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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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January 9, 2012

Is what you see what you get? Proposed pricing disclosures for electronic remittances

In previous posts, we've talked about the state of regulatory reform for remittance payments. Other posts have looked at the evolving landscape for money transmitters—or remittance transfer providers (RTP), as the new Consumer Financial Protection Bureau (CFPB) refers to them.

This week's post speaks directly to a proposed consumer protection requirement that RTPs in the United States may have to comply with when they send electronic remittances to recipients in foreign countries. Specifically, the proposed rule would require RTPs to disclose clear and complete information about cross-border money transfer services, including all fees, the exchange rate, and the amount of currency the recipient will actually receive once the fees and exchange rate have been applied.

This sounds reasonable. Under the new rule, consumers would be able to determine the total price, and therefore would know the net proceeds available to the recipient. The rule would also establish error resolution rights for remittance senders, defining standards for the resolution process and procedures for cancelling transactions and refunding fees.

However, variables outside the RTP's control can complicate remittance transfer pricing. Many RTPs have reported that the new requirements threaten to drive consumers to less formal and sometimes illicit money transmitters.

Below, we summarize some of the issues that the CFPB must consider as it crafts the final rule provisions. At issue is whether the agency will effectively achieve its mission of improving transparency for consumers without also bringing about the unintended consequences of onerous regulatory compliance costs for RTPs or undesired process formality for unbanked and possibly less sophisticated consumers.

Why would remittance costs vary?
The following table shows how pricing can change depending on how RTPs combine the fees and foreign exchange costs.

Many commenters on the proposed rule contend that RTPs cannot always control the transaction from start to finish, so compliance with such a requirement could become very complicated. They argue that the sending RTP may not know the exact amount of taxes, fees, and other charges that intermediary firms and governments impose. The lack of such information would also complicate the error resolution process. Nearly all commenters suggested that the rule be modified to allow RTPs to estimate costs based on information available at the time of the transaction.

Disclosures may not be enough to do the job
The CFPB aptly notes that disclosures may be insufficient in the battle for improving transparency and customer awareness. Consumers often rely on shortcuts and opt for convenience when making decisions; they often do not make the most advantageous financial choices. Additionally, many consumers need some extra help to understand disclosures, however well-designed and articulated. The CFPB also therefore recommends augmenting disclosure practices with customer education and outreach campaigns.

There is yet another issue to consider. As we've noted in previous posts, technology is helping create new business models for money transmitters and opening new channels for delivering remittance services. As a result, RTPs will need to modify their disclosure practices for multiple channels as remittance transfers continue to evolve into new innovative products and services. As the new regulator for ensuring that nonbank RTPs are ensuring adequate consumer protections, the CFPB must also assume an adaptive posture in the highly dynamic remittance service market.

Cindy MerrittBy Cynthia Merritt, assistant director of the Retail Payments Risk Forum

October 24, 2011

Keeping pace as money transmitters proliferate

As the United States migrates from paper-based retail payments to electronically enabled methods, we are witnessing a proliferation of entrepreneurial and innovative nonbank stakeholders entering the retail payments market. As my colleague discussed in a previous post, these nonbanks provide a variety of services that banks can use to create more efficient payment systems. But the fast pace of technological change and the ease with which these new companies can enter the retail payments arena may also be translating into new risk vulnerabilities for the nation's retail payments systems.

There are many different types of nonbanks in U.S. payments systems today, including technology developers, aggregators, agents, third-party service providers, and money service businesses (MSB) and transmitters. As technology enables more nimble and innovative payments, the role of MSBs and, in particular, money transmitters is growing more important.

Am I an MSB?
According to this table from the Financial Crimes Enforcement Network (FinCEN), certain products or service offerings may dictate the capacities in which a business might fit the definition of an MSB. Note that money transmitters represent a specific type of MSB that engages primarily in funds transfer services.


The innovations that PayPal introduced illustrate the value that transmitters add to the payment system through the provision of nimble service offerings that respond to consumer payment needs. Over time, PayPal has evolved into a mainstream payment service provider and household name, and has demonstrated a commitment to risk management and regulatory compliance across all the jurisdictions in which it operates. But PayPal's commitment contrasts with the overall state of the industry of MSBs, whose efforts are not completely transparent. MSBs and transmitters today operate in a fragmented regulatory environment determined by the specific governing laws, licensing requirements, and permissible business activities of each U.S. state.

As money transmitters become more prevalent players in our nation's payment system, is it time to reassess their regulatory environment and consider the potential benefits of a national supervisory framework?

