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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September 18, 2017
The Rising Cost of Remittances to Mexico Bucks a Trend
From time to time, I like to look back at previous Risk Forum activities and see what payment topics we've covered and consider whether we should revisit any. In September 2012, the Risk Forum hosted the Symposium on 1073: Exploring the Final Remittance Transfer Rule and Path Forward. Seeing that almost five years have passed since that event, I decided I'd take another, deeper look to better understand some of the effects that Section 1073 of the Dodd-Frank Act has had on remittances since then. I wrote about some of my findings in a paper.
As a result of my deeper look, I found an industry that has been rife with change since the implementation of Section 1073 rules, from both a regulatory and technology perspective. Emerging companies have entered the landscape, new digital products have appeared, and several traditional financial institutions have exited the remittance industry. In the midst of this change, consumers' average cost to send remittances has declined.
Conversely, the cost to send remittances within the largest corridor, United States–Mexico, is rising. The rising cost is not attributable to the direct remittance fee paid to an agent or digital provider but rather to the exchange rate margin, which is the exchange rate markup applied to the consumer's remittance over the interbank exchange rate. As remittances become more digitalized and the role of in-person agents diminishes, I expect the exchange rate margin portion of the total cost of remittance to continue to grow.
Even though the average cost of sending remittances to Mexico is on the rise, I found that consumers have access to a number of low-cost options. The spread between the highest-cost remittance options and the lowest-cost options is significant.
With greater transparency than ever before in the remittance industry, consumers now have the ability to find and use low-cost remittance options across a wide variety of provider types and product options. To read more about the cost and availability of remittances from the United States to Mexico and beyond in a post-1073-rule world, you can find the paper here.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
December 3, 2012
CFPB Modifies Remittance Disclosure and Error Resolution Rules
According to their congressional mandate, the Consumer Financial Protection Bureau's (CFPB) primary focus is to advocate for consumers when dealing with financial companies. Champions of the CFPB see them as part of the "checks and balances" regulatory environment of all things financial. One of the CFPB's primary activities since being created in mid-2010 has been to work to create disclosures to assist consumers in better understanding their costs, rights, and responsibilities when entering into various financial transactions or agreements. The Dodd-Frank Act, which created the CFPB, also added a new section to the Electronic Funds Transfer Act (EFTA) implemented through Regulation E. The addition requires the CFPB to develop disclosure and error resolution requirements for remittances being sent outside the United States.
In February 2012, the CFPB published rule 1073 dealing with the prepayment disclosure of the total costs of consumer-originated remittances. The rule also imposed liability for errors on the remittance transfer provider (RTP) even if the consumer was the one that provided an incorrect account number or routing information. The rule was originally scheduled to become effective February 7, 2013. More details about the rule can be found in previous Portals and Rails blogs. (Under Categories on the right side of this post, select remittances to get a full listing.)
Responding to input from financial institutions, other governmental regulatory agencies, and the remittance industry groups, the CFPB announced on November 27, 2012, that it plans to issue a proposal to refine specific provisions of the rule and will propose an extension of the effective date until 90 days after the bureau finalizes the proposal. Following are the proposed key changes:
- One of the key requirements of the rule is that the RTP must disclose the exchange rate and all fees and taxes charged for the remittance so the sender can see the net amount received by the recipient. The CFPB received a number of comments indicating that it would be extremely difficult for RTPs to create and maintain an accurate database of national and local taxes as well as other fees imposed by the disbursement facility. In response, the CFPB's proposal will provide additional flexibility by permitting RTPs to base disclosures on published bank fee schedules and only for taxes levied at the national level.
- Originally, the rule placed the liability on the RTP for transmittal errors resulting in nondelivery or late delivery resulting from incorrect account numbers. However, the CFPB plans to release the RTP from this responsibility if the RTP can demonstrate that the consumer provided incorrect information. The RTP must still make a good faith effort to recover the funds.
The CFPB will be publishing its proposed modifications in December and will be seeking public comment before issuing a final rule sometime in the spring. While these modifications are termed "limited" by the CFPB, remittance providers must be breathing a measured sigh of relief, especially regarding the shift in liability from consumer-created errors. It will be interesting to monitor the impact of these regulations to determine if there has been any constriction in the number of countries served due to the additional requirements.
