How CFPB's Remittance Rule Will Reshape Global Money Transfers

WASHINGTON — The Consumer Financial Protection Bureau recently revised its final rule on remittances to make it less burdensome for banks, but it will still have a significant — though unclear — impact on international money transfers.

Bankers said the new rule, coupled with global efforts to reduce transfer fees, will require them to update their automated systems and likely rework their fee structure, among other major changes.

Though there are residual concerns about the regulation, many in the industry see it as necessary given the rising costs of international money transfers and the difficulty of comparing bank fees.

The CFPB remittance rule is "definitely needed in the industry," said James Fleisher, senior vice president and manager of the electronic payment and global trade operations for Bank of the West in San Francisco, in an interview. "With the changes in the rules and giving the customer that full transparency along the way, it gives them a much better understanding upfront of what is involved in the cost of the transaction."

At issue is a rule first issued in February 2012 that requires banks to provide more disclosures about international remittances. After complaints from the industry that it was nearly impossible to comply with, the CFPB issued a revised final rule late last month to make it easier for banks to comply with the regulation.

But a key question remains how the new rule, which takes effect Oct. 28, will affect consumers, including whether remittance fees will go up or down.

"Certainly costs have gone up and how an institution chooses to pass those costs on remains to be determined," said Mark Erhardt, senior vice president of retail products at Fifth Third Bank, in an interview. "It will depend ultimately on how many financial institutions stay in the business ... if a large number continue to stay, you will see a very competitive marketplace."

The global average cost for sending remittances was 9% in the first quarter and has remained somewhat stable in the last year, according to the World Bank. But that percentage equals roughly a $18 charge per $200 transfer, which has raised concerns for World Bank's Massimo Cirasino, who heads the payment system development group.

Cirasino recently cautioned global lawmakers about "leaks" in international money transfers generating excessive fees for consumers, particularly migrant workers who sent $400 billion in U.S. dollars to their families in 2012. Financial institutions received roughly $36 billion in fees from migrant workers alone last year based on the global percentage average.

"A large proportion of the money is drained away by the transaction costs of sending money internationally," Cirasino said in a column in The Guardian in February. "Given the typically low incomes of migrants and the small amount of each remittance transfer, too much is being spent on these transactions — and too little of the money is reaching migrants' families."

Cirasino estimates migrants could save about $16 billion annually if lawmakers reduce global remittance prices down to 5% by 2014. The CFPB's remittance rule should help with that by requiring banks to disclose certain fees and tax estimates to consumers up front. It also requires the provider to "attempt" to recover any funds deposited into the wrong account when a sender provided incorrect information.

Industry advocates say the CFPB's final remittance rule will drive down pricing through requiring banks to disclose price estimates for the entire transfer.

Yet others say that banks will also raise remittance fees due to the cost of new automated systems designed to ensure compliance with the new CFPB rule.

"There are competing forces here," said Jeremy Rosenblum, a partner at Ballard Spahr who leads the firm's consumer financial services group. "What the CFPB has done in amending the rules is to reduce prices from where it would have been under the rule's earlier formation. Whether that will be less than where prices are today, I just don't know."

Nor do most bankers. Many said their own costs would rise initially in just updating their systems to comply with the rule.

The CFPB estimates that the total one-time burden for 5,915 respondents would amount to 385,000 hours. But that burden would eventually be reduced to 276,000 hours per year.

Some domestic banks have already updated and prepared their automated systems.

But domestic banks face extra challenges when transferring to banks oversees that don't have to comply with the remittance rule, especially institutions in Third World countries or small villages that use manual systems.

"In order to consistently provide disclosures, banks are going to either have to automate it or centralize" their systems, said Ben Mendelsohn, vice president and senior retail product manager at Fifth Third Bank.

Still, Mendelsohn and other bankers say a more centralized system is better for consumers in the long run.

Under the rule, "customers could, in effect, shop around to determine who provides the best value of service and that will put some pressure on the industry to create efficiency within the network to reduce costs," Fleisher said.

Even now, banks such as Fifth Third are working with corresponding institutions in trying to guarantee costs up front in the contract, which makes it easier to comply with the CFPB's disclosure requirements. Typically, the sending bank charges an up-front fee, but any other institution that corresponds during the transmission deducts an undisclosed fee before reaching the recipient's institution.

Many banks "are working through an open network and so they're relying on banks throughout the world that are not required to provide the fee information to us," Mendelsohn said. "So it's just a slow progress to get banks to come around to the guaranteed" fee agreements.

There are also some technicalities to the rule that may take time for banks to process, including which outside fees and taxes need to be disclosed and when a bank must let the consumer know that the recipient bank increased its rate after multiple transactions. Even when banks are dealing with an error in the transaction, like receiving the wrong account number, they must prove they made a "reasonable" effort to remedy the situation before they are off the hook for compensation.

"There are little things in the rule that are going to take time and give some hiccups," said David Pommerehn, counsel for legislative and regulatory affairs at the Consumer Bankers Association. But "the new rule is much more appropriate for serving consumers and keeping banks in this game ... [the CFPB] made it workable."

Because it is difficult to determine what other institutions, particularly foreign institutions would take in fees during a transfer, the CFPB amended the final rule so banks would have the option of disclosing certain outside fees and taxes by the receiving institution. It also relieved banks of a requirement that would have forced it to refund a customer when the sender provided certain wrong information, such as an account number.

Erhardt at Fifth Third said the bank would have stayed in the remittance business under the original rule, but it would have been difficult to maintain current volumes.

"We ended up with a good balance," he said. "The consumer protections are there but there is also not a significant restriction on servicing and that's the win-win."

Though no one can predict exactly where pricing will fall once the rule has been fully implemented, bankers agreed it would be far higher had the CFPB stuck with its original rule.

"Under the earlier version, there's no question in my mind that costs would have gone up substantially," Rosenblum said. "It would have driven many banks out of the market."