94460 Global Remittances Working Group IMPLEMENTING THE CPSS–World Bank GENERAL PRINCIPLES FOR INTERNATIONAL REMITTANCE SERVICES THE WORLD BANK GROUP Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions Special-Purpose Note 2013 Global Remittances Working Group IMPLEMENTING THE CPSS–World Bank GENERAL PRINCIPLES FOR INTERNATIONAL REMITTANCE SERVICES THE WORLD BANK GROUP Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions Special-Purpose Note 2013 The Global Remittances Working Group (GRWG) was created in February 2009 to respond to the multiple calls for coordination in the area of remittances received by the World Bank. The GRWG is a multiyear platform that aims to increase the efficiency of the remittances market and facilitate the flow of remittances by providing guidance and policy options to the global community. The GRWG is composed of representatives nominated by the participating countries and chaired by the World Bank Vice President for Financial and Private Sector Development. The Coordinators and a small Secretariat facilitate the initiative, and an International Advisory Committee of global experts provides quality assurance and technical guidance. Four thematic areas covering different aspects of remittances have been established around the seven G8 recommendations. These address data; interconnections with migration and develop- ment, and policy; payment and market infrastructure; and remittance-linked financial products and access to finance. The discussions in the thematic areas are conducted through participation from organizations, governments, and other entities and through the inclusion of specialists who can bring their expertise to analyzing the identified topics. This document has been prepared by the GRWG Secretariat in consultation with the mem- bers of the Public and Private Partnership on Remittances (Thematic Area 3), and with the contribution of the GRWG International Advisory Committee. The document was drafted with the assistance of an external consultant, Developing Markets Associates Ltd (www.developingmarkets.com). The document is published as a Special-Purpose Note and is intended to provide guidance to reform efforts in the remittances arena both nationally and globally. The findings and interpre- tations presented are those of the GRWG Secretariat, and do not necessarily reflect the views of the World Bank and the GRWG. Janamitra Devan Vice President and Head of Network Financial and Private Sector Development World Bank–IFC Contents Abbreviations–––––––––––––––––––––––––––––––––––––––––––––––––––––iv 1 Introduction–––––––––––––––––––––––––––––––––––––––––––––––––––––1 2 Methodology–––––––––––––––––––––––––––––––––––––––––––––––––––1 3 Background–––––––––––––––––––––––––––––––––––––––––––––––––––– 2 4 Current Situation––––––––––––––––––––––––––––––––––––––––––––– 3 4.1  Examples of Difficulties in Accessing Bank Accounts–––––––––––––––––––– 4 4.2  Access to Bank Accounts in Receiving Markets–––––––––––––––––––––––– 10 4.3 Summary–––––––––––––––––––––––––––––––––––––––––––––––––––– 10 5 Reasons for the Existing Situation–––––––––––––––––––––––– 11 5.1  Lack of Consistency in AML/CFT Standards–––––––––––––––––––––––––– 11 5.2  Banks’ Attitude toward Risk–––––––––––––––––––––––––––––––––––––– 12 5.3  Ongoing Regulation/Supervision–––––––––––––––––––––––––––––––––– 12 5.4  High-Risk Countries–––––––––––––––––––––––––––––––––––––––––––– 14 5.5  Conflict of Interest––––––––––––––––––––––––––––––––––––––––––––– 14 6  Potential Solutions–––––––––––––––––––––––––––––––––––––––––– 14 6.1  Create Country-Level Task Forces–––––––––––––––––––––––––––––––––– 14 6.2  Improve Enforcement/Supervision/Monitoring––––––––––––––––––––––– 15 6.3  Enact Common AML/CFT Standards––––––––––––––––––––––––––––––– 16 6.4  Establish Specialized MTO-Focused Banks––––––––––––––––––––––––––– 16 6.5  Allow Microfinance Institutions to Offer Remittances––––––––––––––––––– 16 7 Next Steps–––––––––––––––––––––––––––––––––––––––––––––––––––––– 16 APPENDIXes A  Results from Survey of Non-Bank Financial Institutions–––––––––––––––––– 17 B  Payment System Infrastructure––––––––––––––––––––––––––––––––––––– 21 Abbreviations AML anti–money laundering CFT combating financing of terrorism EU European Union FATF Financial Action Task Force MSB money service business MTO money transfer operator PI payment institution RSP remittance service provider All dollar amounts are U.S. dollars unless otherwise indicated. Barriers to Access to Payment Systems and Proposed Solutions 1 Introduction they need for their remittance business. Many RSPs are not even able to open such an account. General Principle 4 of the General Principles for In- ternational Remittance Services states: “Competitive This paper analyzes the difficulties for nonbank RSPs market conditions, including appropriate access to do- in their indirect access to the domestic payment sys- mestic payment infrastructures, should be fostered in tem infrastructure. It presents the background (sec- the remittance industry.”1 tion 3) and the current situation, giving examples from a few key sending markets (section 4). The main Such access can be either direct or indirect. In the lat- factors underlying the current situation are outlined ter case, an indirect participant uses the payment sys- (section  5), and several potential pragmatic solu- tem through the services provided by a direct partici- tions are presented as a basis for further discussion pant, typically a bank. Both forms of access are capable along with implementable proposed action plans (sec- of providing remittance service providers (RSPs) with tion 6). The paper concludes with possible next steps suitable payment services. (section 7). Worldwide, there are numerous cases where this prin- 2 Methodology ciple is not being met. Many nonbank RSPs do not have direct access to payment systems and cannot ob- As interest in the topic is relatively new, there is a lack tain proper services from indirect access.2 For exam- of documentation or research on the issue of nonbank ple, many RSPs are not able to retain the bank account RSPs’ access to the domestic payment infrastructure. There have been a number of articles and isolated com- mentaries on the topic, but nothing that could be de- 1 “General Principles for International Remittance Services” was scribed as a research project. Thus, the Global Remit- published in January 2007 by the Committee on Payment and tances Working Group undertook a range of primary Settlement Systems and the World Bank; it is available at www. worldbank.org/paymentsystems. research techniques to produce the analysis presented 2 Nonbank RSPs are here defined as nonbank organizations in this paper. These included an online questionnaire specialized in the provision of remittance services. In addition to targeted at nonbank RSPs; and interviews and/or money transfer operators, nonbank institutions such as micro- finance institutions, cooperatives, and credit unions can provide phone calls with banks, regulators, nonbank RSPs, and remittance services, depending on national legislation. trade associations.  