By David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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September 17, 2012
Change Is the Only Constant: Section 1073 Set to Take Effect
If you are reading this post, then no doubt you are familiar with the passage of the Dodd-Frank Act, specifically Section 1073, which is the basis for the new rule pertaining to consumer-originated funds transfers from the United States to consumers or businesses in foreign countries. I recently attended a meeting where representatives from the remittance transfer industry discussed the responsibilities, complexities, and challenges of complying with the remittance transfer rule by the inaugural date of February 7, 2013. Not surprisingly, complying with the rule is a massive undertaking—when you consider that the remittance transfer business is, by definition, a business with a global reach.
One premise behind the rule was to create more transparency in remittance costs and thereby encourage competition in the market, to the ultimate benefit of the consumer. Today’s procedures for sending money abroad are basic. Locate one of more than a half-million domestic locations—in addition to many financial institutions, almost every gas station, drug store, and grocery store offer this service—complete a remittance form, hand money and form to a clerk, and wait a few minutes for confirmation. The funds are then made available to the receiver. A recent report published by the World Bank concluded that the United States currently maintains an average total cost to send a remittance below the global average (6.93 percent of the remittance amount versus 9.3 percent), thanks to the high volume and intense competition among the current large number of products and services available in the United States.
However, unknown to both parties at the time of origination is the exact dollar amount that the recipient will receive, because of hidden fees, taxes, and other costs not necessarily apparent. The rule will replace this "unknown" with a required hard copy receipt outlining, in any language used to market, advertise, or solicit business, all fees, commissions, taxes, the exact dollar amount netted to the receiver, and the time that the funds will be available for pickup. (There are other specifics, but no need to reiterate the entire law in this short blog!) A common pain point yet to be resolved in the compliance effort revolves around the ability of the sending entity to provide accurate receiving-end tax information. As an example, some countries have multiple and changing tax rates for different regions or a variable-fee structure on the receiving end based on the receiver’s status and relationship with the receiving entity. These tax and fee issues suitably demonstrate how achieving compliance will require cooperation from foreign entities in more than 213 country corridors, not under a remittance transfer provider’s control or subject to U.S. jurisdiction. Many in attendance suggested that a central database of tax information may be a way to address the conundrum. Whether provided by a third party in the industry or a government entity, a central database would provide consistent data and minimize research and upkeep costs for all transmitters.
In addition to cooperation, education for all players will be instrumental. Consumers should be made aware of their new right to cancel any transaction within 30 minutes of submitting and that they have contact information on their receipt in the event of any errors. At the same time, all remittance providers, including agents, need to be trained and educated to ensure compliance with this new rule.
With system changes required to produce the disclosures, will remittance providers reduce the number of channels used for remittances until they can modify their systems? With the number of contractual agreements required, will providers reduce the number of countries served or products offered? And given the cost, will remittance providers raise prices? And will U.S. consumers find alternative ways to send money? Only time will tell as the deadline for complying approaches.
The rule may eliminate some existing players from the game, as protection never comes without a price. At the same time, pioneering and innovative competitors might provide new channels and more products that will benefit consumers. Like anything that forces us to reinvent ourselves, change brings with it new threats and challenges, but the opportunities can be vast and rich. With a little imagination and a lot of hard work, the rewards can be enormous.
Remember, "The only thing that is constant is change" – Heraclitus
By Michelle Castell, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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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.
By Cynthia 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.
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.
By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
June 1, 2010
Mobile P2P money: Contemplating new risks while analyzing adoption potential
Cell phone ubiquity and the growth of wireless networks are helping the world's poor to transcend from informal, cash-based societies to societies with more efficient and safer payments systems. The recent success of mobile operator-led payments services in emerging markets is galvanizing market experimentation in developed countries such as the United States.
Technology ripe for advance of mobile P2P
Mobile network operators and other nonbank firms are beginning to offer mobile-enabled payments transfer services in cross-border environments, using "agents" such as the corner store to accept cash deposits and accommodate withdrawals in lieu of traditional bank branches. These money transfer services, including both domestic and cross-border person-to-person (P2P) payments, are shifting to the mobile channel, providing consumers efficient, electronic alternatives to paper-based P2P payments. However, improved carrier roaming capacity and increased transaction activity may create opportunities for money laundering abuses and other unforeseen financial crimes. As new mobile financial services such as mobile P2P gain acceptance in markets throughout the world, how will industry participants plan for new and unanticipated risks?
