Below is a lightly edited transcript of the podcast:
POLO ROCHA: I met Julio outside a branch of Western Union in the Adams Morgan neighborhood of Washington D.C. --- a couple of days before Thanksgiving. People were coming in and out of the branch, sending money back to their families thousands of miles away. Julio is one of them, and he agreed to talk to me if I only identified him by his first name.
JULIO: La verdad que hoy en día está muy caro.
ROCHA: Julio, who is 27 and works as a chef, has lived here since 2012. He says he sends money home to his family in El Salvador every two weeks or so, and finding ways to do it isn’t the hard part. There are companies like Western Union and MoneyGram all over the city, in grocery stores or pharmacies or the check-cashing shop where we’re talking. And these days, you can also do this entirely online. But he says it is expensive.
JULIO: Yo de vez en cuando hago mis envíos hacia mi país para ayudar a mi familia y pues resulta algo costoso, la verdad.
ROCHA: Western Union can charge $8 to send a few hundred dollars back home, and the fees cut down how much his family ultimately gets. Millions of families all over the world depend on workers in countries like the U.S. for those remittances — every year,
From American Banker, I’m Polo Rocha, and this is Bankshot, a podcast about banks, finance and the world we live in.
We talk a lot on this podcast about the unbanked, those that don’t have checking or savings accounts at a bank. And it’s a big topic of conversation among policymakers -- how to bring people into the banking system instead of less-regulated alternatives.
The U.S. has made progress in reducing how many people are unbanked, but the most
We don’t know how many of those 7 million are immigrants, but we do know there are some big disparities. Here’s an example from the FDIC’s estimates: Some 12 percent of Hispanic households were unbanked in 2019, compared to just 2.5 percent of white households. So one way of reaching those potential customers could be to offer the services they need, like international money transfers. But for the most part, banks just don’t do this.
JOSE QUIÑONEZ: The financial institutions as a whole, you know, have relegated poor people as secondary users to the products and services that they create for other people. You know, they're not innovating, they're not providing services that are actually real, you know, to their needs, right? And so, remittances is part of that. It’s an example of that.
ROCHA: That’s José Quiñonez. He runs the Mission Asset Fund in San Francisco, a nonprofit that offers zero-interest loans to immigrants and entrepreneurs. The fund lends people money so that they can pay for immigration-related application fees, or to pay for school or other expenses that come up.
It’s a far cheaper alternative than payday loans, and they perform well — ninety-nine percent of borrowers have paid the loans back. And the fund reports people’s repayment history to credit bureaus, which helps them improve their credit score or build a credit history in the U.S.
QUIÑONEZ: What we're trying to demonstrate is that, you know, servicing the needs of low income immigrants, you know, it's actually not that difficult. It's not that hard. It is not that expensive, either. You know, people actually do follow through with their commitments, right?
ROCHA: Quiñonez and other community advocates say that banks are making a mistake by basically ignoring the remittance market. It’s not that they don’t offer remittances — many banks technically do offer these services. But banks don’t really tell people that they can send their money overseas, and when they do, they focus on wealthier immigrants who can send more money rather than just a few hundred dollars at a time.
We’ll get into the details on why in a little bit, but the reason why remittance services aren’t advertised is essentially because banks don’t think it’s profitable. And that’s partly because it is pretty expensive to send money overseas — it requires building out a bigger infrastructure for remittances and complying with a whole array of national and international money laundering rules to ensure banks aren’t unwittingly financing illegal activities.
But there is a cost to banks in ignoring the remittance market; getting immigrants in the door with attractive money transfer offerings could also give them greater access to bank products. This is not a new argument. Here’s former Federal Reserve Chairman Ben Bernanke making the case for this at a 2005 congressional hearing
ROCHA: Of course, that was in 2005, and a lot has changed since then. Several financial technology companies have popped up that focus specifically on remittances. Xoom, which is now owned by PayPal, was the pioneer in this space, and was just getting off the ground in 2005. More recently, fintechs like Wise, Remitly and World Remit
The traditional remittance giants —
These digital channels and greater competition from fintechs have helped drive down the cost of remittances over the years. Here is Talie Baker with the consulting firm Aite-Novarica.
TALIE BAKER: Having a digital first, digital only business model, much more cost effective than having the brick and mortar stores and agents everywhere. So that's driven the cost, the overall cost of remittances down. it's driven down the margins that companies like MoneyGram and Western Union had made in the past.
And then there are more recent developments with cryptocurrency. Facebook, now known as Meta, has started a crypto pilot program that sends remittances between the U.S. and Guatemala. And El Salvador’s president has declared Bitcoin as legal tender in the country, partly to improve the remittance system.
The laws governing remittances also changed after the financial crisis, creating rules that industry groups say are too burdensome and have pushed banks out of the market.