Transmitters and the U.S. regulatory structure
Money transmitters are required to register with FinCEN and to comply with federal laws for anti-money-laundering and counterterrorist-financing provisions of the Bank Secrecy Act. In addition, 48 states require the licensing of money transmitters before they can do business. For money transmitters that operate in more than one state and across state lines, differences in state legal requirements create challenges to developing effective enterprise-wide compliance and risk-management programs. Furthermore, monitoring changes in various state legal regimes can be extremely complicated, not to mention costly.

Ironically, state regulatory authorities governing money transmitter businesses are generally budget-strapped in today's economically distressed environment, and lack the financial resources for taking action against all but the most egregious of bad actors. Unlike the prudential regulatory governance employed by the agencies of the Federal Financial Institutions Examination Council for the nation's mainstream financial institutions, regulatory response for the oversight of money transmitters is prompted instead by complaints to state authorities, or by the filing of suspicious activity reports to FinCEN.

Future regulatory considerations
There are many risks to consider in this nascent segment of the retail payments industry. With the ease of entry into the market for money transmitters and the potential lack of funding in some states for comprehensive regulatory oversight, some startups may circumvent licensing and capital requirements by merely opening for business, undetected by state authorities. FinCEN has issued advisories requesting that financial institutions that discover such businesses file suspicious activity reports (SARs) as a means of mitigating unlicensed and potentially illegal activity. Unfortunately, as technology supports more sophisticated advancements in electronic payments as well as new alliances between carriers and money transmitters, regulatory efforts will become increasingly difficult.

The newly established Consumer Financial Protection Bureau is empowered to exercise enforcement authority for improper conduct on behalf of money transmitters, but the task is daunting, considering the disproportionate state-by-state regulatory framework currently in place. Is it time to consider a more consistent, national approach to the legal and regulatory oversight of money transmitters? And, considering the onerous compliance costs that the current environment imposes, would money transmitters in fact welcome a more consistent, uniform environment?

Cindy MerrittBy Cindy Merritt, assistant director of the Retail Payments Risk Forum

 

August 1, 2011

Regulation E expected to add new consumer protections for remittance transfers

One of the many changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act is an update to Regulation E to reflect new protections for consumers who make remittance transfers to recipients in foreign countries. A remittance transfer is a transaction in which a consumer sends funds to someone in another country. The proposed rule is expected to help carry out the Dodd-Frank Act's overall intent to improve accountability and transparency in the financial system through new disclosures, notices, and error resolution procedures for remittance transfers. Recently, the Federal Reserve Board (the Board) formally announced its request for public comment on the proposed rule and model disclosures.

According to some initial comments on the proposed rule, some industry participants believe that the added requirements could increase costs and add unnecessary burdens to a system that is, as they view it, already functioning properly. Others expect that the proposed changes will reduce errors and even, in some instances, improve the speed for remittance transfers because of enhanced communications between the sending and receiving agents.

Will these changes to Reg E stifle progress in the remittance industry or help it become more consumer-friendly? And will these changes enable a thriving business environment for transfer providers—rather than stifling market growth—while preserving consumer protections?

Prevalence of remittance transfers
Remittance transfers are typically consumer-to-consumer payments of low monetary value. The World Bank estimates that a total of $440 billion in remittances was sent worldwide in 2010, of which $325 billion went to developing countries. The World Bank further estimates that the United States had the highest volume of remittances in 2009, totaling $48.3 billion.

New disclosures, notices, receipts, and error resolution procedures
Some of the proposed disclosure requirements call for remittance transfer providers to disclose to the sender, before the sender pays any money, the remittance value in the currency of the recipient's country, all fees charged in connection with the remittance transfer, and the exchange rate that will be used (to the nearest 1/100 point). Then, after sending the payment, the provider must provide the sender a series of other disclosures on the receipt. Separate notices are required for transfer providers that offer Internet-initiated remittance transfers.

Additionally, remittance transfer service providers may be required to prominently display notices describing a model remittance transfer in every storefront location that the provider owns or controls. The proposal also adds new error resolution procedures for remittance transfers. Under the proposal, the deadline for a consumer to report an error is 180 days from the promised delivery date. This notice may be oral or written, but it must contain the amount of the transfer shown in the foreign currency amount, as indicated in the receipt.

Testing existing disclosures, notices, and error resolution procedures
Prior to releasing these proposals, the Board consulted with a research group to help determine whether these requirements would help the consumer price shop remittance services or understand their fee structure. Overall, the resulting study found that most participants (remittance senders) were satisfied with their experiences.

The study, when determining what information participants received from remittance transfer service providers during an in-person transaction, found that participants infrequently received written information before they completed the transaction. However, the participants indicated they could get needed information by asking an agent. In contrast, they almost always received some form of written information after the transaction, including the exchange rate, fees, amount of money sent, and so on.

