Consumers transfer tens of billions of dollars from the United States each year in international remittances. In 2009 the World Bank estimated that US$48 billion was sent from American consumers to friends and family in other countries, a number that represents 0.3% of our GDP.While consumer international remittances are a big business, transparency and consumer protection rules have been missing — and transaction fees have been hard to understand as a result of a complex chain of foreign currency spreads and agent fees.This is the starting point for the Consumer Financial Protection Bureau (CFPB), a new regulatory body established in July 2010 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the same act that included the Durbin Amendment, now Regulation II).
The CFPB has just created its very first Final Rule. It is an Amendment to Regulation E (which implements the Electronic Fund Transfer Act) concerning international remittances. Lets look first at the CliffNotes summary of the rule before we move on to explore the implications. Refer to the Final Remittance Rule summary and the actual text for more details.
In general, the Final Remittance Rule applies to remittance transfers that are more than $15, originated by a consumer in the U.S., and sent to a recipient in a foreign country. This regulation applies to many types of transfers including: wires, international ACH, cash-to-cash and other account-to-account, account-to-cash and cash-to-account products offered through closed network systems.
The Final Remittance Rule is primarily directed at non-bank money transmitters but applies to most companies that provide remittance transfers including banks, thrifts and credit unions. The rule requires:
- Disclosure to the consumer of the exchange rate, fees and the net amount to be delivered before the consumer finalizes the transaction;
- A receipt repeating disclosure information with an arrival of funds date;
- A 30 minutes (or more) cancellation window and full refund if the consumer cancels the transaction;
- Companies to investigate disputes and remedy errors; and
- Companies to be liable for the acts of their agents and authorized delegates.
The rule also outlines the circumstances under which funds loaded to a prepaid card would be deemed a remittance transfer. The determining factor is whether or not the funds will be received in a foreign country, and thus subject to the rule.
The new rule takes effect in January 2013. There is an exception for insured depository institutions and credit unions that can provide estimates of the amount to be received instead of exact actuals until 2015.
Request for Public Comment
The CFPB is concurrently requesting public comment on two areas:
- The definition of “remittance transfer provider” to help determine when a company should be excluded from the regulation because it does not provide enough remittance transfers to make remittances a normal course of business.
- How to apply the rules when the consumer schedules a remittance transfer in advance and the fees may need to be estimated.
In addition to obtaining public comment, the CFPB is in discussions concerning the implications for state or federal anti-money laundering (AML) regulations.
This rule has considerable implications with both intended and potentially unintended consequences. Money transmitters will need to make investments to roll out accurate pre-transaction disclosures and post-transaction receipts. Open networks like ACH and wires will need to support their participants with robust information to enable compliance. Do these compliance investments raise the bar significantly for players in the remittance space? Will it mean a concentration of volume at providers who can afford the changes?
Another question that many of us are asking is whether more disclosures will bring lower or higher prices. On the surface the rule will make it easier for consumers to shop and compare different remittance products – likely creating downward pricing pressure in the market. But a possible unintended consequence is that money transmitters will have to price their services higher to ensure their pre-transaction disclosures are accurate despite a complicated chain of agents, currencies and government fees. We saw the same thing several decades ago when the government began to regulate published airline schedules. In an attempt to make it more transparent about the on-time departure and arrival performance of each flight, the airlines ended up increasing the end-to-end flight time as a buffer.
What do you think? Share your thoughts by posting a comment below or sending me an email.