The potential for market adoption
According to CGAP—or the Consultative Group to Assist the Poor—more than a billion people worldwide lack access to traditional financial services, but they do have mobile phones. This ubiquity has the potential to extend even more financial services to unbanked peoples throughout the world. In fact, a 2007 survey conducted by the GSM Association found that respondents expected the number of subscribers using mobile domestic money transfers to grow more rapidly for developed markets than for developing markets. These results imply that consumers in developed markets are interested in electronic P2P payment options and would be willing to conduct them via the mobile device.
The game changer when we think about payment adoption is the ability of the cell phone to execute domestic transfers in addition to international exchanges. This expanded functionality may fulfill the needs of mainstream consumers, as well as the unbanked, by giving them a convenient, cheap, and efficient alternative to writing checks or going to an ATM for a cash withdrawal for low-value exchanges.
The risk environment
In emerging markets, the risks of money laundering, identity theft, and other fraud are very real—they are merely eclipsed by the risks inherent in informal, cash-based systems, such as theft and extortion and possibly more violent crimes. So consumers in these countries where mobile payments are successful are arguably better off today despite the new risks introduced. However, this may not be the case in the United States, where we have a vast array of secure payment alternatives in place already. If convenience ultimately leads to adoption here, as it has abroad, what risks will P2P mobile money introduce, and how will we manage them?
The risks inherent in all retail payments systems are also present in the mobile space, including money laundering, privacy and security, consumer protection, fraud, and credit and liquidity risks. However, the mobile environment adds a dimension of complexity that makes quantifying risk more difficult. Participants in the payments value chain are increasingly disintermediated and outside the traditional legacy banking environment where the regulatory and legal governances are well established. In addition, there are other risks more unique to telecom firms that financial institutions and their regulators lack experience in detecting and monitoring. Finally, the regulatory domains governing banking and telecommunications are accustomed to operating independently and autonomously from one another and may be challenged to work collaboratively.
Implications for the United States
Domestic and international mobile money transfers are gaining adoption in world markets whose participants are likely to transact with U.S. consumers as wireless carriers provide services cross-border. Today, evidence in support of U.S. consumer demand is inconclusive because of the limited availability of P2P services and limited user experience. However, prevalence in offerings may not be the appropriate benchmark for determining whether discussions on risk management and payment system integrity are important going forward, as risk exposure may not be directly correlated to the rate of adoption. In order to protect the integrity and ensure continued security of retail payments systems in the United States, all participants in the emerging mobile payments industry should engage in proactive dialogue on emerging risk issues inherent in mobile money transfers.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
December 28, 2009
Mobile money transfers: Benign P2P or hawala money?
Informal value transfer systems (IVTS) such as traditional trade and barter have existed since the beginning of time and still serve legitimate purposes today. While informal payments may provide benefits such as improved reliability and convenience to users over formal systems, they may also create regulatory and risk management challenges. Person-to-person (P2P) payments via the mobile phone, also known as mobile money transfers (MMT), represent an innovation with the potential for use in informal channels as nonbanks, many of which are start-up firms, extend services in a cross-border enviroment.
IVTS were defined by Nikos Passas to describe "any network or mechanism that can be used to transfer funds or value from place to place either without leaving a formal paper trail of the entire transaction or without going through regulated financial institutions." One of those systems is hawala, which has its origins in classical Islamic law and is mentioned in texts of Islamic jurisprudence as early as the eighth century. Hawala drew interest from the U.S. government after 9/11 because payments are exchanged on the honor system without a paper trail. With this arrangement, it could be difficult to determine if a transfer of funds was for legitimate purposes.
In addition to hawala, Passas identified other important IVTS to include gift and money transfer services via Internet sites, Internet-based payments and transfers, and stored value cards, such as prepaid telephone cards, to name a few. IVTS systems and mechanisms range from basic and traditional exchanges to modern and sophisticated ones.