So banks are looking at the current environment and saying it’s just not worth it. Here is Talie Baker again.
BAKER: You've got the compliance, you got, you know, the infrastructure that has to be set up to be able to do remittances. And then the fact that people are going online, so they'd have to build some type of digital capabilities. These are all the things that are making remittances so cost prohibitive for banks.
ROCHA: But remittances are a big business. The World Bank estimates people will send $589 billion in remittances globally to low- and middle-income countries this year. The U.S. is the largest source of remittances, and India, China, Mexico, the Philippines and Egypt are the biggest recipients.
Some countries’ economies are particularly reliant on remittances. They’re expected to account for 44 percent of Tonga’s GDP this year, 35 percent of Lebanon’s and 26 percent of El Salvador’s.
Many worried the pandemic and economic crash would cause a drop in remittances. But despite a dip early on, the opposite happened. People started sending more money.
Here’s the World Bank’s leading economist on remittances, Dilip Ratha, going through three reasons why remittances went up.
DILIP RATHA: The first one is migrants’ willingness to help their families in times of difficulties. Second, the economic recovery, which was a bit more surprising than anybody expected. And that process was aided by the third reason, which is the fiscal stimulus programs put in place.
ROCHA: In terms of the dollar amounts, banks actually played a pretty big role in transferring those remittances. In a
In terms of number of customers served, banks are far behind — that same CFPB report found that banks processed just 4 percent of the individual remittance transactions.
Quiñonez and other community advocates argue that banks are thinking about the issue too narrowly.
QUIÑONEZ: I think that's where banks are leaving a lot of value on the table, you know, because they're not growing with the clients and not developing products that are, you know, meaningful, or that can bring real value to the client and to the bank. Instead, they’re just relegating that client base to other providers.
ROCHA: Critics also say that banks that do remittance services don’t advertise them. And that appeared to be the case with Julio. He has an account at Bank of America, and he pays them a monthly maintenance fee to keep the account open. But the bank has only ever offered him ways of sending money within the U.S., not outside of it, and he wishes that the monthly fee covered the costs of sending money home.
JULIO: “Si los bancos los pudieran incluir pues sería perfecto.”
ROCHA: I asked Bank of America about this, but the bank declined to comment.
Now, there are definitely banks and credit unions that are far more engaged in remittances. There are smaller niche institutions that do this, and banks and credit unions that focus on immigrant communities tend to make the service more front-and-center. But the biggest bank that has a sizeable remittance business is Wells Fargo, the country’s third largest bank. Wells Fargo is smaller than Bank of America and JPMorgan Chase, but it processed more remittance transactions that those two banks combined. That’s largely thanks to Daniel Ayala, who spent 18 years at Wells Fargo and ran its remittance group until June.
DANIEL AYALA: It's really rather difficult to ignore and puzzling to understand why traditional financial services institutions are not focused on the opportunity.
ROCHA: Ayala says banks can offer these remittance transactions profitably, and that they can open the door for banks to offer their immigrant customers all their other products as well. And he sends remittances too — he grew up in Colombia and moved to the U.S. as a teenager. He says he’s sent money to his mother in Colombia every month since 1986.
AYALA: There's a huge sense of accomplishment as an immigrant, when you're able to send that first transaction back. And then you continue to send that is a way to a demonstrate that your family that you are making progress, number one, and number two, is a sense of personal pride to be able to provide for those, right? The same way that people send money to their kids in college, in the same way that some of us care for our grandparents or our parents — it's no different than that.
He now works for an immigrant-focused fintech called Welcome Tech. The company offers financial services to immigrants and aims to be their “digital Ellis Island.” Welcome Tech plans to launch its own remittance services next year.
I asked Wells Fargo for its vision for its remittance operation since Ayala left. In a statement, the company said that it is “proud to give customers access to an economical, convenient and dependable way to send money home.” It also said it continually looks for ways to improve its services, including in remittances, to ensure they are “convenient, fast, secure and meet our customers’ financial needs.”
But as we’ve said, banks in general don’t really make this service available, and Ayala says that is partly because of a fear of the consequences if regulators think they are breaking any rules.
AYALA: The entire banking system operates in fear, in fear of being penalized for making a mistake, and for being taken to the central square, and shown off as a bad actor.
ROCHA: And to be fair, there are a lot of rules one could break in the remittance world. There are consumer protection rules that make the process more transparent for people. There are “know your customer” regulations, which require banks to verify who their customers are. And there are related anti-money laundering rules, which protect against financing of criminal or terrorist activities. And they have to meet those requirements not only in the U.S., but in whatever country they send money to.