1 2   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions An example of the online questionnaire is attached RSPs, like everybody else, need to be able to use do- in appendix A. The questionnaire was sent to over mestic payment systems. In most countries, only 250 nonbank RSPs and answered by 51 money trans- banks are allowed to be direct participants in such fer operators (MTOs) and 2 credit unions. Responses systems. Nonbanks have to access the systems indi- were received from Europe (Belgium, Spain, Sweden, rectly, as customers of banks. There are arguments for and against this arrangement. Switzerland, and the United Kingdom), the Middle East (Saudi Arabia and the United Arab Emirates), Asia (India, the Philippines), Australia, and Canada See appendix B for more detail on these discussions. and the United States. The majority of responses were received from the United Kingdom, the United States, Common sense and good business practice mean non- and the United Arab Emirates (see appendix A for a bank RSPs should, at a minimum, be able to access more detailed breakdown of the composition of the bank account facilities provided they meet appropri- respondents). The results have been formulated into ate standards in terms of financial probity and compli- a series of findings and recommendations detailed in ance with regulations including anti–money launder- this report. ing and combating financing of terrorism (AML/CFT) legislation. In an efficient market, nonbank RSPs not 3 Background only have access, but have a choice of banking service providers so they can access bank accounts at a com- The General Principles are a set of standards that were petitive price. This competition helps ensure that op- developed to assist countries in improving their mar- erational costs are kept low and that reductions can be kets for remittance services. They have been endorsed passed on to consumers. by, among others, the G8, the G20, the Financial Sta- bility Forum, and the Association of Southeast Asian Perhaps even more importantly, if nonbank RSPs are Nations (ASEAN). The five General Principles cover not able to use banking services, their businesses be- elements including price transparency and consumer come cash-only operations. Higher reliance on cash protection, legal and regulatory frameworks, payment throughout the value chain typically raises transaction system infrastructure, governance, and risk manage- costs—which are normally transferred on to custom- ment as well as market structure and competition. ers in the form of higher prices for remittance services. They also include a set of recommendations on the Moreover, evidence from many countries shows that roles public authorities and RSPs must play in the de- RSPs working on a cash-only basis without a bank velopment of an efficient market. In certain countries, account in a licensed commercial bank are often not there have been initiatives that address each of the regulated and may even be operating illegally. In such principles individually or in totality. The World Bank cases, regulatory authorities will not be able to moni- has led the implementation of the General Principles tor transactions from either an AML/CFT viewpoint at the global level. or a development angle. It is essential to find solutions to this issue that work for all stakeholders: regula- As stated above, General Principle 4 provides the tors, banks, and other RSPs operating in remittance context for this research paper: “Competitive market markets. conditions, including appropriate access to domestic payment infrastructures, should be fostered in the re- As this paper discusses, current difficulties in access- mittance industry.” The principle goes on to state that ing domestic payment systems affect some of the most Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   3 important markets in the world and solutions are re- Figure 1: Total Average Cost of Remittance by quired in as short a time period as possible. RSP Type, 2008–Q1 2013 4 Current Situation Percent 16 Remittance Prices Worldwide is an online database Bank (www.remittanceprices.worldbank.org) implemented 14 by the World Bank that tracks the cost of remittances in 219 corridors globally. Data from the database show 12 that MTOs—a type of nonbank RSP—are consistently cheaper than banks for sending $200 or the equivalent 10 Global average in local currency.3 8 According to data for the first quarter (Q1) of 2013, MTO the total average cost of sending $200 by bank is 6 13.54  percent, compared to 6.92 percent for MTOs Post office and 6.30 percent for post offices. Banks also tend to 4 be less transparent in terms of providing the customer 2008 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 with the actual total cost of the service; in Q1 2013, 2009 2009 2010 2010 2011 2011 2012 2012 2013 24  percent of banks were nontransparent compared with only 2 percent of MTOs.4 Failure to disclose total Source: World Bank, Remittance Prices Worldwide 5, March 2013. costs affects a migrant’s ability to identify and select the most competitive and convenient service. Figure 1 market and channeling the estimated $401 billion a shows the difference in the total average cost of send- year sent by immigrants back to developing countries.5 ing money from developed to developing countries by RSP type between 2008 and Q1 2013. Immigrants often cannot afford the high fees banks charge; furthermore, access may be problematic when Throughout the world, migrants rely on the cheaper, transferring money through banks, as both sender and more competitive services of MTOs and other non- recipient are usually required to have a bank account. bank RSPs in order to send money home to their fami- Thus, in most markets, banks are not offering a service lies (commonly in small amounts). Nonbank RSPs that is attractive or affordable to migrants. play an important role in servicing this segment of the It has been demonstrated that, in markets where there is a dearth of choice and few nonbank RSPs are operat- 3 Note that while this conclusion is generally borne out by the ing, there are higher volumes of remittances moving data, there are a few countries where this is not the case—e.g., in the Philippines for receiving money from California, where the through unauthorized means (intra-Africa transfers cost to send via Filipino banks is lower than through MTOs and U.S. banks. 4 In this context, “nontransparent” means that it was not possible 5 Source: World Bank, Migration and Development Brief  20, for the researchers to obtain the total price a customer pays. In all ht t p : / / s i t e re s o u rc e s . w o r l d b a n k . o r g / I N T P R O S P E C T S / cases, this is because the bank was not able to provide the exchange Resources/334934-1288990760745/MigrationDevelopmentBrief20. rate used with the transaction. pdf. 4   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions are a good example of this scenario). Unauthorized re- The information presented is derived from interviews mittance operators are not only risky to use for senders with market participants combined with responses to and their families, but may also circumvent any AML/ the questionnaire and desk research. CFT and other regulatory restrictions, with potentially damaging consequences for the wider community. One of the main factors banks take into account when More competitive costs in sending remittances home considering whether to offer banking services to non- and improvements in access to and convenience of bank