About $110 billion a year leaves the U.S. and is sent to families of foreign workers. Come February, sending such payments overseas will become harder for money transmitters. Dodd-Frank Section 1073 amends the Electronic Funds Transfer Act, which governs consumer payments initiated in the U.S. but sent to recipients in other countries.
Comprehensive disclosures, hard-to-calculate fees and taxes and greater liability are all part of the new rules, which were published in January of this year and take effect Feb. 7, 2013.
To put this in perspective, most international remittances don't go through banks. About 40% of consumers' international payments are made with physical cash, according to Neil Vernon, development director at Gresham Computing. Another big chunk of payments is made through closed networks such as Western Union and m-Pesa. Banks process less than 20% of these transactions.
But banks do need to accommodate their customers who need to make such payments, usually to send money to their families back home.
The first requirement of the new rules is disclosure - the remittance provider must state the amount the recipient will receive denominated in the currency that the recipient will receive, the amount of all fees charged by the remittance transfer provider in connection with the remittance transfer and the exchange rate to be used, to the one-hundredth point. Once the payment is made, the sender must provide the earlier disclosure again, along with the promised date of delivery to the recipient, the name and either telephone number or address of the recipient (if provided by the sender), error resolution rights as prescribed by the bill and contact information for the remittance provider and for the provider's state regulator as well as the number of a consumer complaint hotline. For electronic remittance transactions, the disclosures can be made electronically but must comply with the E-Sign Act.
"The bigger challenge is providing accurate information on the disclosure with respect to fees and taxes that will be relevant to that challenge," says Greg Murray, global product manager for Bank of America Merrill Lynch's USD Clearing and Banknotes businesses.
"What needs to be disclosed is how much that payment is going to cost end to end and when it will get there," Murray says. "In order to determine how much it will cost, you need to break that down to the various components of the payment. There's the fee from the originating institution. On the far end of the payment, you've got fees charged by the receiving bank, so say if a payment goes to Hong Kong, the recipient might be charged a fee by their bank for the incoming credit. In the middle of these two, you have the correspondent bank fees. Not every bank that initiates a wire in the U.S. has a relationship with the beneficiary's bank. In fact, most of the time they don't. They need a correspondent, a large global bank, to be able to deliver that payment to the beneficiary's bank. Even the correspondents rely on correspondents. No one bank has account relationships with every bank in the world. It's not practical."
Having little control over that chain of payment processers, banks are hard put to get the right disclosures to the consumer up front. "The easy part is, what is Bank of America's fee to the consumer," Murray says. "Where it gets difficult is the intermediary bank fees and beneficiary fees at the far end. Those fees tend to be different from bank to bank and depend on the reciprocal business banks do with each other." There could be a standard price and a discounted price. Some types of payments are naturally subject to different sets of fees than others.
Local taxes and currency exchange rates at the time of payment completion are also tough to determine but must be disclosed under Section 1073.
"No one questions the intention behind the regulation, it's a solid and worthy objective to provide more transparency to the consumer," Murray says. "But based on the mechanics of how cross-border payments work, it's not optimal to provide an exact set of disclosures."
The information Bank of America provides to its clients will come from a combination of data it receives directly from the correspondent banks, data it gleans from market research, and industry practice, as well as estimates where there's no empirical data.
The second aspect of Section 1073 that presents a challenge to banks is about the consumer's rights to amend, recall or cancel a payment. Even if the consumer made a mistake and say, provided the wrong account number, the bank must immediately reissue the payment correctly, before it has a chance to recall the erroneous payment. Consumers have 180 days to potentially reissue or change a payment.
Bank of America is investing in technology to manage the fee and tax information. It is also building linkages from that repository to the branch system and other interfaces to retrieve that information in real time. The bank hopes to have its platform ready by November.
The bank is building this system itself. "With 1073, the time frame for implementation between when the rule was made final and when it became effective was no more than 13 months," Murray says. "I'm not certain the technology providers had sufficient time to be able to create an off-the-shelf solution. The tenets of the regulation were still in a fair amount of flux until February of this year. Some banks will choose to build their own solutions and others may choose to talk with other banks that are building their own solutions as well as tech vendors."
Among the banking industry as a whole, what's needed is more visibility, Vernon says. "The example I use is FedEx - with FedEx, you've got complete visibility, you can send your $10 package from New York to London and see every step of the way where that package is, even when it's with third-party providers. You can't do that in the banking network, the banks themselves would struggle to tell you exactly where a transaction is, let alone give you a complete life cycle view of a transaction. They've got a lot of work and engineering to do within any one institution."
Small banks will be looking for absolute certainty of what their fees will be and stronger service level agreements with bigger providers, Vernon says. Some will white label an offering from Citigroup or Bank of America, others will build an infrastructure to deal with this.
BOTTOMLINE Banks and other money transmitters need to hurry to get their systems ready for disclosure and liability rules in Dodd-Frank.