More and more banks are leaving the remittance business. Money laundering scandals and huge fines for transgressions have left financial institutions wary and led them to conclude that the potential risks of maintaining cheap money transfer services do not warrant the return. But where does this leave money transfer businesses that rely on banks to carry out their transactions and customers who have no other means of transferring funds abroad?
Four U.S. banks, Bank of America, HSBC, Citigroup and JP Morgan have pulled out of remittances. BBVA meanwhile is looking to sell its Latin American money transfer arm. JPMorgan halted its Rapid Cash program in November and Bank of America stopped offering its SafeSend product last year, both some of the least expensive means for mainly Mexican immigrants to send money back home. While some banks may still offer wire transfers in Mexico, the cost is significantly higher than a typical remittance and often require that the sender or the recipient have bank accounts.
U.S. banks have blamed overzealous regulation which forces them to police money transfers for the potential laundering of drug, terrorism and other related funds for their withdrawal.
These checks cannot entirely be carried out with software alone. Once a system has identified suspicious transactions, these have to be checked manually as well. Mistakes in this process can be expensive.
HSBC was fined $1.9 billion over money laundering problems in 2012 and subsequently suspended its Mexican remittance business.
Money transfer firms that maintain accounts with traditional banks to operate their remittance business confirm the negative effect of banks abandoning the market.
Leesa Kow, general manager of Jamaican JN Money Services, which also operates in Cayman, said the money remitter had either bank accounts closed or faced increased costs to maintain bank relationships. These direct and indirect costs also concern banks beyond those in the U.S.
“This issue has had a huge impact in the U.K., where currently only one bank offers banking services to money services businesses, and even this bank has closed hundreds of MSB accounts in the past year,” says Kow.
Although the banks blame regulation and costly due diligence, this is only half of the story. New and greater competition has driven down prices in the remittance sphere.
Sending money from the United States has become cheaper and returns for the banks smaller. This year, the average cost of money transfers is about 5.78 percent of the sum sent abroad. This is down from 7.21 percent only five years ago, according to the latest World Bank remittance price report.
The global average cost of sending remittances was at 8.14 percent at an all-time low.
The cost of sending remittances to Latin America and the Caribbean experienced the most significant decline, and they remain the least expensive regions to send money to, with an average of 5.57 percent, followed by southeast Asia with 6.45 percent of the sum transferred.
This cost decline over the past few years was driven by competition, says Kow.
In addition, new services are catching on. Cash products remain the most widely used service (41 percent), but other services, such as cheaper online services, are catching up and represent 16 percent.
“A number of providers are emerging in this space, offering senders different options to pay for the transaction (from their bank accounts, with either a wire transfer or direct debit, or by debit or credit card). The sender can also choose different ways for the money to be delivered, for example, to the beneficiary’s bank account or in cash at an agent in the receiving country,” the world remittance report notes. The average cost for these services in the second quarter of 2014 was 6.13 percent.
Although the cost of sending remittances using a commercial bank declined slightly, from 12.53 percent to 12.05 percent, banks remain by far the most expensive vehicle to transfer money. As a result, only 26 percent of remittances worldwide are sent via banks.
Post offices are the cheapest (4.66 percent), followed by money transfer organizations with 6.56 percent. However, the drop in prices is expected to reverse as money transfer businesses lose bank relationships and are saddled with regulatory requirements to invest more in the monitoring of fund transfers and anti-money laundering measures.
JN Money Service’s Kow says, “The loss of banking relationships is forcing many players out of the business, which is resulting in somewhat reduced competition, and also the refusal of banks to take on new MSB accounts will likely make it difficult for new competitors to enter the market. These factors along with the increased cost of compliance should result in a reversal of the downward trend in costs.”
In addition, remittance services have to invest in new technology.
Kow acknowledges that many online services have entered the space, but the business is still predominantly an over-the-counter business. Nevertheless, money transfer businesses have started to widen their product offering.
“Like other players, our response has been to start the process of putting facilities in place to meet customers demand for alternate channels, such as online and mobile,” she adds.
But Kow predicts that the increasing operational cost burden will ultimately lead to consolidation in the industry.
“I believe the increased compliance requirements and the attendant costs, as well as the growing banking access problem, will result in a continued trend of mergers and acquisitions and market players seeking to leverage each others’ resources to meet the compliance requirements while maintaining profitability.”