what regulators see and what senders use [4] [12].
5. Competing narratives and hidden incentives
Industry providers and fintech advocates emphasize safety, traceability and the long‑term benefits of formalization and often promote digital platforms as a fix—an agenda that can reflect commercial interests in expanding market share [2] [13]. Conversely, some research and advocacy highlight affordability and cultural embeddedness of informal systems, arguing that simply tightening rules without lowering costs or improving access will leave vulnerable users worse off and sustain informal networks [1] [9]. Both perspectives are valid: formalization reduces certain risks but only if it addresses the core drivers—cost, convenience and access—that keep people using informal couriers and IVTS [7] [8].