The Wall Street Reform and Consumer Protection Act signed by President Obama last month has a little something for poor migrants who send money home – it includes the following:
- Remittance service providers (RSPs) will be required to disclose to remitters the equivalent amount that will be received in local currency by the beneficiary, the exchange rate used for the remittance transaction, the cost of the transaction, and the date of delivery to the recipient.
- RSPs will need to provide consumers access to error-resolution mechanisms and remedies (including refunds). RSPs would need to provide the contact details of the relevant regulatory authority in the receipt at the time of the transfer. RSPs will also need to provide the information on pricing and error-resolution procedures in the language in which they advertize and promote their remittance services (e.g. Spanish to Mexican migrants, Amharic to Ethiopian migrants etc.).
- Remittances will be included in the strategy for financial literacy for low-income communities, as part of the US government’s Strategy for Assuring Financial Empowerment (SAFE).
- The Federal Reserve and Treasury will work to extend automatic clearinghouse (ACH) systems and other payment systems for remittances to foreign countries, with a focus on countries that receive significant remittance transfers from the US.
- A report will be prepared on the feasibility of using remittance history to improve credit scores and the legal and business model barriers to such credit scoring.
(An excellent summary of the Act is provided by Appleseed.)
The transparency requirements mentioned above are welcome even if they are not new. Remittances are like gifts – the remitter, like a gift-giver, does not ask the beneficiary, “oh, by the way, how much did you receive?” That shyness in the remittance transaction puts the remitter at a great disadvantage relative to remittance agents who might just extract that extra dollar or interest float. When the cost of a service is published openly, the consumer is empowered. This is especially true for poor, disenfranchised people who may or may not be living with proper documents in foreign countries.
Remittance companies are of course opposed to the additional costs that such transparency will involve. But in the end, their worrying is more a short-term, knee-jerk reaction than a carefully considered long-term problem. We have long maintained that remittances are cost-elastic – the lower the cost, the larger the volume of remittances and hence higher the revenue to the RSPs. Instead of a business strategy based on opaque and sometimes questionable pricing practices, one based on transparency and trust will improve the sustainability and formalization of the remittance industry while benefitting millions of poor people around the world.
Beyond disclosure requirements on pricing and exchange rates, the Act includes provisions on financial education, which can have far-reaching effects on financial inclusion. The Act also encourages the expansion of automatic clearing house system to major remittance corridors, another welcome feature. Finally, the provision of the Act calling for a report on the use of remittances for credit scoring is highly welcome.
The provisions of the Act are a welcome departure from the recent AML-CFT (anti-money laundering and countering the financing of terrorism) regulations that forced many correspondent banks to close the accounts of small money transfer operators. Prevention of financial crime involving retail payments can only be easier when people have little incentive to use invisible, underground remittance channels. Such incentives are significantly strengthened by the transparency provisions mentioned above.