RSPs is the current global approach to risk—and, the service encourage immigrants to use authorized in particular, to compliance with AML/CFT rules. channels. Guidelines at the regional and national levels on com- pliance with AML/CFT legislation are driven by the For all these reasons, it is important to create an envi- recommendations of the Financial Action Task Force ronment in which nonbank RSPs can operate trans- (FATF; see box 1), an intergovernmental entity that parently and efficiently to provide money transfer aims to set standards and promote effective implemen- services. However, there is currently a mixed picture tation of legal, regulatory, and operational measures around the world with respect to nonbank RSPs be- for combating money laundering, terrorist financing, ing able to access bank accounts and payment system and other related threats to the integrity of the interna- infrastructure to improve their operations. Table 1 tional financial system. Each country or region adapts provides a short summary of some of the major remit- the principles of the FATF recommendations and tance-sending markets. translates them into locally appropriate regulation. An interesting case is that of the Russian Federation, So far, over 180 countries have committed to the FATF where MTOs have to become banks to operate. While regulations. One of the key approaches adopted is a it is expensive to become a bank in Russia, competition risk-based approach that aims to establish compliance is still strong, and Russia is one of the cheapest mar- rules that are proportional to the risk posed by the kets in the world for sending remittances. Conversely, scheme being regulated.6 in markets such as the United States and the United Kingdom where there is a large number of nonbank Australia RSPs, the difficulty of accessing bank accounts either increases bank charges, which makes continuing op- Australia is a high-priced market for remittances. erations more difficult, or actually reduces the number The average cost of sending money from Australia in of operators in certain corridors. Q1  2013 was 14.9 percent of the sent amount com- pared with the global average (9.05 percent).7 4.1 Examples of Difficulties in Accessing Bank Accounts All operators in Australia must provide details of every transaction to the government’s anti–money launder- It is helpful to highlight particular examples from dif- ing tracking division (AUSTRAC) for AML/CFT pur- ferent sending markets to demonstrate some of the difficulties that are being experienced by MTOs and 6 For further information, please see “Making Remittances Work: Balancing Financial Integrity and Inclusion” (World Bank, other nonbank RSPs. The following case studies high- forthcoming). light the situations in Australia, Norway, Spain, Swit- 7 Source: Remittance Prices Worldwide, http://remittanceprices. zerland, the United Kingdom, and the United States. worldbank.org/. Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   5 Table 1: Summary of Access to Bank Accounts for Nonbank RSPs in Major Sending Markets Volume of remittances Countrya Bank account access for nonbank RSPs sent (billion $) FATF status Australia Opening bank accounts has been relatively straightforward for nonbank RSPs, 3.8 Member although recent feedback suggests this may be changing. France Very few nonbank RSPs have been authorized. Even though French law mandates 14.8 Member that any legal or natural person has the right to a bank account,b anecdotally it would appear that a number of RSPs have had some difficulty in opening an ac- count. Germany Historically, there have only been a limited number of nonbank RSPs. However 16.7 Member since the introduction of the European Commission’s Payment Services Directive, around 100 nonbank RSPs have passported in. Opening a local bank account for these passported payment institutions is challenging.c Italy Fewer restrictions in opening an account for nonbank RSPs than in other European 13.0 Member Union countries. Russian Only banks are allowed to offer money transfer services. Some MTOs have be- 22.7 Member Federation come banks; as such, they have no difficulty in obtaining bank accounts. Saudi Arabia Highly regulated market that is bank dominated. Nonbanks have extensive difficul- 28.5 MENAFATF ties in opening correspondent bank accounts with U.S. banks. Member Spain Obtaining bank accounts for businesses authorized by the Banco de España is a 12.6 Member manageable process. Difficult practices are entailed in opening bank accounts for passported-in payment institutions. Switzerland Highly regulated market—only nonbank RSPs that are publicly quoted on stock 30.8 Member markets can access bank accounts, barring exceptional circumstances. United Kingdom Only one bank will consider opening accounts and only for authorized payment 3.3 Member institutions. It is currently not possible for small payment institutions to open bank accounts.d United States Difficult practices are entailed in opening bank accounts for nonbank RSPs. 51.6 Member Sources: Responses to questionnaires; interviews with MTOs, banks, and regulators; analysis of various statutes and regulations. Remittance data are for 2011 and were taken from World Bank, Remittance Data Outflows, April 2013. FATF status information is from the FATF website (www.fatf-gafi.org). Note: FATF = Financial Action Task Force; MENAFATF = Middle East & North Africa Financial Action Task Force. a. Country selection was based on the top 10 remittance-sending countries as per the World Bank’s Migration and Remittances Factbook 2011. Here, however, the United Kingdom, France, and Australia replace Luxembourg, Kuwait, and the Netherlands so as to reflect some of the measurement issues with remittances data and capture countries where specific bank account access challenges have been identified or addressed. b. Article L.312 of the French Code monétaire et financier. c. A payment institution is a nonbank RSP that has gained regulatory approval. As per the Payment Services Directive, an authorized payment institution is a licensed nonbank financial institution that is allowed to “passport” its approval to other European Union member states. “Passporting” is a practice whereby a financial institution authorized in one European Union member state is able to operate under that same approval in another member state. See http://ec.europa.eu/internal_market/payments/ framework/index_en.htm for more information. d. Small payment institutions—nonbank financial institutions with a lower level of regulatory approval that conduct payments that are cumulatively not more than (on aver- age) €3 million per month—are not allowed to passport their license to another country. See http://ec.europa.eu/internal_market/payments/framework/index_en.htm for more information. 