Study participants were also asked to share their experiences with dealing with errors or problems during a remittance transaction. Most reported having had problems with at least one service provider, but almost all reported that their problems were resolved expeditiously. The most common error they reported was the misspelling of the recipient's name.

Conclusion
Remittance transfers are an increasingly important source of income for households in lower-income countries. Yet, given the results of the study on the current state of remittance transfers, it is difficult to know whether the Dodd-Frank's remittance provisions will increase efficiency in the remittance industry while preserving consumer protections. What is clear, though, is that the proposed amendments to Reg. E will establish standardized disclosures and notices, thereby creating more transparency in the remittance industry so that a consumer can confidently price shop providers while fully understanding fee structures and services. Although the Board has initiated these proposals, the Consumer Financial Protection Bureau assumed responsibility over this new regulation on July 21, 2011.

Photo of Ana Cavazos-WrightBy Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed

November 8, 2010

Proposed rule targets cross-border wire transfers

In its simplest terms, money laundering generally involves the creation of an intricate series of financial transactions designed to conceal the identity, source, and destination of illicitly obtained funds. The success or failure of the laundering process generally turns on whether the launderer successfully minimizes or eliminates the trail that would lead law enforcement to trace the illicit proceeds back to their illegal source.

One common method for laundering money is wire transfers, particularly cross-border wire transfers, as they permit funds to move instantaneously from one account to another within and among international financial institutions. The Financial Crimes Enforcement Network (FinCEN) recently took action to address the money laundering risks commonly associated with cross-border wire transfers by proposing more stringent reporting requirements for financial institutions.

Expanded reporting for cross-border wire transfers
On September 27, 2010, FinCEN issued a notice of proposed rulemaking that would lower the reporting threshold on cross-border electronic fund transfers (CBEFT) from $10,000 to $1,000. FinCEN based its proposed rule on the conclusions of two studies: Feasibility of a Cross-Border Electronic Funds Transfer Reporting System under the Bank Secrecy Act, and Implications and Benefits of Cross-Border Funds Transmittal Reporting. The proposed rule would also require certain depository institutions and money services businesses to provide records to FinCEN of certain cross-border electronic transmittals of funds. Banks directly transacting with foreign financial institutions would be required to report all cross-border wire transfers to FinCEN.

The proposal would also require financial institutions to report the taxpayer identification numbers (TIN) of individuals who make CBETFs. Banks would file a list of these numbers annually for all CBETFs, regardless of the amount. MSBs would file TINs for CBETFs of $3,000 or more.

Currently, financial institutions are subject only to reporting suspicious wire transfers and maintaining and making available upon request to FinCEN records of cross-border wire transfers. According to FinCEN, the proposed rule will most likely affect larger financial institutions that use centralized message systems like SWIFT (Society for Worldwide Interbank Financial Telecommunication), Fedwire, and CHIPS (Clearing House Interbank Payments System).

The challenge in monitoring cross-border wire transfers
Monitoring cross-border wire transfers can present unique challenges since their processing can sometimes involve several intermediary financial institutions before the intended funds are received by the beneficiary. Effectively monitoring these transfers for anti-money laundering purposes generally requires that banks and nonfinancial institutions be knowledgeable of an account's normal and reasonable activity so they are better armed to identify transactions that may fall outside a known pattern.

According to a paper by the Basel Committee on Banking Supervision, there is need for improved transparency in cross-border wires due to the variance with the existing wire structure, which has done little to enable institutions to report the difference between cross-border and domestic wire transfers. The paper states that existing messaging practices can impair an institution's risk management and compliance obligations.

The proposed cross-border wire transfer reporting requirements are intended to improve transparency by facilitating more information gathering and enhancing money laundering due diligence. The proposed rule may also further assist law enforcement with the arduous task of unraveling the launderers' intricate web of tracing laundered proceeds back to their illegal source. FinCEN estimates that the proposed rule will spur 500 million to 700 million new reports a year. Currently, financial institutions and MSBs file more than 15 million reports per year.

Containing existing loopholes
FinCEN indicates that the enhanced reporting requirements will help close certain loopholes in the existing wire transfer rules that are exploited for money laundering, terrorist financing, and tax evasion—for instance, money launderers often purposefully send funds in increments below the current reporting threshold and use multiple institutions to avoid detection. Nevertheless, it is hoped that heightened reporting of account activity will help law enforcement and regulatory authorities detect, mitigate, and investigate money laundering and other illicit financial crimes. Or will the increased reporting requirements only serve to flood FinCEN with massive amounts of wire transfer data? But that is the topic of a future post.

The proposed rule is open for comment until December 29, 2010.

By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed