Partners, Volume 14, Number 1, 2004
Partners, Volume 14, Number 1, 2004
|FedACH InternationalSM Services Opens Payments Channel to Mexico|
There’s nothing like a friendly push from two presidents to get a Herculean job done. And that’s exactly what happened when U.S. President George Bush and Mexican President Vicente Fox signed the Partnership for Prosperity agreement in September 2001.
Although the idea of an automated clearing house (ACH) connection between the United States and Mexico was considered a few years ago, the pieces didn’t really come together until the Presidents challenged the private and public sectors in both countries. They stressed the importance of coming up with ways to lower the cost of remittances sent by Mexican workers in the United States back to their families in Mexico and of helping this population gain access to formal financial services such as bank accounts.
Specifically, the Partnership for Prosperity text included a pledge by the central banks in Mexico and the United States, the Banco de México and the Federal Reserve, to study the possibility of setting up an ACH that would be “an efficient interbank mechanism to carry out payments between both countries that would be available to all financial institutions.” It also challenged the private sector to continue to reduce the cost of sending money to Mexico and to help identify ways to make the use of these funds more productive.
Partnership for Prosperity spurs payments
The challenge of the Partnership for Prosperity (Partnership) motivated private banks and transfer companies to accelerate improvements in existing payments products by making them more user-friendly and cheaper for consumers.
The real driver of the Partnership between the United States and Mexico was, of course, the needs of the growing number of Mexican immigrants living here. According to the U.S. Census Bureau’s American Community Survey, 9.9 million foreign-born from Mexico resided in the United States in 2002. Many Mexicans send a significant portion of their earnings back home, resulting in growing flows of remittances into Mexico. The amount stood at US $13 billion in 2003, up from around US $10 billion at the start of this decade.
One of the Partnership’s goals was to introduce this population to formal financial services. The majority of people sending money to Mexico do not have bank accounts. In the past, when they wanted to send money back home, they encountered a marketplace with few options and very little competition. According to the Inter-American Dialogue, the overall cost of transferring funds (including the fee to transfer funds and the foreign exchange spread) was higher to Mexico than to many other countries in the region, despite the magnitude of the flows from the United States to Mexico.
After the Partnership agreement, new payment products began to enter the market including Bank of America’s SafeSend program and Wells Fargo’s InterCuenta Express Mexican wire transfer service. These products encourage individuals to open bank accounts as well as to transfer money to Mexico via each bank’s proprietary channel. Programs like these provide a significant advantage to consumers by offering more alternatives in the market. These developments are pushing down the cost of sending money to Mexico via wires as well.
Lowering barriers for smaller banks
In the past a bank had to have a presence in Mexico either directly or through a partnership with a local bank in order to offer products like the ones described above. It also had to have the ability to transfer funds and offer foreign exchange. Most smaller and medium-sized banks could only offer such a product to their customers through an intermediary institution. This added layer raised the overall cost of cross-border payments.
To streamline transactions for smaller institutions, architects of the ACH connection between the two countries envisioned a system that would provide every bank in both Mexico and the United States with access to a low-cost, efficient funds transfer vehicle. Once the infrastructure was in place to facilitate flows between the two countries, every bank would have the option to design products for its own particular individual and corporate customers.
FedACH InternationalSM Services frames new product
The Mexico Service now offered by the Fed’s FedACH Internationalsm Services provides a channel for exchanges between the two central banks, which serve as the gateway operators in each country. The gateway operators receive, process, and distribute payments to all the banks in the domestic banking system. In the Mexico Service, U.S. dollars are converted into Mexican pesos by the Banco de México, which provides foreign exchange at a competitive market rate.
The inclusion of foreign exchange in the service provided by the central bank makes it possible for banks of any size to offer as many transfers as needed. Otherwise, banks would have to offer their own foreign exchange, and this service is not economical without large, regular volumes of funds. The Mexico Service extends other efficiencies for participating banks as well: cross-border items can be comingled with domestic ACH payments using the same, standard connections and formats.
Initially this service is being offered to U.S. depository institutions for a surcharge of 67 cents for each payment item. The surcharge is in addition to the standard processing fees (less than a penny per item) that banks incur for their domestic ACH connection. The price to the consumer for this service, which is determined by the participating bank, reflects the additional value added by the bank and its relationship with its customers. The service accommodates credit payments for individuals and businesses.
According to Dr. Manuel Orozco, project director at the Inter-American Dialogue, the impact of this product in attracting more banks into the remittance market will be to lower the cost over time. “I think the impact on pricing will give a push to lower the cost. The real impact will be felt if banks adopt a marketing strategy to attract immigrants into their banks by offering various financial products, of which low-cost or cost-free remittance transfers is one.”
Banks are not the only beneficiaries of the Mexico Service. Credit unions can also access the service. Furthermore, the U.S. Social Security Administration is transmitting benefit payments over this channel to recipients living in Mexico. Previously, government benefits were delivered by check, which meant higher costs. The government paid to issue a paper check and to deliver it across the border, and the recipient generally paid a fee to cash a foreign currency check in addition to foreign exchange conversion. Now funds can be delivered in a secure, efficient, low-cost manner.
The two central banks offering these services in each country will only work directly with depository institutions. Individuals or businesses interested in using the service should contact their banks directly about its availability. Currently the service is only offered from the United States to Mexico, but the capacity for bi-directional flows is now being developed.
Mexico Service model may extend to other countries
In January of 2004, Presidents Bush and Fox concluded that significant progress had been made since the Partnership for Prosperity began. They noted that the cost of sending remittances had fallen by 58 percent, while the flow of remittances had grown steadily each year. Now leaders in North and South America are turning their attention to the possibility of bringing these same improvements to other countries in the region as well.
By Elizabeth McQuerry, assistant vice president in the Atlanta Fed’s Retail Payments Office, and Jennifer Grier, community affairs project manager at the Atlanta Fed.