6   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions poses. There are a number of recent examples of small Box 1: the FATF Recommendations MTOs that are facing increasing difficulty in accessing the payment system infrastructure. Some banks have Established in 1989 by the ministers of its member in fact begun closing the accounts of small operators jurisdictions, the FATF (www.fatf-gafi.org) seeks to based on their analysis of the risks such operators generate the necessary political will to bring about would pose in terms of AML/CFT compliance. legislative and regulatory reforms in the AML/CFT arena. Its recommendations are recognized as the in- Norway ternational standard for combating money laundering One of the largest banks in Norway recently wrote to all and the financing of terrorism and the proliferation of foreign-owned payment institutions (PIs) giving them weapons of mass destruction. They form the basis for 30 days’ notice that it will stop accepting cash paid into a coordinated response to these threats to the integ- their accounts.8 The bank further advised that if a client rity of the financial system and help ensure transpar- tries to pay in any cash, it will close the account in total. ency and a level playing field. First issued in 1990, There are no viable alternatives for these PIs, and they the recommendations were revised in 1996, 2001, cannot control their existing customers to ensure that 2003, and—most recently—2012 to ensure that they they will not pay cash in. In addition, not all of their remain up to date and relevant, as the methods used clients can operate on a noncash basis. It would appear to launder the proceeds of criminal activities and fi- that this action threatens the viability of the PIs’ op- nance illicit activities are in constant evolution. eration in Norway and that it discriminates in favor of Norwegian-registered PIs (of which there are very few). To achieve global implementation of its recommenda- tions, the FATF relies on a strong network of 36 mem- Spain ber countries and 8 regional bodies. These latter play an essential role in promoting effective implementa- Spain is the most competitive money transfer market tion of the recommendations by their membership within the European Union (EU) (figure 2). The av- and in providing expertise and input to FATF policy erage cost of sending $200 from Spain was 6.77 per- making. Over 180 countries have committed to the cent of the amount sent in Q1 2013 compared with the recommendations. 9.05  percent global average. Spain has approximately 44 authorized PIs and 122 companies that have pass- The FATF conducts peer reviews of each member on ported their services into the country from other EU an ongoing basis to assess their levels of implemen- tation of the recommendations, providing an in-depth description and analysis of each country’s system for 8 A PI is a nonbank RSP that has gained regulatory approval. As preventing criminal abuse of the financial system. per the European Commission’s Payment Services Directive, an authorized PI is a licensed nonbank financial institution that is Worldwide compliance with the standards protects allowed to passport its approval to other European Union member the integrity of the international financial system and states. Small  PIs are nonbank financial institutions with a lower enhances international cooperation on AML/CFT. Pub- level of regulatory approval. While the approval process involves more than simple registration, the requirements are significantly lic identification of noncompliance has encouraged lower than for an authorized PI; e.g., there is no need to safeguard jurisdictions to improve their AML/CFT systems. customer funds, and the businesses conduct payments that are cumulatively not more than (on average) €3 million per month. See http://ec.europa.eu/internal_market/payments/framework/ index_en.htm for more information. Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   7 Figure 2: Average Cost to Send $200 from select European countries Percent 16 Netherlands 14 Czech Rep. Germany 12 France United Kingdom 10 Belgium Austria Global average Italy 8 Spain 6 2008 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2009 2009 2010 2010 2011 2011 2012 2012 2013 Source: World Bank, Remittance Prices Worldwide 5, March 2013. states (mainly from the United Kingdom). Small PIs fair competition in the market between Spanish and do not operate in Spain. other EU-based PIs. Based on discussions with the most important Spanish Switzerland banks and local nonbank RSPs, it would appear that Switzerland transfers significant volumes of remittances there are no particular challenges in opening bank ac- ($19.6 billion in 20109). The market has traditionally counts and thus in obtaining access to the payment been served by Swiss Post and nonbank RSPs rather system infrastructure. There are, however, significant than by banks. Until the end of 2011, the market was op- challenges for businesses that have passported into erating smoothly in terms of access to payment services. Spain. The country’s banks do not view non-Spanish authorized PIs as they do locally authorized ones, Since then, however, one of the main banks that pro- due to concerns regarding their understanding of the vided banking facilities to MTOs decided to close AML/CFT approach applied by each entity. Therefore, while there are few concerns with payment system ac- 9 Source: World Bank, Migration and Remittances Factbook 2011, cess in Spain, there may exist some concerns regarding http://data.worldbank.org/data-catalog/migration-and-remittances. 8   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions accounts for all MTOs except those that are publicly had told all small PIs to close their accounts or con- quoted on an international stock market. This decision vert to an authorized PI. has significantly changed the situation of appropri- It is now virtually impossible for a small PI to open a ate access to payment services in the country. It has bank account in the United Kingdom. It is possible for proved very difficult for the remaining companies to authorized PIs to access banking facilities, but only at a establish a bank account, as the other banks are not high price. The price of banking services, such as credit interested in having MTOs as customers. As a result, and debit card acceptance, is higher for nonbank RSPs some MTOs are currently operating on a cash-only than for other businesses, which are perceived as car- basis, albeit in a perfectly legitimate manner. Thus far, rying a lower risk. it is unclear how this market will develop as a result of the situation, what the impact on prices will be, and In addition to their difficulty in accessing bank ac- how much of the flows will be diverted toward non- counts in the United Kingdom, authorized PIs that are regulated remittance channels. licensed in the United Kingdom are finding it increas- ingly difficult to open accounts with the same bank in United Kingdom another EU country. As an example, one authorized The United Kingdom hosts more than 65 percent of PI wished to open a bank account in Swedish kronor the nonbank RSPs defined as PIs within the 30 coun- in Sweden so that its agents could credit that account tries of the EU and the European Economic Area; it is for its transactions in the local currency. Its request therefore an important country from the perspective was refused. The PI will either have to open an account of nonbank RSPs. In total, there are about 1,250  PIs with a bank that has direct access to the Swedish clear- in the country; approximately 1,050 are small PIs, and ing and payment system (which involves a series of around 200 are authorized PIs. The United Kingdom is cumbersome procedures) or, as is the current practice, one of only six EU countries that allow for both