Passas' initial work predated the recent developments in the mobile payments channel and certainly came before the growth in mobile enabled P2P and the use of prepaid airtime for remittances, as described in an earlier edition of Portals and Rails. When P2P payments are conducted by mobile carriers in a bank-agnostic ecosystem, do they potentially represent a more sophisticated, modern-day informal payment system?
MMT: The fastest-growing mobile payment
P2P payments represent possibly the fastest form of financial transaction enabled by mobile phones, driven by the steady growth in remittance markets, the ubiquity of cell phones themselves, and the desirability for an electronic P2P payment alternative in developed countries like the United States. Research firm Gartner recently identified mobile money transfer as the first of the top 10 consumer mobile applications in 2012, made possible by developments in smart handsets like the iPhone. Separately, ABI research predicts that almost three times as many consumers worldwide will use mobile phones to conduct P2P payments than those who will use them to conduct mobile banking functions by the end of 2011.
Formal versus informal
GSMA (Global System Mobile Association), the alliance of mobile network operators, launched the Mobile Money Transfer Programme initiative to promote the mobile channel and formalize international remittances. With low barriers to entry, roaming capacity, and a growing unbanked market in developed countries, start-up firms may offer informal MMT services, including international and domestic P2P in cross-border markets to expand their customer reach and network opportunities. While informal payment systems can provide means for legal transactions, the lack of transparency could potentially provide bad actors the opportunity for money laundering and other financial crimes.
Nonbanks, like telecom firms and others, are rapidly entering the financial services arena, creating an uncertain regulatory environment as laws and regulations vary from country to country. Will mobile P2P innovation permit service offerings that are characterized as informal payments with the potential for misconduct? Will violators of money-laundering laws go undetected as stored-value mechanisms move from the plastic card to the mobile device? These questions will no doubt be the focus for regulators in many markets going forward as they attempt to understand both the operational and regulatory risks money transfer services have the potential to introduce.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
October 5, 2009
Mobile top-up for international remittances: New opportunities and new risks
The growth in the mobile telecommunication industry worldwide is driving the ubiquity of handsets, which in turn is expanding the reach of financial services across wireless networks in less developed countries.
Adding air-time value (industry parlance known as "mobile top-up") to a mobile phone represents a new method that some mobile network operators (MNOs) are using to provide payment services, particularly in emerging countries where financial services are scarce. One example is Safaricom's M-Pesa, offered in Kenya and Tanzania. This service uses money agents, often small village stores, to sell additional air time on mobile phones. This air time can then be used for nontelecom purchases of goods and services, or sent via text message (SMS) as a person-to-person (P2P) payment transfer, allowing the recipient to use the prepaid value.
A recent case study found improved financial access in years following the 2007 launch of M-Pesa. The availability of mobile payment services lessened the population's reliance upon more risky hand-to-hand transfers and has been widely reported as a positive development for these emerging economies. Initiatives such as the Mobile Money for the Unbanked (MMU) program supported in part by the Bill and Melinda Gates Foundation, are contributing to the expanded use of mobile financial services in emerging markets.
Mobile top-up is also emerging as a means for international remittances by allowing users in one country, such as the United States, to purchase mobile air time for users in other countries, thereby "topping-up" the recipient's account in the local currency. For example, Western Union recently announced a service to provide mobile top-up remittances within the United States for users of phones issued by LIME in the Caribbean. Because many international telecom operators have roaming agreements that span geographic borders, mobile top-up remittances can be far-reaching, with the recipient using the prepaid value on the mobile phone to purchase goods and services in the home country.
While these innovations have been shown to have positive impacts in terms of access to financial services in emerging markets and may offer a number of other efficiency benefits, they also alter the risk profile for service providers and those who monitor payments for criminal activity. Depending upon the business model and parties involved, regulatory and law enforcement agencies will have new issues to consider in terms of anti-money laundering and monitoring international payment flows under existing laws. These developments in the mobile top-up market deserve continued attention to ensure that effective policing of payment flows can ride alongside the positive developments in the emergence of a new means for movement of money internationally.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum at the Atlanta Fed
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- An Ounce of Prevention
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- Racing Ahead in the Wireless Space
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- The Case of the Disappearing ATM
- The First Step in Risk Management
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