Will CFPB's New Remittance Rule Raise Costs?

WASHINGTON — Industry observers are bracing to see whether the cost of international wire transfers will skyrocket once a new Consumer Financial Protection Bureau rule goes into effect starting today.

Some lenders have argued for months that the rule, which requires institutions to provide new disclosures including early cost estimates and error resolutions, will cause rates to increase. But others say the disclosures could spur customers to shop around for the lowest rate, forcing companies to keep fees minimal in order to keep the business.

"I think the answer is somewhere in the middle on whether or not the rates will jack up after Monday but I do think the competitive effect is a strong one," said Tim Burniston, a former Federal Reserve regulator who now heads the U.S. consulting practice at Wolters Kluwer Financial Services. "There's a market for the remittance business and the people involved like to keep that business. At the same time … a spike in fees is possible."

To date, the average cost of sending money overseas has remained relatively stable in recent years. The World Bank reported last month that the global average cost of sending $200 was 8.93% in the third quarter, slightly up from the 8.85% in the previous quarter but down from the 8.96% a year earlier. However, the World Bank added that commercial banks were the most expensive means of sending money, averaging a 12.9% cost in the third quarter.

But the overall impact of the new rule remains unknown.

"Overall, banks are ready … but there's some of them that just don't understand the rule and unfortunately, there's going to be some turmoil," said Michael Rockouski, senior vice president of the financial institutions practice at global payments provider, Cambridge Mercantile Group. "For those banks, all heck will break loose come Oct. 28."

Rockouski said smaller community banks that do not utilize a bankers' bank are especially finding it difficult to continue to offer remittances at current costs. The CFPB lightened its initial rule by exempting institutions that do 100 or fewer remittances per year. Still, Rockouski said those institutions that are captured by the rule are weighing charging higher premiums to cover new regulatory costs.

"Every institution we've spoken to, they're all placing premiums on any consumer-oriented payment now." he said. "What was a $10 to $20 fee in the past will now be $20 to $40 … This is going to change the landscape dramatically."

Not everyone agrees, however. Consumer advocates and the CFPB have argued that by requiring a provider to release a cost estimate and give the consumer a short period of time to shop, it will force institutions to offer competitive rates.

"We expect the market to become more cost-driven so providers can decide where to put their price point but then consumers can decide to shop," said Annette LoVoi, director of financial access and asset building at the Appleseed, a nonprofit network of public interest justice centers. "Because of this, we're looking to see pricing trend downward."

LoVoi also argued that it will be hard for institutions to turn away from the billions of dollars that flow out of the country per year. According to the World Bank, the migrant outflow of money from the U.S. to other countries came to a halt in 2009 and remained stagnant for three years, hovering around $50.5 billion until 2012 when remittance outflows picked up to nearly $51.1 billion.

"We believe that the remittance volume is huge and will continue to grow and this will be a favorable market for financial institutions that want to treat their customers fairly," LoVoi said.

As with any rule, the CFPB plans to monitor market trends and has the ability to alter its rule if it finds that consumers are being harmed more than helped. Michelle Person, a CFPB spokeswoman, said in a statement that the costs of new disclosure and error resolution standards are already a part of the credit and debit card markets.

"We expect that the protections will help promote competitive pricing by helping consumers to compare prices and get the services they are promised," Person said.

The CFPB has also already extended the effective date of the remittance rule and amended it to relieve some of the paperwork burden. However, the agency only released exam procedures last week, just shortly before the rule took effect, which may create some challenges for compliance, Burniston said.

"The CFPB has been pretty good about keeping the industry up to date with what they've been doing on this regulation … but the exam procedures really didn't come out until the other day and it's a fairly thick package," he said. "To absorb that and understand what the examiners are focusing on is going to be challenging."