Editors Note: Elizabeth McQuerry joined Glenbrook last week and this is her first Payments Views contribution. Her practice will focus on International payments and ACH. Welcome Elizabeth!
We are living an amazing period in the payments industry – a new “golden age of payments”, perhaps? I’m super excited to participate in these developments as a member of the Glenbrook team. I just finished my first week and it was a turbo-charged one full of conversations about payments and industry developments – mixed in with the necessities of new employee orientation.
There are several topics that I’d like to explore more in the coming months. While international payments in general will continue to be a primary focus for me, I’m also very interested in what the future holds for the ACH network. There’s no payment rail that is more efficient and capable of powering payments growth and innovation at a low cost … yet the network seems mired in legacy costs, the politics among market segments, and frankly, the fear, among some bankers, of network success.
Top of mind is also how the possibly dramatic changes in the Euro area will affect payments. Even as many companies have already taken measures to protect their businesses from a “Grexit” or even a larger reduction in the Euro area, many changes will be required to get payment systems back up and running again. As well, I’m also interested in exploring the challenges of making cross-border mobile payments a reality. More to come on these important topics.
Last week, however, the focus was on international remittances, as industry leaders and regulators gathered at the Atlanta Fed’s timely “Symposium on 1073”: 1073 being the industry moniker for the section pertaining to consumer-originated remittances in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. My colleague Jacqueline Chilton discussed the new rules in a post earlier this year.
The conference focused on how financial institutions and money transfer businesses are preparing for the approaching February 7, 2013 deadline for compliance with the new rules, and in particular the business implications of these.
In a nutshell, Section 1073 applies to consumer-originated transfers and requires providers to supply details about the transaction (exchange rate, amount to be received, any applicable taxes or other fees, and the date of funds availability to the receiver) to the sender in a pre-payment disclosure as well as on the actual receipt. The consumer now has thirty minutes to cancel the transaction and the providers must remedy any errors. The law imposed a liability on the provider for its actions as well as the actions of its agents and authorized delegates. Certainly consumer protections are a good thing and the money transfer industry is no exception. There have been abuses in the past that the new measures should prevent. In this case, however, the protections were designed without detailed knowledge of how the payment system works and the difficulties of extending end-to-end protections across borders.
While all the industry providers at the conference asserted that they will be “ready” (many noting that any code changes must be completed by the end of October before the year-end freezes), there was much discussion about degrees of compliance. “Degrees of compliance” is an interesting concept in payments, where often, decision engines generally make yes-no decisions. More specifically, what the providers were referring to is that not all their cross-border products would be ready and therefore the products wouldn’t be offered after February until they could be modified. For the banks, the focus primarily has been on preparation for wires and the retail offer. Yet both banks and money transfer operators offered that transfers out to certain countries may be suspended until revised arrangements can be completed. Also, providing transfers on mobile devices will have to wait for many companies.
The reduction of customary service levels was a key point for the money transfer operators who typically offer customer service in the sender’s native language. In larger cities with diverse migrant populations, it’s not uncommon to have Hindi or Tagalog speaking customer service representatives. However, because the new rule requires all disclosures and marketing to also be provided in any language used in the normal course of business, customer service reps will be limited to Spanish and English based conversations due to the expense of providing marketing materials in every language. This will surely be frustrating to some customers. The required pre-payment disclosure and the receipt must also be presented in any language used in the normal course of business.
A dramatic moment for the audience was when a speaker from a leading money transmitter stood up to unfurl the company’s current iteration of a Spanish and English-language receipt. The receipt, including the payment related disclosures as well as the contact information for customer service or complaints to regulatory agencies, measured over 10 feet on the company’s standard three-inch wide cash register paper roll! At its current length (the company hopes to reduce the length to eight feet), a cash register roll can only accommodate twenty transactions.
A huge concern for the financial institutions is the requirement to disclose or estimate any taxes to be applied to the payment on the other end. Banks are not accustomed to disclosing this type of information and uniformly expressed a desire that the CFPB, the agency enforcing the new rule, create and maintain a database that everyone can use. Notably, this is not a worry for the money transmitters as they already providing these data to customers.
Last but certainly not least was the focus on the down-stream implications of the new requirements. The 1073 rules require that the sending institution assume end-to-end responsibility for the payment. This requirement takes many forms including, amazingly, the obligation to make the sender whole if the sender misdirects the payment to the wrong account number. Does any other part of U.S. law excuse a person from his or her own mistakes? Naturally, this provision will invite creative fraudsters to take advantage of this consumer protection
Even when mistakes or fraud are not at play, the law effectively requires the sending institution to control, or be knowledgeable enough to accurately disclose, all details about the transaction to the sender. A speaker representing a money transmitter specializing in payments to India noted several local conditions in that country that make it virtually impossible for banks and money transmitters in this country to fully comply. Key among these conditions is that not all banks in India are on the country’s core banking network. Those banks outside the network exchange payments via letters of credit with timeframes and terms that are not publicly known. Even if the sending institution is aware that a payment is being directed to one of the banks outside India’s core network, how does the sending institution reflect the required date of deliver for this transaction to the sender?
Like in the United States, wire fees to receivers in India are not generally known outside the receiving bank. Another difficulty pointed out is that while it is easy to transfer funds to a mobile wallet, the multiplicity of wallet providers makes it impossible for the sending institution to report to the sender how much it costs for the receiver to take money out of the wallet. Not only do fees differ among providers but also may differ depending on whether the receiver uses the funds to make a purchase, transfer to a friend, or withdraw cash.
Glenbrook’s Take
Many of the expected implications of the rule are indeed materializing. Even small banks and money transmitters are spending thousands of dollars to prepare for the rule and large institutions report spending over a million. Of course, these costs will ultimately be borne by the consumer – perhaps not in February when the rule begins, but eventually. The good news is that there is no obvious stampede for the door by market providers and whether smaller players will be driven out of the market because of this rule is still to be seen. At the same time, many believe that some of the smaller banks and money transmitters are not even aware of the coming requirements or are not (yet) making preparations for compliance.
One point that is becoming clearer is that while open networks like ACH and wires have some heavy lifting to ensure compliance with the rule, so-called closed networks like money transmitters aren’t as “closed” as they previously appeared. While many money transmitters today offer payments to bank accounts overseas and thus have the same dilemmas as banks, they also don’t have full control over their own networks. As the money transmitter business process is often comprised of a chain of private relationships/exchanges, sending institutions must attempt to negotiate new, end-to-end terms with each of their counter parties in foreign countries that have their own laws and obligations to ensure. Moreover, a typical money transmitter may have five or more entry points into a single country, which means that the money transmitter operator has to negotiate and maintain a complicated decision tree which takes into account all the variables to be compliant with the rule.
Finally, we’d be remiss not to note that we also support the rule’s provisions that support transparency. Good payments are always transparent and parties to the payment should easily comprehend the process. At the same time, we wonder if consumers are prepared for the coming changes? Will they be pleased? It will be interesting to gauge their satisfaction and behavior after the rule takes effect.
We plan to revisit this topic over the coming months. In the meantime, what do you think? How is your payments business preparing?
