Remittances are not just money sent home; they represent a lifeline that helps families and communities build a better future. 

Established in 2008, the Single Euro Payments Area (SEPA) is an initiative intended to make payments and money transfers easier and more convenient for individuals and businesses across Europe. For the Western Balkans 6 (WB6)[1], money transfers are directly associated with remittances, a major source of income for many families, and a significant influence on economic growth.

This explainer looks into the impact of SEPA on remittance inflows to the WB6, focusing on how SEPA membership will transform the remittance process, particularly by reducing transaction costs.  

SEPA was created to allow people across Europe to make and receive non-cash payments under the same conditions and rights, regardless of their location in the area. The currency used for SEPA payments is Euro (€). Currently, SEPA has 36 members (27 EU members, 3 members from the European Economic Area (EEA) and 6 members are non-EEA countries). The European Commission is in charge of shaping the legal and technical framework of SEPA. Whereas the European Payments Council (EPC) harmonises payments across Europe, manages SEPA’s payment schemes, sets the criteria for aspiring applicant countries, and assesses whether the criteria have been fulfilled. It consults with the European Commission before deciding on membership for new countries.

SEPA has made it easier and faster to transfer money across Europe; with SEPA, the most it can take for the receiver to receive the money is two business days with SEPA Credit Transfer and SEPA Direct Debit Core. Still, there are also faster methods, such as SEPA Instant Credit Transfer, which transfers your money within seconds and SEPA Direct Debit B2B, which takes up to one business day. SEPA payments/transfers are free of charge if your bank doesn’t charge fees for transfers, or you will only have to pay your bank’s fee for a domestic transfer. For example, suppose you are a Spanish citizen sending money from Spain to Italy; you will pay the same bank fee charged for the transfers within Spain. Making the process of payments and money transfers not only time-saving but also cost-efficient. 

Beyond improving efficiency in both time and cost, SEPA has shown that it can benefit trade by reducing payment costs for foreign trade, support small businesses by offering low transaction fees and real-time payment solutions and promote inclusivity by making it easier for the underprivileged to have financial access (e.g. through digital payments). 

As for the WB6 countries, Albania, Montenegro, North Macedonia, and Serbia have submitted their application to join SEPA. Out of the four, Montenegro is expected to be the first SEPA member from the WB6 region in early 2025, with Albania and North Macedonia hoping to follow a bit later on. Kosovo has made good progress and has already submitted the pre-application last month. Kosovo plans to apply for membership in the last quarter of 2024.  In order to achieve this, the Assembly of Kosovo must approve two critical laws: the Law on Payment Services and the Law on Banks. The Law on Payment Services remains in its preliminary stages, with only the distribution of the draft law completed thus far. Several reviews by the Assembly and its relevant committees are required before it can advance. Conversely, the Law on Banks is further along, having undergone its initial review in the Assembly, and the relevant committees have been assigned to examine the draft. However, there has been little progress since July.

Unlike other WB6 countries, Bosnia and Herzegovina has not taken the necessary steps in this aspect, which has led to them being further from SEPA than their neighbours. However, as with the rest of the accession process, becoming a member of SEPA requires reforms. More concretely, countries that aim to join SEPA are required to reform their legal framework and ensure they meet technical regulations as per EU standards. Such reforms focus on guaranteeing fair competition for payment service providers and making it easier to send and receive euro payments. Besides efforts on the national level, the preparation of WB6 countries to join SEPA is also part of the new CRM Action Plan 2025 -2028, with the World Bank Group taking a leading role in supporting WB6 countries to implement the necessary reforms. 

Remittances represent income generated abroad and later transferred to the home country. Most of the remittances are personal remittances, which are money transferred from migrants to their families back home. WB6 has shown that such remittances can have a substantial impact on a country's economy. When discussing macroeconomic objectives, economic growth is often the primary focus. Economic growth is typically measured by the increase in Gross Domestic Product (GDP), which can be calculated using the expenditure approach. This approach breaks down GDP into four components: consumption, investment, government spending, and net exports, which is the difference between exports and imports.

Nonetheless, this is not the only economic aspect to which remittances have contributed. According to the Bank of Albania, an 8% decrease in poverty in Albania can be attributed to remittances. Another great example is the rise of the Information and Communication Technology (ICT) sector in Kosovo; the diaspora has played a key role by financially supporting many tech startups and young people with innovative ideas, which has resulted in service exports increasing in the country in recent years and new jobs in the sector. Bosnia and Herzegovina’s diaspora also played a pivotal role in helping the country overcome the COVID-19 crisis by sending money to their families and humanitarian organisations.

Positive outcomes often come with accompanying challenges that need to be addressed; in our instance, these challenges are informality and elevated transaction fees. Research indicates that a significant portion of remittances sent from Switzerland to Serbia occur through informal channels, such as being hand-carried by family and friends during their visits or by bus drivers. This issue affects the entire region and is primarily due to high transaction costs. Estimates reveal that the cost of sending €5,000 from the EU to the Western Balkans (WB6) is 12 times greater than the cost of sending the same amount within EU countries.

In the friction between informal channels of transactions and the high costs of formal transactions, SEPA comes into play. If WB6 countries become members of SEPA, none of the above will be an issue anymore. Let us walk through this - suppose you’re a Kosovo migrant living in Germany, and you want to send €10,000 back home; on average, transaction fees would cost you €342[2], but with SEPA membership, you will only pay between €0 - 3 depending on whether you use a traditional bank or a fintech service, and the mode of transfer. On other terms, studies have shown that in 2023, the total cost of sending remittances to Kosovo was €33.7 million; but if Kosovo was a member of SEPA, the transaction costs would be only €7.3 million due to the fact that 83% were sent from SEPA countries. In such a case, Kosovo’s diaspora would save €26 million on costs. Considering that the diaspora of other WB6 countries is primarily located within the EU member countries, similar amounts apply to them as well. 

Remittances are essential for economic growth and development in the WB6, providing crucial financial support to families and households, as well as helping the countries in the region overcome economic and financial challenges. Beyond their economic benefits, remittances have also reinforced the connection between migrants and their families back home.

Recognising the significant advantages that SEPA offers, particularly in streamlining remittances for the WB6 diaspora, it is crucial for all WB6 countries to dedicate considerable effort towards fulfilling the necessary requirements. This involves reforming their legal frameworks and initiating essential activities to ensure that the European Payments Council (EPC) welcomes them into the SEPA. In its attempt to join SEPA, Kosovo should prioritise the approval of two crucial laws: (i) the law on Banks and (ii) the Law on Payment Services as preconditions for SEPA membership. Meanwhile, it remains essential for BiH to enhance its efforts across all sectors and avoid a scenario where they are the only country in the region without SEPA membership. It remains imperative that all governments in the region begin organising informative campaigns/events about SEPA, ensuring that both the diaspora, citizens and businesses are well-informed about the benefits of such membership.

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1. WB6 refers to the geographical area that consists of the following countries: Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia.
2. According to World Bank data for 2023, the average transaction cost of sending remittances to Kosovo was 3,42%. 

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