To drive up demand for its automated clearing house payments to Mexico, the Federal Reserve banks have lowered the cost.
“We’re hoping to get the volume to increase. Our aim is to get the fees and spreads as low as possible,” said Larry Schulz, a vice president with the retail payments office at the Federal Reserve Bank of Atlanta.
This month the Federal Reserve banks announced that they had reduced the spread on dollar-to-peso currency exchanges for cross-border ACH payments to Mexico. The old spread was 1% above the daily Bank of Mexico rate; the new one is 0.21%.
Though the ACH service has been available since February, volume has been extremely low. The main barrier is not the fee but that many potential users lack bank accounts.
Almost all the 17,000 ACH payments sent to Mexico in the average month are Social Security payments to American retirees who live there, Mr. Schulz said.
“There is minimal volume for everything else,” he said. “We’re beating the bushes to let people know about” the service.
A main objective for establishing it was to capture some of the enormous market for remittances sent home by Mexicans in this country, Mr. Schulz said. Last year those remittances, averaging $370, totaled $13.2 billion and constituted the second-largest part of Mexico’s gross domestic product, after oil.
Banks have had little success in attracting this business.
Breffni McGuire, a senior analyst with TowerGroup, the Needham, Mass., market research unit of MasterCard International, said that many Mexicans here have no formal banking relationship. That makes them a poor fit for ACH services, which must originate at a bank.
“The bottom line is that there still is not a lot of volume,” Ms. McGuire said.
John Reichert is a vice president with the $80 million-asset Mitchell Bank on Milwaukee’s largely Hispanic South Side. He said Mexican ACH payments are a key part of his strategy.
Mitchell began setting up its Mexican ACH connections last September; this summer it introduced the service to customers. But so far the bank has initiated only 25 to 50 ACH payments to Mexico.
“It’s totally in its infancy,” Mr. Reichert said.
Many residents of that neighborhood are not only unbanked but undocumented, and are therefore especially wary of opening bank accounts, Mr. Reichert. Many use check-cashing stores and send money to relatives and friends at home through services such as First Data Corp.’s Western Union.
“A lot of people don’t mind paying $25 or $50 to send money home” with Western Union, he said. “Our goal is to bring people into the bank and get them away from check-cashing stores and Western Union.”
The $3 that Mitchell Bank charges for an ACH payment to Mexico provides just a tiny margin above the fees it must pay to the Fed, Mr. Reichert said. It is “close to break-even for us,” he said.
But the bank is trying to attract customers. It has also offered a series of educational programs, notably at parents-night events at local schools.
Moving people into the banking system will improve their financial situation and in the long-run make them more valuable banking customers, Mr. Reichert said. That in turn should eventually increase the volume of international ACH payments, he said.
Mr. Schulz said the Fed and Mexico’s central bank both want the remittance traffic to move across the ACH network because wires are redeemed in cash and tend to remain outside the banking system. Sending the money by ACH could greatly increase bank deposits in Mexico and contribute to its prosperity, he said.
“The idea here is to keep the money in the banking system so the banking system could contribute to the overall economic growth,” Mr. Schulz said. “You could get more value from the money if it stays in the banks.”
But Mr. Reichert said many Mexicans who receive remittances from this country also lack bank accounts. Distrust of financial institutions is pervasive, he said.
“Even if I market the service here, there needs to be an account on the other end I can drop the money into,” Mr. Reichert said. “That’s a huge hurdle.”
To lower that hurdle, the Fed has a entered into a deal with a Mexican savings bank, Banco del Ahorro Nacional y Servicios Financieros. Starting in January, Bansefi will offer low-cost bank accounts for people to receive ACH payments from the United States.
Mr. Schulz said he expects this to help increase cross-border ACH traffic — eventually. But bankers do not expect that to happen overnight.
Mr. Reichert said he is starting to see demand from Hispanic professionals. But “with the masses, it’s going to take awhile,” he said.
It will be years before most remittances to Mexico to go the ACH route, the Milwaukee banker said.
