When Regulators and Remittances Collide, Migrants Lose Out

Just about everyone agrees that international remittances should be cheaper. If you run the numbers on international remittance flows, incomes of recipients and transaction costs, you can make a case that reducing remittance costs would be among the highest ROI interventions for raising incomes of poor households in the developing world (and given what we’re learning about the use and benefits of cash transfers, there’s good reason to believe the money would be well spent).

As this became clear over the last 10 years, the World Bank, IADB and plenty of NGOs have drawn attention to the issue—and have largely succeeded in dramatically reducing the cost of sending money home (costs do still vary widely depending on sending and receiving country). Still, most people I talk with think costs should fall even more.

Source: Report on the Remittance Agenda of the G20, The World Bank, 2014

Source: Report on the Remittance Agenda of the G20, The World Bank, 2014

The trend of lower costs may be reversing however. Last week The New York Times ran a story about large banks exiting the money transfer business. The banks cite the costs and risk of compliance with anti-money laundering regulations; critics suggest the banks are uninterested in a low-margin business and are simply using the regulations as an excuse. In an editorial last week the Times opined, “...it is not credible for banks to suggest that it’s too hard to tell suspicious transfers to, say, Sudan, from legitimate remittances to, say, Mexico.”

The Times story and follow-up editorial inadvertently mislead about what is going on. This is easy to do because the systems by which money is transmitted internationally are complex and opaque. I’ll confess that I didn’t really grasp what was happening and how much it mattered until a set of conversations I had at a meeting at the InterAmerican Development Bank about the research agenda on remittances. There were a lot of people in the room who really understood the systems there.

The issue is not that big banks are not offering services to consumers who want to send money. The banks have never had significant consumer market share (and we should never have expected them to serve a large role in serving these customers).

Source: Competition and Remittances in Latin America: Lower Prices and More Efficient Markets, IADB and OECD, 2007

Source: Competition and Remittances in Latin America: Lower Prices and More Efficient Markets, IADB and OECD, 2007

The real problem is that banks are closing down the accounts of the neighborhood store fronts which offer transmittals through networks like Xoom and Viamericas. An NPR story about remittances to Somalia better captures the issue.

The short version is that these local operators collect a lot of cash each day that they need to deposit into a bank account each night. Those funds are then, via a variety of other intermediaries, used to settle accounts with the agent who disburses the money wherever it is being sent. If those agents don’t have access to bank accounts, obviously the transfer process gets much slower, much more expensive, or breaks down entirely.

The issue for the banks is not that they can’t tell the difference between a Mexican construction worker and a terrorism financier. The banks serving money transmitters never interact with the consumer who initiates the transaction (or for that matter, the consumer who receives it). All they see is large amounts of cash going into and through the system quickly. In that scenario it’s a lot harder to tell the humble migrant worker from the criminal mastermind.

This is not a new issue. This 2013 World Bank report contains a pretty thorough overview of the issues—the conflict between anti-money-laundering efforts and remittance facilitation efforts is real, is by no means limited to the United States and has existed since anti-money laundering efforts ramped up in the early 2000s. According to a survey the Bank conducted as part of its report, a money transmitter being denied a bank account (or having one closed) is far more common than successfully opening an account in the US, UK and other countries.

The bottom line: Understanding the global payments system is crucial to making progress on reducing costs and increasing the speed of remittances. Singling out banks without changing the behavior of regulators is not likely to yield much progress.