The Consumer Financial Protection Bureau (Bureau) seeks industry feedback and public comment on various aspects of the remittance rule (Rule), which implements Section 1073 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This rulemaking affects all participants within the diverse remittance transfer market, encompassing national banks, community banks, credit unions, traditional money service businesses, Fintech providers, and consumers sending money abroad via international electronic transfers of money, i.e., remittance transfers.
According to the World Bank and the Bureau, of the $613.5 billion worldwide dollar amount of remittance transfers in 2017, $148.5 billion was sent from the US in over 325 million remittance transfers, and $6.6 billion was sent to the US. This blog post (1) discusses one key aspect of the Rule, i.e., the use of estimates in these transactions, (2) summarizes current efforts by the industry and the Bureau to mitigate negative outfall from the Rule, and (3) flags the larger significance of these efforts from the perspective of Fintech influence over financial services and regulation. Notably, permission to use estimates will expire in a few months and — if improperly addressed — will likely create a cascade of undesirable consequences to market participants, consumers sending funds, and recipients abroad.
I. History of the Rule
Under federal law, the Rule generally seeks to enhance consumer protection safeguards for covered remittance transfers, such as error-resolution protocols, mandatory cancellation periods, and specified consumer disclosures. The policy rationale for this is in part to allow consumers to engage in a more effective cost comparison between providers of remittance transfers.
By way of historical background, the initial Rule and certain amendments took effect in October 2013. The Dodd-Frank Act required a five-year lookback review for each significant Rule and publication of assessments thereof.
Accordingly, the Bureau issued the Remittance Rule Assessment Report in October 2018, which was revised in April 2019, presenting the costs and compliance burdens associated with the Rule and their impact on the availability of remittances to consumers.
On April 29, 2019, the Bureau also proactively issued a Request for Information Regarding Potential Regulatory Changes to the Remittance Rule (RFI), in which the Bureau sought feedback on, among other things, the expiration of a provision which allowed remittance transfer providers, such as banks, to estimate certain costs to consumers associated with remittances transfers (Temporary Exception). The 2019 RFI sought information from the public as to the impact of the Temporary Exception’s expiration on consumers.
II. Nature of the Problem
The Rule requires remittance transfer providers to disclose (both before and when the consumer pays for the transfer) the exact exchange rate and the amount to be received by the designated recipient of the remittance transfer. The Temporary Exception in its current form is one exception to the Rule’s general disclosure requirements, allowing providers to disclose mere estimates of the exchange rate, covered third party-fees, the total amount transmitted, and the total amount received. As to the necessity of reliance on estimates, an important distinction exists between open-loop and closed-loop systems. If the funds are transmitted through a closed-loop system, a single provider generally controls the entire chain of the transfer and can easily ascertain the amounts that will be deducted in fees or charges from the final transfer amount at the recipient end.
By contrast, if funds are transmitted through an open-loop system, involving various market entities such as US-based banks, service providers, and correspondent banks overseas, the sending entity (i.e., the US-based bank) cannot tell with certainty the amount of fees that will be charged by entities overseas or the final amount the recipient will receive.
Accordingly, the Temporary Exception allowed financial institutions sending remittance transfers to comply with the Rule through the use of estimates. According to call report data studied by the Bureau, in 2017, 3,538 banks offered remittance transfers as a service. In that same year, approximately 886,000 bank remittance transfers provided to consumers relied on the Temporary Exception. Moving forward, however, the Temporary Exception expires on July 21, 2020, and cannot be renewed absent an act of Congress. The Bureau’s 2019 RFI seeks information concerning how the downsides from the expiration of the Temporary Exception can be mitigated.
III. Industry Efforts: A Non-Monolithic View
In response to the 2019 RFI, the Bureau received 44 comments from April 28, 2019 to June 28, 2019. Per a comment letter, consumer advocates value transparency in fees associated with remittance transfers. According to advocates, this need is not overcome by the industry’s need for a continuing exception allowing estimates of such fees, which by virtue of being estimates, are anathema to precision in consumer disclosures. The advocates further believe that sufficient market development has occurred such that the ability to ascertain costs has improved, and banks no longer need the exception.
What we found more fascinating and less predictable, however, among the comments was the view of the industry, in particular, because it presented a splintered approach as between two industry subsets: banks and other depository institutions (i.e., credit unions) versus a Fintech entity, summarized below:
- Banks, credit unions and trade association’s view: the Bureau should replicate the Temporary Exception in the permanent Rule because it remains challenging for sending entities to know, beforehand, the identity and location of the designated recipient insured institutions, which would be required to determine the fees and costs of the remittance transfer at the time the service is requested. By the time the Temporary Exception expires, this ability will not have improved. There are four key concerns from the financial institution perspective:
- First, industry participants explain that the costs of determining exact amounts of fees and exchange rates may be prohibitively expensive for the institution. Consequently, institutions may elect to eliminate the service, limit the service to only certain designated countries, or increase costs to account for the additional overhead (monitoring and training) in providing remittance transfer services.
- Second, this may lead to a domino effect within the industry that will ultimately negatively impact consumers, in the form of less access to the service or increased costs.
- Third, community banks and credit unions note another subset of consumer harm that could arise: if the Bureau’s actions lead to market conditions causing providers to eliminate the service outright, the decreased access to service may hit consumers in rural communities the hardest.
