Why are money transmitters in the U.S. often treated harshly or cautiously by financial institutions?
Money Transmitter License
Asked by Question Bot04/Jul/20141 answer
1 Answer
F
Faisal Khan
Answered 04/Jul/2014
There are many factors that contribute towards this. Money Transmission itself is a complex business, that spreads its tentacles into 50 different states and federal supervisory bodies.
I would humbly disagree with Dr. Joseph Wang's answer. That may be general in the rest of the world, but having worked with MSBs personally in the US, I can relate and talk from experience of the following.
The risk of taking a money transmitter onboard stems mostly from the transaction management system (TMS) that the banks would require to do deep scrutiny on transactions that an MSB is onboarding (be it domestically or internationally or both). For small community banks and credit unions, this truly represents additional investment that they simply are not willing to make, just to onboard a few clients. A typical investment for a small community bank is instantly around US$ 1 Million and hiring of 4-6 additional staff to cater to MSB based businesses. Small banks see this as a burden they can do without. So they say no!
Others will not onboard simply because from an actuarial point of view their risk index and scoring of the bank goes up. By simply dealing with an MSB, your risk goes up. By dealing with an MSB that does cross-border, risk goes up further. By dealing with an MSB that is handing off transactions to another MSB for onward processing, risk goes up further.
The US laws are created in such a way, that everyone in the chain gets to be blamed should a transaction go wrong. It is not as if money laundering, or drug money is not channeled through, it is and it is done so in a very innovative fashion. MSB's are one of the most regulated entities in the US. They invest $100,000s into regulation/compliance every year if not every month. 99.99% of them operate on the very strict and the right side of the law. Yet despite all these assurances, they are the most mistrusted category of clients for the bank.
Because the banks themselves will make very little money from MSB (MSB don't like to keep money in the bank, but like to keep it moving), so the banks are simply acting as a financial clearing house for them, nothing more. They don't even get to do overnight borrowing on the deposits.
Because of these three factors:
MSBs are simply just not a good fit for the banks. You'd have to go through a whole lot of paperwork, assurances, surety bonds, etc. just to be able to open an account with a Bank in the US if you are an MSB. So much so, that today, "With whom do you bank with?" is almost akin to asking a secret question from one MSB to another.
Many small and mid-size banks have actually a very myopic view of the MSB business and in many cases are ignorant as to what an MSB does. They will decline you, just because everyone else is declining (surely that has to be the right reason!).
Large Banks will not entertain MSBs until and unless they are truly well-established (the definition of well-established means, 10+ years in the business, and a really big group backing you up financially). Large banks are happy to serve as correspondent banks for overseas banks and make money through that arena (along with a day or two worth of float).
All in all, the financial exclusion of MSBs by the Banks is now a serious issue for 1000s of MSBs across the US and is now being discussed on various platforms (Federal, State Regulators, Banking Commissions, etc.) to find a solution for the industry that is most regulated in the US, and yet at the same time is being choked by the very financial institutions with whom they have to work with.
I would humbly disagree with Dr. Joseph Wang's answer. That may be general in the rest of the world, but having worked with MSBs personally in the US, I can relate and talk from experience of the following.
The risk of taking a money transmitter onboard stems mostly from the transaction management system (TMS) that the banks would require to do deep scrutiny on transactions that an MSB is onboarding (be it domestically or internationally or both). For small community banks and credit unions, this truly represents additional investment that they simply are not willing to make, just to onboard a few clients. A typical investment for a small community bank is instantly around US$ 1 Million and hiring of 4-6 additional staff to cater to MSB based businesses. Small banks see this as a burden they can do without. So they say no!
Others will not onboard simply because from an actuarial point of view their risk index and scoring of the bank goes up. By simply dealing with an MSB, your risk goes up. By dealing with an MSB that does cross-border, risk goes up further. By dealing with an MSB that is handing off transactions to another MSB for onward processing, risk goes up further.
The US laws are created in such a way, that everyone in the chain gets to be blamed should a transaction go wrong. It is not as if money laundering, or drug money is not channeled through, it is and it is done so in a very innovative fashion. MSB's are one of the most regulated entities in the US. They invest $100,000s into regulation/compliance every year if not every month. 99.99% of them operate on the very strict and the right side of the law. Yet despite all these assurances, they are the most mistrusted category of clients for the bank.
Because the banks themselves will make very little money from MSB (MSB don't like to keep money in the bank, but like to keep it moving), so the banks are simply acting as a financial clearing house for them, nothing more. They don't even get to do overnight borrowing on the deposits.
Because of these three factors:
- Investments in systems/HR to be able to process and handle adequately MSBs
- Actuarial Risk
- No deposits, continuous flow of funds
MSBs are simply just not a good fit for the banks. You'd have to go through a whole lot of paperwork, assurances, surety bonds, etc. just to be able to open an account with a Bank in the US if you are an MSB. So much so, that today, "With whom do you bank with?" is almost akin to asking a secret question from one MSB to another.
Many small and mid-size banks have actually a very myopic view of the MSB business and in many cases are ignorant as to what an MSB does. They will decline you, just because everyone else is declining (surely that has to be the right reason!).
Large Banks will not entertain MSBs until and unless they are truly well-established (the definition of well-established means, 10+ years in the business, and a really big group backing you up financially). Large banks are happy to serve as correspondent banks for overseas banks and make money through that arena (along with a day or two worth of float).
All in all, the financial exclusion of MSBs by the Banks is now a serious issue for 1000s of MSBs across the US and is now being discussed on various platforms (Federal, State Regulators, Banking Commissions, etc.) to find a solution for the industry that is most regulated in the US, and yet at the same time is being choked by the very financial institutions with whom they have to work with.