Flee or Stay?

CFPB requirements spark reassessments of the viability of remittance-transfer services

By Cary Whaley

After more than two years of regulatory activity, punctuated by three sets of proposed and final rules, October is decision time for community banks. That is when the Regulation E Remittance Transfer Rule goes into effect. And that’s when banks that exceed the Consumer Financial Protection Bureau’s 100-per-year remittance-transfer transaction safe harbor face significantly more complicated disclosures and procedural requirements for sending international funds transfers for their customers.

The CFPB rule, intended to provide transparency of fees to consumers and make it easier to comparison-shop for these services, went through an additional ICBA-advocated makeover after it was finalized in April. Those subsequent revisions eased bank liability for remittance transfers that are undeliverable because a customer provides incorrect account or routing information. They also made disclosing recipient bank fee and foreign taxes optional.

Remittance-transfer dilemma

While these changes will make it easier for community banks to send remittance transfers (although they didn’t go as far as ICBA recommended), the question remains whether the overall compliance burden from the new rule will cause many community banks to pull the plug on providing remittance transfers. One such community bank is the $525 million-asset Southern Commercial Bank in St. Louis. Sending international consumer payments has been a routine business service for the bank for more than a decade. On some busy holidays, the bank has processed up to 700 such transactions, for which it charges a $45 flat per-transaction rate.

Remittance transfers are not a huge profit center for Southern Commercial Bank ($30 of its transaction fee goes to cover costs), but the transactions are hugely popular with the bank’s Croatian and Bosnian immigrant customers. Until the CFPB remittance-transfer rule came about, that had been reason enough for Southern Commercial Bank to stay in the remittance-transfer game, says Melany Kniffen, the bank’s chairman.

“From what we understand, the bigger providers charge 10 percent of the transaction,” which translates to a cost of $50 to $300 for each transaction, Kniffen explains.

But because of the CFPB rule, Southern Commercial Bank may have to raise its fees significantly to cover anticipated cost hikes associated with new compliance requirements. And that fee increase wouldn’t account for the bank’s exposure should a customer—within the rule’s 180-day error-resolution period—report a transaction error to the bank. Transaction errors that now might trigger refunds include incorrect amounts, computational errors and failure to meet disclosed delivery dates.

“While that is hard to do, it’s even harder to pull up the corresponding paperwork. Those kinds of things are a nightmare,” Kniffen says. “Why would we do that?”

There’s also the new transaction risk to account for because the rule requires a 30-minute window during which consumers can change their mind and cancel a remittance transfer, Kniffen says.

“The bank is still undecided whether we will continue to offer the service,” adds Mary Panzeri, vice president and a Bank Secrecy Act/anti-money laundering compliance officer at Southern Commercial Bank. Much of the bank’s decision to stay or exit the remittance-transfer market will hinge on whether Western Union (which the bank uses to process non-U.S. correspondent bank international wires) can alleviate some of the compliance burdens to allow the bank’s transaction fees to “stay reasonable,” Panzeri says.

At bankers’ banks

Sheila Noll, executive vice president for Midwest Independent Bank, a bankers’ bank in Jefferson City, Mo., understands bankers’ concerns about serving highly valued immigrant populations, military families and even business customers who may be confused about why certain transactions require disclosures but not others. But bankers’ banks, she says, will be ready to process these transactions on behalf of their bank clients once the rule takes effect in October, regardless of the cost to do so.

“The majority of our customers fall within the safe harbor, but we do have about a dozen customers that are affected,” Noll explains. “We are working with our international providers to develop the system disclosures so community banks won’t have to create the disclosures.”

Midwest Independent Bank has developed a 35-minute buffer to allow a bank to stop a transaction before it’s processed, but stopping incorrect transactions within that time frame will still be problematic for community banks, Noll admits.

If community banks do continue to offer remittance transfers after October, they will have other processing alternatives. The least expensive and most easily accessible option would be to offer remittance transfers via an international ACH, but there hasn’t been “great demand” for international ACH from community banks, mainly due to a complexity in explaining fluctuating exchange rates, Noll says.

“We’ve tried educating our banks so they can educate their customers, but it’s a steep learning curve,” she says.

While international ACH transactions are available to send to only 35 countries, the Fed is working to broaden the reach of its service, which could expand interest in ACH payments, Noll adds. And while wire transfers don’t always settle the same transaction day, it’s a known process and typically is faster than international ACH transfers, which can take one to two days to arrive.

Noll cautions community banks that are currently evaluating whether to stay in or get out of the remittance-transfer business because of the new regulation to “wait and see.”

“The market will adapt,” she says.

Cary Whaley is vice president, payments and technology policy at ICBA.