Most U.S. banks don’t have big branch footprints outside the country, so to complete those transactions they need to partner with local banks, which are known as correspondent banks. And that means that they have to trust that those correspondent banks’ employees are doing a good job complying with the rules. All of that amounts to a significant up-front compliance cost that most banks have simply decided isn’t worth the risk.
STEPHEN CECCHETTI: The big European and American banks especially, have been saying, you know, “I do not want to do correspondent banking for people in certain parts of the world.”
ROCHA: That’s Stephen Cecchetti, an economist and professor at Brandeis International Business School. He’s also a former top official at the Bank for International Settlements, the Swiss-based institution known as the bank for central banks. Not taking up correspondent banking relationships for the purpose of remittances, or anything else for that matter, is part of a broader trend known as “de-risking.” That is exactly what it sounds like: banks getting out of riskier sectors instead of managing those risks.
CECCHETTI: They've been cutting back on their correspondent banking relationships, because they say, “This is too risky.” The business isn't profitable enough, I can wipe out 20 years worth of profits with one mistake. And it could be an honest mistake, it doesn't matter. The authorities don't care about honest mistakes, right? Mistakes are mistakes when it comes to compliance.
ROCHA: Human rights groups like OxFam have raised alerts about banks severing ties with these correspondent banks, or canceling the bank accounts of companies that offer remittance services.
And this de-risking trend got some attention in 2014 and 2015, when U.S. banks stopped doing business with Somali money transmitters and cut off the flow of remittances to the country. Lawmakers this year tasked the U.S. Government Accountability Office to study this issue.
But as with many banking stories, this one also comes back to the passage of the Dodd-Frank Act. While the law is best known for creating a new regulatory framework for U.S. banks and creating the CFPB, a lesser-known provision extended new consumer protections for immigrants. We’ll get into that after this break.
ROCHA: This is former Congressman Barney Frank, co-author of the Dodd-Frank Act, speaking at a press conference announcing the passage of his bill out of the House Financial Services Committee in 2009. That bill created the Consumer Financial Protection Bureau, which was designed to police consumer financial products — including remittances.
ROCHA: As Frank said, federal consumer protection laws for remittances were basically non-existent before Dodd-Frank. If a consumer felt a remittance company was abusing them, there wasn’t all that much that federal regulators could do to take action.
The law put remittances squarely under the authority of the brand-new CFPB. And the agency has made some use of its new enforcement powers. It has fined a few non-bank providers for violating the rules.
The CFPB also wrote a big rule governing remittances in 2013 that required remittance companies to be more transparent with people on how much it will cost them to send money home and how much the recipient will get. It also gave customers the right to cancel a remittance and ask for a refund, and it created a whole process that companies need to follow in case there’s an error somewhere along the way that they need to fix.
But bank and credit union groups say the rule made it too expensive for their members — particularly smaller ones with fewer resources — to offer these services at scale, and so some of them just don’t.
ANN KOSSACHEV: It contains some really burdensome compliance requirements. So it's resulted in not only compliance challenges, but also an increased expense, so fewer credit unions are offering the service as a direct result of the rule.
That’s Ann Kossachev, the director of regulatory affairs at the National Association of Federally-Insured Credit Unions, or NAFCU.
KOSSACHEV: We do know that there is still a need for quick payment services. And it would be great if more community financial institutions could play a bigger role in the remittances market because we know there's a need.
ROCHA: Under the original rule, a bank or credit union that processed 100 or fewer transactions in a year wasn’t subject to the CFPB’s remittance requirements because remittances weren’t a day-to-day part of their business. But NAFCU and other groups argued that the transaction threshold of 100 was set too low, and said it discouraged members from playing a bigger role in offering remittances. So they had asked the CFPB to increase the threshold.
And the agency responded to those concerns under the Trump administration. The CFPB set a new threshold that exempts banks and credit unions from the rule if they process 500 or fewer transfers. So, for example, if an institution processes, say, 400 remittances in a year, they don’t have to meet the CFPB’s requirements for offering those products.
Industry groups say that number is still too low and will continue pushing their members away from offering the service. But consumer groups worry the changes have made remittances less transparent, and they hope it doesn’t result in customers being shortchanged. This is Margot Saunders, senior counsel at the National Consumer Law Center.
SAUNDERS: Our concern is we've got a whole federal rule that Congress has passed 11 years ago now, and that the CFPB regulates under requiring robust protections for consumers. Why should some providers, especially when they provide as many as 500 a year, not have to comply with that rule? What are the damages to the consumers who get those 500 or 499, remittances from those institutions?
ROCHA: For now, no one expects an immediate change to the status quo: Western Union and MoneyGram will continue processing the bulk of the transactions, fintechs will carve out more market share, some companies will continue experimenting with cryptocurrency-based solutions, and banks will be mostly out of the picture. But perhaps one way of changing this dynamic is for banks to partner with fintechs rather than building out remittance products on their own.
