Why are banks like Westpac exiting FX and money-services businesses, and how likely is it that others will follow?
Banking
Asked by Question Bot01/Apr/20171 answer
1 Answer
F
Faisal Khan
Answered 01/Apr/2017
tl;dr: Medium-Risk/High-Risk posed by Money Transfer Operators. Other banks will exit.
Banks are used to simple transactions, give a check in, cash it out. Take a payment in, deposit it, etc. When banks become financial intermediaries for transactions, and especially cross-border transactions where they have no say or insight as towards the transaction's payout, things can get dicey.
The bank may not necessarily have all the data-points to assess the risk associated with the transaction. This is a huge issue. If someone in say Austin, TX is paying an MTO in the US to send money to their sibling in Mumbai, India, the bank in the US would also see limited transactional data for the transaction. They (the bank) will not see who the beneficiary is, who the payout partner is, etc.
Because they have partial information about the transaction, per existing standards, the transaction is a high-risk transaction, hence the client is a high-risk client.
Most banks (I can safely say in the US, almost - 95% of every state charter bank and credit unions) do not have the adequate software or control mechanisms to record these missing pieces even if the information was provided to them.
Doing so, would require investment into software, hardware, training, human-resources, domain knowledge and possibly enhancing the AML/KYC program. To do so, requires money and time. If by taking an MTO client a bank nets in only say $300,000 in fees per year, the CFO may decide it is not worth the risk, hence the bank will decline the business.
Rather than saying, "hey! sorry, I'm not equipped to handle it" banks use a more skewed nomenclature for it, they term it as de-risking themselves from the money services business.
If the larger banks decide to do the same, smaller banks follow suit. What ends up is that the FX-cross-border trade is oligopolized by a very few banks.
Dilip Ratha, who is the oracle of all things remittances at the World Bank, is the Lead Economist on Remittances & Migration data. He cites and I quote:
Dilip Ratha, Lead Economist - Migration and Remittances, Head - Global Knowledge Partnership on Migration and Development, (KNOMAD), Development Prospects Group, World Bank.
This issue of de-risking has become a serious issue not just in Australia (where the MTOs were extended this benefit till 31st of March 2015), but other countries as well, UK, US, Canada, NZ, etc. it is so very difficult to get banking if you are an MSB.
Banks are used to simple transactions, give a check in, cash it out. Take a payment in, deposit it, etc. When banks become financial intermediaries for transactions, and especially cross-border transactions where they have no say or insight as towards the transaction's payout, things can get dicey.
The bank may not necessarily have all the data-points to assess the risk associated with the transaction. This is a huge issue. If someone in say Austin, TX is paying an MTO in the US to send money to their sibling in Mumbai, India, the bank in the US would also see limited transactional data for the transaction. They (the bank) will not see who the beneficiary is, who the payout partner is, etc.
Because they have partial information about the transaction, per existing standards, the transaction is a high-risk transaction, hence the client is a high-risk client.
Most banks (I can safely say in the US, almost - 95% of every state charter bank and credit unions) do not have the adequate software or control mechanisms to record these missing pieces even if the information was provided to them.
Doing so, would require investment into software, hardware, training, human-resources, domain knowledge and possibly enhancing the AML/KYC program. To do so, requires money and time. If by taking an MTO client a bank nets in only say $300,000 in fees per year, the CFO may decide it is not worth the risk, hence the bank will decline the business.
Rather than saying, "hey! sorry, I'm not equipped to handle it" banks use a more skewed nomenclature for it, they term it as de-risking themselves from the money services business.
If the larger banks decide to do the same, smaller banks follow suit. What ends up is that the FX-cross-border trade is oligopolized by a very few banks.
Dilip Ratha, who is the oracle of all things remittances at the World Bank, is the Lead Economist on Remittances & Migration data. He cites and I quote:
“…even though there is little data, to support any connection, any significant connection between money laundering and these small remittance transactions.”
Dilip Ratha, Lead Economist - Migration and Remittances, Head - Global Knowledge Partnership on Migration and Development, (KNOMAD), Development Prospects Group, World Bank.
This issue of de-risking has become a serious issue not just in Australia (where the MTOs were extended this benefit till 31st of March 2015), but other countries as well, UK, US, Canada, NZ, etc. it is so very difficult to get banking if you are an MSB.