Latin America Advisor

Financial Services Advisor

A Daily Publication of The Dialogue

How Could US Financial Reform Affect Money Transfer Companies?

Q: A draft version of the Restoring American Financial Stability Act proposed by U.S. Sen. Christopher Dodd (D.-Conn.) contains an amendment that would directly impact the money transfer industry, including requirements that companies regularly disclose and post exchange rates. How would the bill in its current form affect remittance providers? What are the arguments for and against stronger exchange-rate disclosure?

A: Manuel Orozco, director of the remittances and development program at the Inter-American Dialogue: "The legislation is an important effort to address challenges in foreign currency payments, but it needs improvement. For one, the measure requires prominent daily postings of exchange rates and descriptions of model transfers of $100 and $200. However, exchange rates constantly fluctuate, posing accuracy and disclosure problems. Moreover, the use of a model transfer is no substitute for information on the actual transfer; it won't properly inform the consumer about his or her real cost. In addition, the money transfer market has become increasingly competitive, offering low-cost transfers, where margins are significantly low—below 0.3 percent—and where the public rates businesses very high. In a 2008 survey, we found that less than 1 percent of customers believed companies are not transparent in the exchange rate. In addition, problems of exchange-rate disclosure are restricted to very few instances within the industry that can be solved without regulatory action. Second, although these reporting requirements are mandated to a remitting company, they apply in practice to the agents, who in turn are not held directly accountable. Also, the legislation assumes a particular cash-to-cash business model and ignores many other prevailing practices of sending money: 75 percent of transfers are done through money transfer operators, but the rest are informal or via other means, such as the Internet or banks. Will the legislation expect banks to respond in a similar way and require all bank branches to post exchange rates? How can disclosure be posted if the transfer is done online? Indeed, there are many loose ends to tie on this legislation. Disclosure of foreign exchange rates for money transfers is an essential feature of fair financial access for anyone, especially for low-income migrants, who regularly transfer money to their relatives. Is physical posting the solution? Most likely not. The challenge lies in finding adequate policy procedures that can mitigate speculation and abuse against clients without producing adverse effects on both the industry and its market."

A: Annette LoVoi, director of the Financial Access and Asset Building Program at Appleseed in Austin, Tex.: "Because immigrants and remittance consumers in the United States are found primarily in lower-income communities, and because their families back home typically face even greater financial hardship, small savings are vital to both sides of a remittance transaction. These savings are easier to achieve if all costs are disclosed by remittance companies, allowing customers to make more informed decisions. Appleseed's research, available at , has led us to recommend minimum market standards, pretransaction pricing disclosure and a complaint resolution process. Appleseed partnered with five remittance providers to pilot test pretransaction disclosures and concluded that of those consumers checking the disclosure, 78 percent found them helpful and 84 percent wanted to see the disclosures in all remittance service provider locations. Both the House and Senate versions of financial reform legislation contain important safeguards for immigrant and other consumers sending money home. Both require remittance providers to disclose vital cost information prior to a transaction. Details to be provided to consumers include the amount of currency the sender intends for the recipient, the time interval for the transfer, and error resolution processes. These disclosures must be in writing and available in the non-English languages most commonly used by remittance customers. Appleseed supports legislation to achieve our Fair Exchange Principles—transparency, simplicity, fairness, accountability and access in the market—and we applaud efforts to move pricing disclosures from discretionary to standard in a business of paramount important to immigrants."

A: Paul S. Dwyer, Jr., CEO of Viamericas Corporation in Bethesda, Md.: "The draft remittance legislation contained in Sen. Akaka's amendment to Sen. Dodd's bill will impose significant and costly operational requirements on money transfer companies, with no real benefit to consumers. The bill requires that each authorized delegate location post in their storefront window, every day, a disclosure template that contains the number of units of local currency that the remittance company will pay out for sends of $100 and $200, to the top three countries that location sends to. If a remittance company works with several payment agents in a country, rates for each payment agent would need to be printed and posted in as many languages as are spoken at the send location. Authorized delegates that deal with more than one remittance company would need to print and post all of this, every day, for every company they work with. Their front windows will be papered over. Moreover, the information is likely to be outdated as soon as it is printed because currency markets fluctuate constantly. Likewise, a requirement to provide customers with written pretransaction disclosure, whether they want it or not, will do little other than generate a lot of wasted paper. The storefront disclosure provision and the pretransaction receipting provision are wasteful and will not provide the consumer with any more information than is currently available to him or her with a simple question that customers already ask authorized delegates across the country: 'What company has the best rate today?' Finally, the bill would impose liability on money transfer companies for an authorized delegate's failure to comply with the disclosure provisions, even if the money transfer company has taken reasonable steps to assure compliance. That is simply unfair—if Congress wants to impose these detailed requirements—with no input from industry as to their feasibility—it at least needs to impose liability for noncompliance on the authorized delegates, not on money transfer companies that have made it feasible for the delegate to comply and the delegate has simply refused of neglected to do so."

A: Tom Haider, a St. Paul, Minn.-based consultant on government relations and regulatory compliance issues: "There are many pros and cons for remittance companies in the Dodd proposal. For multistate companies, the need to comply with only one regulator's directives as opposed to 50 different state requirements may have great compliance advantages. One possible drawback, however, is the potential posting of exchange rates. On its face, it seems like a reasonable concept but it is fraught with compliance challenges. That is because one of the features of remittance companies is that a consumer can send money to any country the remittance company serves from any of its locations. Thus, a company with thousands of agent locations across the United States could potentially be required to post exchange rates in all of them for every possible currency transaction. Imagine the complexity of not just posting exchange rates for Mexican pesos and European euros, but also for the Zambia kwacha, Malaysian ringgit, Suriname guilder and many others. Now you're adding a layer of complexity that no one can hope to comply with. Such posting requirements will need to have reasonable limits, as will consumer disclosures since in some situations the 'receive' country's law requires that it be the one to set the exchange rate and not the 'sending' country. Congress will also need to take care that its effort to enhance disclosures does not impede technological improvements in the remittance industry. There are big strides being made in advancing the concept of remittances via mobile phones and other electronic devices. This new media must not be handcuffed by old fashioned regulatory concepts."

Suggested Content