That’s an option floated by Manuel Orozco, one of the leading experts on the intersection of remittances and financial inclusion.
MANUEL OROZCO: By making that connection, you can basically operate globally. So the question is whether they have thought about going in that direction as another service. I think the option could be there. But I think for the most part, the business models still don't see this as a relevant market.
ROCHA: Banks could also step up their partnerships with the legacy providers like Western Union and MoneyGram. Like the newer fintechs, those companies are already doing the work of sending money across borders — and verifying that individual transactions are safe.
And these partnerships are already happening to a certain extent. Western Union and MoneyGram have operations inside bank branches where they can process remittances for consumers. But this is a very physical model — requiring customers to come into a branch during its business hours.
And what’s less common — at least here in the U.S. — is an all-digital solution for international transfers done through a bank. Rather than sending money through Western Union or MoneyGram at a bank branch, you could log into your bank app and send money through those providers. Banks could advertise this service to new and existing customers, and they could keep remittance senders engaged on their bank apps.
But while there are a few examples of this, executives at the two companies say they haven’t seen much interest from banks to do that here in the U.S.
Here’s MoneyGram’s Chief Financial Officer, Larry Angelilli.
LARRY ANGELILLI: Outside the United States, banks are huge partners for us. I mean, we partner with banks all over the world. The United States has actually been sort of the exception, and I'm not really sure why.
ROCHA: And here’s Rebecca Mann, who is Western Union’s global head of enterprise partnerships and commercial development. She told me Western Union has about 100 banks across the world that have integrated with the company’s digital service, either by putting their own label on it or co-branding the service with Western Union. But for whatever reason that hasn’t caught on quite as much in the U.S.
REBECCA MANN: My greatest wish, is that banks in the United States would wake up and be like, Why am I sleeping? I've got to serve this customer segment, and give them a better experience. And I think it would create so many great changes in the US in terms of banking, but yeah, it's just not there's just not a lot of bank demand today for it.
ROCHA: I asked the two companies about the high costs that Julio and others face. The World Bank says that the average cost globally of sending $200 was 6.5 percent in 2020. Although that has fallen gradually over the years, it’s still above the United Nations’ goal to limit remittance fees to 3 percent by 2030.
Western Union sent me a statement saying that the company’s average costs were about 4% in 2020 and have been trending toward the UN’s 2030 target. It said the costs for bank-to-bank transfers are significantly lower, at 1 to 2%, but that it’s more costly to process cash transactions. The company said that requires bigger overhead costs for the agents processing transfers and to make sure it has the right safeguards in place.
Western Union says that it understands affordability is a key factor for many customers and that it strives to “balance that consideration with the costs and investments required to sustain the quality, flexibility and security of our service.”
And Angelilli, the MoneyGram CFO, took issue with the World Bank’s figures. He says the average MoneyGram transaction is about $400, not the $200 that the World Bank looks at. And he says when looking at the costs for a $400 transaction at MoneyGram, the company is well below the UN’s goals.
The World Bank told me looking at costs for $200 transactions is appropriate because the average size of remittance transactions are small.
MoneyGram’s CFO also told me the company’s costs have been declining for years, partly due to a more competitive market and because sending money digitally — rather than going to a store and doing a cash transaction — is cheaper. And he said the company consistently tells its investors to assume costs will keep dropping.
ANGELILLI: We are in a very competitive market. And we see prices declining, just about everywhere in the world.
ROCHA: Making a bigger dent could require adjusting anti-money laundering rules. The World Bank’s Ratha says regulators could adopt a more practical approach, such as identifying the types of transactions that pose bigger risks and focusing compliance on those rather than verifying each and every transaction.
RATHA: We do that with domestic remittances, right? I mean, we send money within the country, let's say within the US, and most of the time, you know, the checks and balances are fairly simple. You can send money, or you know checks for example, easily. You can do those transactions. Or even cash payments. Whereas international transactions are very, very cumbersome from the viewpoint of regulations right now. And commercial banks are avoiding them. So, having a risk-based approach is necessary.
ROCHA: Ratha also says that newer ways to send money online have helped lower costs for immigrants. But here’s the problem. To send money digitally, you generally need to have a bank account, or a credit or debit card. And to do that, you need to have the right government-issued documents to verify your identity. So for some migrants, opening a bank account is next to impossible, and they don’t benefit from these cheaper methods of sending money.
That’s another reason why Ratha says changes to existing anti-money laundering rules may be needed. Because many people across the world -- those without the proper documents, or those with informal sources of income -- don’t have access to a bank account.
RATHA: A large number of these people are cut off from the banking system. They’re not able to use digital channels to send money. And yet, the very reason they're there, the very reason migration happened to start with, was to be able to send money home and help families. So there is a huge challenge we need to address.