- Fourth, the expiration of the Temporary Exception would serve no meaningful consumer-protection purpose, as there is no evidence of consumer harm in disclosing estimates rather than exact amounts for remittance transfers, and the quality of the estimates remains rather high, given the databases of fee information maintained by banks.
- Fintech view: according to a comment letter submitted by a nonbank remittance transfer provider, the product it offers is more compatible with precise estimates, because it—unlike banks—need not rely on traditional infrastructure such as SWIFT (i.e., the Society for Worldwide Interbank Financial Telecommunication messaging infrastructure), which comes with correspondent and intermediary fees. Instead, this provider’s remittance transfer service utilizes local clearing and local payment rails to send money from its own accounts to recipients in those countries. For this and other reasons, the Fintech entity asserts that the Bureau should not continue making the exception available, because consumers are better served if they can save substantial fees after they have compared and identified the lowest cost provider. Ultimately, they argue that the marketplace has evolved to make superior forms of technology available, which in turn obviates the need for reliance on estimates.
IV. The Bureau’s Response: Proposed Solutions
Following the receipt of the comment letters, the Bureau published a proposal to implement a permanent exception to the Rule. The proposal, described in more detail below, is conceptually similar to the Temporary Exception and permits certain insured institutions to estimate the exchange rate and third-party fees for a remittance transfer under certain circumstances.
- Specifically, with respect to the exchange rate, the Bureau proposes a permanent exception that would permit insured institutions to estimate the exchange rate for a remittance transfer to a particular country if: (1) the designated recipient will receive funds in the country’s local currency and (2) the insured institution made 1,000 or fewer remittance transfers to that country in the recipient’s local currency in the prior calendar year.
- With respect to covered third-party fees, the Bureau is proposing an approach similar to that taken with respect to the exchange rate. The proposed would permit insured institutions to estimate covered third-party fees for a remittance transfer to a particular designated recipient’s institution if the insured institution made 500 or fewer remittance transfers to that designated recipient’s institution in the prior calendar year. Unlike with exchange rates, however, for purposes of meeting the 500 threshold, the Bureau will consider all remittance transfers provided to a designated recipient’s institution in the prior calendar year, regardless of whether the funds were received in the country’s local currency or another country’s currency.
V. Additional Bureau Rationale for Distinctions in the Proposal
Several key considerations motivated the Bureau’s decision to propose a 500-transfer threshold for third-party fee estimates, vs. a 1,000-transfer threshold for exchange rate estimates.
First, the Bureau recognizes that many institutions more often rely on the exception allowing for the estimate of third-party fees than for the exchange rate because, when the service is requested, the former is generally harder to identify than the latter. Accordingly, the qualification threshold for the prior year’s remittances (500) is lower for third-party fees than the threshold (1,000) for exchange rates.
Second, the lower threshold for the third-party fees advances the Bureau’s objectives of transparency to consumers, while addressing the reality that covered third-party fees vary from institution to institution. The Bureau recognizes that it may be unduly costly for the institution to establish the relationships necessary to identify the exact third-party fee amount that will apply when the disclosures are made if only a few transfers to the particular recipient institution are conducted within a year. On the other hand, if an institution is making 500 or more transfers to a particular recipient institution, this exception encourages the sending and receiving institutions to establish a banking relationship which would presumably enable the institutions to control, or at least ascertain, the third-party fees that will apply when the disclosures are provided.
Third, the 500 to 1,000 question is not an “apples to apples” comparison. The 1,000-threshold for exchange rates takes a broader look and considers the number of transfers to a particular country (not to an institution). The Bureau is concerned that it may be unduly costly for the institution to establish and maintain currency-trading desk capabilities and risk-management policies and practices related to foreign exchange trading of that currency, or to use service providers, correspondent institutions, or persons that act as the insured institution’s agent to obtain exact exchange rates for that currency if fewer than 1,000 remittance transfers are made in the prior year.
Fourth, unlike covered third-party fees, where the amount of the fees charged vary by institution, the Bureau understands that the exchange rate generally is determined at the country level.
VI. Implications for Bureau Approach and Competition Between Banks vs. Fintechs
Given the Bureau’s proposal, it appears that the Rule signifies a hands-off approach that is more deferential to industry concerns.
The less obvious trend emerging from this rulemaking, however, relates to the distinction between traditional banking and Fintech. As noted above, the issue of estimates in the Rule is one in which industry participants were divided: banks and depository institutions sought to preserve the status quo, whereas the Fintech wished to tighten the restrictions on the industry to provide consumers with more precise disclosures.
The Fintech sought not only to demonstrate heightened compliance capability as to existing rules but to argue that bank models were inferior for precision in consumer disclosure and future rules should be made more stringent given its superior technology. The Fintech requested the Bureau to actually change the rules to make it more difficult for incumbent banks to compete and to make it easier for the Fintech to monetize superior payment rails abroad by leveraging a permanent demise of the Temporary Exception. In this instance, it appears the Bureau declined the Fintech’s proposal, and provided a more sympathetic response towards banks and depository institutions, by proposing that a variation of the Temporary Exception be passed in a more permanent form.
Finally, the current state of play is one in which the Bureau’s rulemaking division resides in a separate organizational silo from that of the Office of Innovation. As the industry moves forward, however, and Fintech businesses are afforded increased opportunities to influence the Bureau’s policies through the latter office, it will be interesting to see how Fintechs may more palpably seek to leverage rulemaking to gain a competitive advantage. From the looks of the Rule and other industry developments, that trend has already begun.