small request that its Swedish agents send funds in pounds and authorized PIs. to its account in the United Kingdom. This latter ex- poses the PI to foreign currency risk, which will in There are currently four nationwide, or large retail, turn be passed on to the consumer as a higher-priced service. A number of similar examples were described banks in the United Kingdom. Interviews highlight in interviews conducted for this research. that, of these, United States • two will not open bank accounts for any form of MTO; Any nonbank RSP that sends or receives U.S. dollars needs an account in dollars with a U.S. bank. While it • one used to consider opening accounts for autho- is possible to do business without this, most operators rized PIs as long as they met a series of high criteria, do not want to rely on another intermediary in order but at the end of 2012 it made a global decision to to be able to access U.S. dollars. close all bank accounts for nonbank RSPs as a result of heavy fines levied by U.S. authorities for unrelated Since the USA PATRIOT Act was introduced after compliance breaches; and the 9/11 terrorist attacks, U.S. banks have taken a sig- • the remaining bank has given notice to over 250 au- nificantly closer and more critical look at the accounts thorized PIs to move their accounts—previously, it they offer in light of AML/CFT. As a result, it has be- Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   9 come much harder—if not impossible—for nonbank RSPs to open or maintain bank accounts in the United Box 2: Remittances to Somalia from States. An interview with a nonbank RSP from the Gulf the United States States revealed that, in the last nine years, it has had 6 U.S. dollar bank accounts closed and a further 17 ap- Migrant Somalis globally send an estimated $1.6 billion plications declined. In each case, the reason given was per year in remittances, which has played an impor- that the banks had reviewed their strategy and were tant role in keeping the Somali economy afloat. Money no longer offering services to nonbank RSPs. Research transmitters have long provided an essential way for has revealed many similar examples. Somali Americans to support their families back home. In 2012, the two local banks that were providing ser- For any money service business (MSB) that wishes vices to registered Somali nonbank RSPs in Minnesota to offer services in the United States, the regulatory withdrew the account facilities because of security con- environment is highly complex.10 Nearly every state cerns. Some of the operators were forced to close, as (47 out of 50) has its own money transmission regu- they had no other options for conducting their business. lations. Additionally, Washington, D.C., and the U.S. Territories have regulatory jurisdictions. Thus, in or- As an alternative solution for Somali migrants, the der to operate throughout the United States, an MSB U.S. Treasury has suggested sending money through must be covered by 55 jurisdictions. There are many other money transfer services or through U.S.-based similarities among state laws, but the supervisory re- banks to clearing houses or hubs in Dubai that ar- gimes range widely in rigor, frequently overlap, and range for payouts in Somalia. It has also suggested sometimes contradict each other. This ultimately leads that Somalis could declare the money and ship cash to uncertainty for operators and service providers to or money orders to those hubs for payout in Somalia. MSBs, such as banks. Under a range of regulatory pres- However, these are expensive and potentially risky al- sures, banks have consistently been closing accounts ternatives for people who wish to send money home, for their MSB customers.11 and may push migrants to look for nonregulated and illegal methods to achieve their ends. U.S.-based nonbank RSPs also report several restric- tions in their access to the domestic payment system While Somalia may be considered an extreme case, infrastructure. Although a large number of nonbank it is important to note that the MSBs involved were RSPs do have bank accounts, interviews revealed per- fully approved and registered at the state level, and sistent challenges in maintaining or obtaining a bank that there was nothing in terms of the prudential or account. The situation has become almost untenable legal compliance of these particular operators that for the large Somali community in Minnesota, with provided any cause for their accounts to be closed. people unable to send money through formal channels (box 2). One area in which the United States has shown some innovation is in the use of third-party compliance au- dits to help banks determine whether the AML/CFT 10 MSB is a term used widely in the United States; in this con- approach of some MSBs is deemed to be appropriate. text, it is the equivalent of a PI in Europe—a nonbank payment institution. This approach may be advantageous if applied on a 11 Source: National Money Transmitters Association. broader scale. 10   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions 4.2  Access to Bank Accounts in Receiving odds with the General Principles. This particular issue Markets is, however, beyond the scope of this paper. Table 2 presents a summary of access to bank ac- 4.3 Summary counts in receiving markets. It shows that accessing bank accounts/payment systems is not a problem in The research finds that there are issues in accessing the main receiving markets. To a large extent, this is bank accounts and other domestic banking services in because regulation in most of these markets actually many of the sending markets surveyed. The examples prevents nonbank RSPs from operating in the market discussed above provide a level of detail to some of the at all. Such regulations are clearly a significant issue in more consistent findings revealed. Overall, the prob- terms of competition in the market and therefore at lems can be summarized as follows: Table 2: Summary of Access to Bank Accounts for Nonbank RSPs in Major Receiving Markets Volume of remittances Countrya Bank account access for nonbank RSPs received (billion $) FATF status India Only banks and licensed institutions are allowed to operate. 63.0 Member China Only banks are licensed to offer remittance services. 60.2 Member Mexico Access to bank accounts is not a problem, and nonbank RSPs are well serviced by 23.2 Member the commercial banks. Philippines Access to bank accounts is not a problem. Only banks and authorized entities 23.1 APG Member are allowed to provide money transfer services and have access to the payment system. Bangladesh Access to bank accounts is not a problem. Only banks and authorized entities 12.1 APG Member are allowed to provide money transfer services and have access to the payment system. Nigeria Access to bank accounts is not a problem. Only banks and authorized entities 20.6 GIABA are allowed to provide money transfer services and have access to the payment Member system. Pakistan Access to bank accounts is not a problem. Only banks and authorized entities 12.3 APG Member are allowed to provide money transfer services and have access to the payment system. Poland No reported problems with accessing bank accounts. 7.6 EAG Member Lebanon No reported problems with accessing bank accounts. 