The 'de-risking' trend is harming countries that rely on remittances

Ali Magsi - stock.adobe.com

According to the World Bank, total global remittances to low- and middle-income countries will reach $656 billion in 2023. This category of financial support exceeds foreign direct investment and development assistance grants in scale, and serves as a critical lifeline for millions of people around the world who are most in need. The U.S. is the largest source of remittance payments, with roughly $80 billion being sent by individuals to friends and loved ones abroad. 

Despite the sheer volume and importance of remittance payments, a number of existing headwinds continue to restrict access to services, create friction and stifle progress in reducing costs for those sending and receiving critical funds — all of which undermine key global development goals, especially during times of global crisis. Many of these headwinds are embodied in a troubling dynamic referred to as "de-risking," which is when financial firms restrict or cut off services to vulnerable populations. 

There are many reasons for de-risking that were recently cited by the U.S. Treasury Department in a new report, including concern that a particular jurisdiction or "class of customer" might expose a financial provider to heightened regulatory scrutiny due to challenges with know-your-customer requirements, reputational damage if criminals use the service and "implicit signals" from agencies indicating that higher-risk remittance services are disfavored. Service provider reliance on midmarket exchange rates, which become unreliable or unavailable during times of heightened currency volatility, is another source of de-risking, as evidenced recently by reports that some providers had to cut off services in Pakistan, Ghana and Argentina when recipients most needed critical funds, whether for food, medicine or other daily living expenses. 

The cost of de-risking is severe. As the Treasury Department notes "de-risking undermines several key U.S. government policy objectives by driving financial activity out of the regulated financial system, hampering remittances, preventing low- and middle-income segments of the population, as well as other underserved communities, from efficiently accessing the financial system . . . and undermining the centrality of the U.S. financial system." 

Fortunately, there are three concrete steps policymakers and industry can pursue to advance policies and initiatives that can counter the deleterious effects of de-risking and enhance cross-border payments, expand financial access for those who need it most, reduce costs and foster well-regulated remittance service innovation and development.

First, the government should collaborate with the private sector to advance global digital ID frameworks and efforts to fight crime, fraud and abuse. With respect to digital ID, it will take a concerted public-private collaborative effort to develop standards and systems that comport with U.S. norms around privacy, security and reliability. These efforts must be coordinated at the global level with the U.S. taking a leadership role, and ensuring that the global unbanked and underbanked have an ability to access an increasingly digital economy underpinned by money that rapidly moves across geographic borders — including in the context of remittances. We are supportive of recent efforts by the government, including a Fincen and FDIC tech sprint with the private sector, but believe these types of efforts need to be redoubled to meet a critical 21st-century challenge.

With respect to collaborative efforts to combat crime, fraud and abuse, the industry should come together to identify solutions that can better target bad actors, while avoiding undue friction for the overwhelming majority of users sending funds to friends and loved ones. While overall a small part of global cross-border payments, illicit finance continues, including forms that contribute harm to individuals and children around the world. Private sector coalitions should come together now to help identify patterns indicative of crime and efficiently work with law enforcement to bring bad actors to justice.

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Second, policymakers and regulators must pursue policy agendas that can counter the de-risking trends identified above. To this end, building on the Treasury report recommendations regarding the importance of financial access and inclusion as key policy objectives, regulatory guidance and examiner training should emphasize the importance of balancing such objectives with legitimate law enforcement needs. More specifically, especially in the context of small-dollar remittance services, regulators should explicitly note that a risk-based approach to compliance properly tailors expectations based on the size and reasonably surmised purpose of a cross-border payment. For example, small-dollar transactions that do not otherwise indicate suspicious activity should be deemed lower risk by regulators.

With respect to regulatory agendas that can counter de-risking, policymakers should also reject recent calls by some to mandate reliance on midmarket exchange rates under the fiction that it promotes transparency. The midmarket rate is simply a post analysis or set of estimates of backward-looking currency-pair pricing and doesn't reflect the dynamic, real-time nature of foreign exchange, especially in more volatile and less-developed markets. It is further not easy to understand the meaning of midmarket rates and related benchmarks — even for the most sophisticated customers — and few providers actually acquire foreign currencies at such rates. Most problematic, firms that do rely on midmarket rates are forced to suspend services or charge higher fees during times of market volatility, including after natural disasters or armed conflict — directly harming consumers when they most demand access to funds and resulting in higher costs.

Fortunately, current disclosures required by the U.S. Consumer Financial Protection Bureau under the remittance rule, which include the exchange rate, fees and the total amount expected to be delivered to the recipient in their domestic currency, allow for easy comparison from providers. In fact, fintech competition and existing CFPB regulation have helped to drive down the average costs of remittances for consumers, from a global average of over 9% in 2011 to approximately 6% today, with digital providers serving as the lowest cost category. 

Finally, policymakers should expand direct access to Federal Reserve payments infrastructure to well-regulated nonbank remittance providers, which will result in simplified, more transparent and efficient and lower cost transactions for consumers. Leading global jurisdictions are increasingly recognizing the inefficiency that comes from requiring remittance providers to operate through a bank partner just to access government-run payments systems; such unnecessary complexity raises consumer transaction costs, increases friction and delays payments. Allowing direct access for remittance providers would not only better serve consumers, but it would establish a foundation for further payments innovations driven by digitization trends.

The U.S. is a global leader in facilitating payments flows, but complacency will undermine its position. Underserved populations around the world do not have time to wait. By investing in infrastructure for innovation in cross-border payments, the United States can ensure it meets the key objectives identified by the Treasury Department earlier this year and best serves the interests of individuals and communities around the world.