7.5 MENAFATF Member Egypt, Arab No reported problems with accessing bank accounts. 14.3 MENAFATF Rep. Member Sources: Responses to questionnaires; interviews with MTOs, banks, and regulators; analysis of various statutes and regulations. Remittance data are for 2011 and were taken from World Bank, "Remittance Data Inflows" sheet. FATF status information is from the FATF website (www.fatf-gafi.org). Note: APG = Asia/Pacific Group on Money Laundering; EAG = Eurasian Group on Combating Money Laundering and Financing of Terrorism; FATF = Financial Action Task Force; GIABA = Inter-Governmental Action Group against Money Laundering in West Africa; MENAFATF = Middle East & North Africa Financial Action Task Force. a. The selection of countries is based on the World Bank’s Migration and Remittances Factbook 2011. The countries listed here are the same as in that publication except for excluding Belgium, France, Germany, and Spain, as these countries include items such as pension transfers, which are not relevant to this study. Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   11 • Some banks are making a strategic decision not to factors are as follows; these are delineated in the re- open bank accounts for nonbank RSPs. mainder of this section: • Some banks are closing already existing bank ac- • Lack of consistency in AML/CFT standards across counts for nonbank RSPs. countries • Costs charged by banks are increasing for services • Banks’ attitude toward risk provided to nonbank RSPs. • Ongoing regulation/supervision • Nonbank RSPs from outside the United States are facing challenges in opening accounts in that coun- • Country’s high-risk status try and trading in U.S. dollars. • Conflict of interest. • International banks are not always applying the same criteria in opening accounts for existing corporate 5.1 Lack of Consistency in AML/CFT clients in countries where they have subsidiaries. Standards • Challenges exist for nonbank RSPs passporting into In general, banks have been fully involved in the devel- opment of the FATF recommendations, while money other EU countries in opening local bank accounts. remitters have only recently begun to contribute to the • In general, banks are providing an inconsistent and discussions. Many of the recommendations concern declining approach in terms of the services they of- bank account to bank account transactions, although fer to nonbank RSPs. there are a few recommendations and guidelines on using the risk-based approach for specific nonbank The next section provides an explanation for why RSPs. Thus, some national regulations have adopted many banks believe they have no option but to place thresholds and limits that do not take into consider- restrictions on the services they offer nonbank RSPs. ation the characteristics of the market segment served by nonbank RSPs. A key area in this regard is the level at which enhanced due diligence is undertaken. 5 Reasons for the Existing The FATF recommendations use a threshold of 1,000 Situation (euros, U.S. dollars, or pounds) for application of en- hanced due diligence to transactions, but many coun- Based on interviews with banks and regulators, it is tries have adopted different levels—both higher and clear that risk management is the primary reason be- lower—into local regulations. hind the difficulties nonbank RSPs are experiencing in trying to obtain and retain bank accounts and other The translation of the risk-based approach has been banking services. welcomed by all market participants, but many non- bank RSPs feel they would benefit from more precise The survey results and interviews with banks and non- guidance from local regulators as to what would be bank RSPs highlight a number of reasons behind non- acceptable and what would not. It is often a challenge bank RSPs’ difficulty in accessing bank accounts, some for regulators to find the right balance between pre- of which are common to several markets and others scriptive regulation and discretionary elements, which that are specific to one or two. The five most common frequently results in an ambiguous gray area. This am- 12   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions biguity regarding appropriate application of the risk- the majority of its serious crime investigations involve based approach needs clarification. nonbank RSPs and money laundering at some stage. Differences and inconsistencies in AML/CFT require- Because the remittance volumes processed by nonbank ments mean that banks do not always trust foreign stan- RSPs and the revenues they bring to banks are rela- dards when dealing with nonlocal nonbank RSPs. Work tively small, the potential reward for a bank in servicing to harmonize regulations across the European Union nonbank RSPs is often not worth the perceived or ac- through the Payment Services Directive is undermined tual risk. This is especially true for the smaller nonbank by differences in the AML/CFT requirements contained RSPs. This risk-reward assessment means that a number in another piece of EU regulation (the Third Money of banks are choosing not to operate in this market. Laundering Directive). Thus, a PI that can passport its regulatory authorization to other European Economic 5.3 Ongoing Regulation/Supervision Area countries has to comply with up to 30 different in- terpretations of AML/CFT regulations and in the Unit- One of the main reasons behind the tendency of banks to ed States with up to 55 different sets of legislation. deny access to nonbank RSPs to the payment system in- frastructure is the perceived difference in approach and systems used, and compliance standards maintained, by 5.2 Banks’ Attitude toward Risk banks and nonbank RSPs. While regulation for both is The banking system is built on trust. As such, it is based on a risk-based approach, the level of risk is left imperative for large financial institutions to protect to interpretation. This subjectivity presents its own chal- their reputation in order to ensure the public’s trust in lenges with regard to consistency and trust (box 3). holding and managing their money. In recent years, banks have become more cautious and conservative, It is apparent that, for a number of the large commer- particularly in the wake of the financial crisis, when a cial banks interviewed, each individual transaction is number of large, well-respected financial institutions treated identically, irrespective of value: a transfer of were the subject of highly publicized investigations of $10 is treated in exactly the same way—with the same fraud, financial mismanagement, and money launder- ID requirements, security checks, and processes—as a ing. Subsequently, banks have adopted many measures transfer of $100,000. The bank’s level of controls thus to protect their reputation and keep themselves away may be unnecessarily high for low-value transactions from public scrutiny. The more prosecutions (and re- (including remittances) and not proportionate to the sulting press coverage) banks endure, the more likely level of risk for criminal activity posed. In contrast, the they are to take a more risk-averse approach to new or risk-based approach taken by MTOs, which are deal- existing customers. ing with low-value transactions, means that their re- quirements may not be as stringent. While some national and international authorities for- mally report that money transmitters do not present a More specifically, the average size of a nonbank RSP uniform or unacceptably high risk of money launder- transaction is around $500, which is under the manda- ing, terrorist financing, or sanctions violations, most tory enhanced due diligence level in the FATF recom- institutions perceive nonbank RSPs as a high-risk mendations. For banks, the average international pay- business. For example, the Serious Organised Crime ment size for all classes of payment is higher than the Agency (SOCA) in the United Kingdom reports that enhanced due diligence level. Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   13 Box 3: Example of Regulation/Supervision in the U.K. Market As was brought out in interviews, banks in the United Kingdom are not comfortable with the level of regulation/supervision imposed on smaller MTOs under the country’s small PI regulation and their auditing by the Financial Services Authority and Her Majesty’s Customs and Revenue (the responsible supervisory authorities). The diagram below shows the flow of funds and the flow of compliance responsibility. Flow of Funds in a Money Transfer and Channels of AML/CFT Responsibility AML/CFT responsibility Regulation license Settlement bank Ç È } Responsible for origin of all funds leaving the country Highly regulated; often stringent Bank controls on ID and customer verifi- cation for processing transactions Ç È Required to audit the MTO to ensure compliance MTO Regulated, licensed, and audited } by the Financial Services Authority Ç È Responsible for setting AML requirements and auditing agent and Her Majesty’s Customs and Revenue according to the Payment Services Directive and MSB regu- Agent lations; a risk-based approach Ç È Responsible for collecting ID Remittance sender According to the Financial Services Authority, any party involved in the transfer of money from start to finish must take respon- sibility for the source of those funds and in ensuring that they meet and comply with all international and national laws with regard to AML/CFT. This implies that each nonbank RSP’s bank is ultimately responsible for each transfer that is processed through the nonbank RSP (even though they are bulked). Banks are increasingly concerned with being reliant on third-party nonbank RSPs and agents to ensure they adhere to their AML/CFT requirements. For banks, it is only financially feasible to audit and provide financial services to the larger nonbank RSPs where they are more regulated and where they bring in larger volumes. Smaller, corridor-specific nonbank RSPs that tend to offer the most competi- tive services to senders do not process the volume of transactions to make audits by the bank worthwhile. Banks are currently, in effect, being made to duplicate the work of the regulators. The situation in the United Kingdom had, as of May 2013, escalated to the point that none of the four main retail banks were prepared to open new accounts for MTOs—and indeed were closing accounts for all operators except the largest 10 MTOs. 14   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions This would not pose a problem if there was guidance Further examples of this are currently being observed from the authorities as to where the responsibilities in the United Kingdom–China market and in some of banks start and stop: whether the bank has to as- payments to countries like Armenia that share a land sume ultimate responsibility for all funds it processes, border with Iran. or whether the regulatory authorities should take re- sponsibility for ensuring compliance. The compliance 5.5 Conflict of Interest levels banks adhere to are more stringent than those for MTOs, yet the MTOs rely on banks in order to con- In offering money transfer services, nonbank RSPs duct their business. compete with banks’ own service lines. While the banks interviewed emphatically rejected this compe- 5.4 High-Risk Countries tition as a factor in their decision to deny accounts to nonbank RSPs, it is worth noting that there is the Generally, banks are reluctant to deal with compa- potential conflict of interest and that banks are per- nies that transfer money to high-risk countries, such haps less incentivized to find a solution to the current as Somalia and Sudan. When someone sends money challenges. outside of the country, banks must have proof that the company receiving the funds knows its customer and 6  Potential Solutions can validate the identification of the person picking up the cash. Banks have a responsibility to adhere to the Many efforts have been made through the implemen- laws and ensure that the money transmitted ends up in tation of the General Principles to improve the com- the right hands. petitiveness of the money transfer market, reduce the cost of sending remittances globally, and bring and In some countries, such as Somalia, there is no formal keep nonbank RSPs in the regulated market. Other ef- market regulation to support this requirement, and forts at the global level have been made to ensure that therefore a number of governments worry that such an AML/CFT requirements are appropriate to the risk environment could assist in funding terrorism. involved. However, the current situation undermines much of this work, and a solution needs to be found In the United States, the USA PATRIOT Act and that will foster a healthy global remittances market. amended Bank Secrecy Act make it increasingly dif- ficult for financial institutions to be in full compli- 6.1 Create Country-Level Task Forces ance with AML/CFT regulations. Instead of trying to comply, many are electing to opt out so as not to incur There are a variety of stakeholders involved in the heavy federal fines. money transfer business. At the sending and receiving ends, there are migrants and migrant families. Agents, Banks have deemed nonbank RSPs offering money money transfer businesses, foreign exchange brokers, transfer services to Somalia too risky and have there- and banks are involved in processing the payments. fore terminated accounts. However, these nonbank Also involved—because of risks with regard to money RSPs are filling an important gap in the market that laundering and terrorist financing—are regulatory and no one else is currently servicing. Economic migrants licensing bodies, ministerial departments such as trea- need to send money home to support their families in sury and customs, and law enforcement authorities. times of political turmoil and disruption. Development agencies are also involved to a certain Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   15 extent in light of the significant developmental impact and regulations are to be interpreted; this will aid of remittances. banks in managing/enforcing risk in this area. Each of these stakeholders has its own agenda and pre- Regulatory bodies need to take a more proactive role, rogatives—which are not always aligned. It is evident especially with regard to regulatory enforcement. They that the current market situation in many countries need to ensure that legal requirements are met. Their presents several bottlenecks and constraints, and ul- increased vigilance will assure financial institutions timately affects senders and recipients. Uncertainties of nonbank RSPs’ compliance with the most relevant and high perceived levels of risks are forcing nonbank regulations. RSPs out of the regulated sphere, with detrimental consequences at a global level. Actions need to be tak- In some cases, insufficient resources are allocated to en in order to resolve these challenges. auditing and policing nonbank RSPs, making authori- ties reliant on informal or intermittent information Given the number of stakeholders involved, it may in determining whether to launch an investigation. A be worth considering the possibility of creating a task more sophisticated level of enforcement and auditing force within each country with the objective of finding (either by regulators or trusted third parties) would and implementing a workable set of solutions for all discourage illegal activity and would reassure banks parties involved. One of the key objectives of such a when considering the risk involved in providing ser- task force would be to develop incentives to encourage vices to nonbank RSPs. Further, allocating more re- the adoption of its recommendations. Potential con- sources to enforcement and compliance checks would flicts of interest among the stakeholders in the private likely reduce the temptation for MTOs to perform ille- sector require this initiative to be coordinated by a re- gal activities and help eliminate some of the risk man- spected third party, possibly a public authority. More- agement burden from banks. over, the World Bank is available to support and assist countries in the establishment and management of a It should be noted that such measures would likely task force of this kind. increase compliance costs for nonbank RSPs. How- ever, this increased cost would likely be counterbal- Also, because a number of stakeholders, including anced by a reduction in the compliance costs required banks, have made decisions on this topic on a global by banks to provide access to the payment system basis, there would be value in establishing a global infrastructure. task force to provide guidance to the local task forces and ensure that solutions are addressed at the global A second-best solution would be for each nonbank level. RSP to be required to have a certified third-party com- pliance audit by a registered organization. Such an au- 6.2 Improve Enforcement/Supervision/ dit would increase bank confidence in the MTO au- Monitoring dited, just as it does with any other entity banks audit in advance of other financing decisions. In some coun- Given their role, regulators are perceived as being re- tries, this facility is in place and is being successfully sponsible for setting industry standards that are clear used; the United States already has a well-developed for each stakeholder. The authorities thus should pro- compliance auditing industry, although it is currently vide further detailed guidance on how existing laws not widely used for MSBs. 16   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions 6.3 Enact Common AML/CFT Standards efficiently. While it is possible that such a bank may carry the risk of creating a monopoly in the remittance The lack of consistency and coordination between transfer market, appropriate regulation could be devel- regulators in different countries and regions increases oped to mitigate this risk. compliance costs, and creates problems when finan- cial institutions in one country are asked to process Significantly more work would be required to make transactions originating in countries where the AML/ this solution a reality, and it ultimately may not be CFT requirements are not as stringent. Harmonizing financially feasible. However, in markets with many AML/CFT regulations regarding remittances and set- nonbank RSPs—such as the United Kingdom and the ting some commonly understood global standards in United States—this option might be worth exploring. a more prescriptive manner would help mitigate these problems. The country-level task forces proposed 6.5  Allow Microfinance Institutions to Offer above might take the necessary steps at the national Remittances level. For example, it might be desirable for a task force to issue voluntary guidelines for MTOs/RSPs and as- In many receiving markets, remittances are only al- sess compliance every three to five years. Coordination lowed to be offered by banks and other authorized with the FATF would be essential. entities—a situation that often excludes microfinance institutions and cooperatives. It is recommended that, A key component would be greater adoption of a more where appropriate, microfinance institutions should consistent risk-based approach and a common under- be permitted to offer remittances. standing of what the key legal components are and what acceptable risk management measures look like. Spe- Banks have not tended to exclude access to banking fa- cifically, better guidance on a global and country basis cilities for microfinance institutions. Indeed, in many would be a major aid for banks and MTOs. cases, they wish to partner with these organizations to extend their network in a more efficient manner in re- 6.4 Establish Specialized MTO-Focused mote and rural areas. This practice should be encour- Banks aged in order to deepen remittance networks. From discussions with many banks, it emerged that their level of understanding about the nonbank RSP 7 Next Steps business model is not as complete as it could be: they are consequently not able to see nonbank RSPs as profitable The research conducted for this paper has led to a clients; instead, they view them as high-risk enterprises. number of conclusions and potential solutions. It is clear that addressing the issue of access to bank ac- A solution may be for authorities to encourage the counts and payment systems for nonbank RSPs is not development of a financial institution whose main a simple matter due to the number of stakeholders in- purpose is the provision of payment and other finan- volved and the number of influences pertaining, some cial services to nonbank RSPs. Such an entity would of which are conflicting. need to become a bank and have access to payment infrastructures. This form of bank would set opera- The Global Remittances Working Group looks for- tional and risk-based criteria specifically for nonbank ward to structuring appropriate measures to further RSPs and would consequently fill a gap in the current address this topic and begin possible pilot projects to marketplace, enabling nonbank RSPs to operate more tackle constraints in interested countries. Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   17 APPENDIX A Results from Survey of Non-Bank Financial Institutions A short questionnaire (presented at the end of this appendix) was sent to over 250 nonbank RSPs by e-mail using a database of international nonbank RSPs. In total, 53 responses were collected; 51 from MTOs and 2 from credit unions (table A.1). Figure A.1 shows the percentage of respondents who reported recently opening a bank account; the majority had done so within the previous 12 months. Figure A.2 shows the numbers of nonbank RSPs that have attempted to open bank accounts in the surveyed countries. Table A.2 shows where business accounts have been shut down by a bank. Table A.1 Figure A.1 Number of Type of organization Country responses MSB Credit union Americas No Canada 1 1 n.a. 28% United States 16 14 2 Europe Belgium 1 1 n.a. Spain 2 2 n.a. Sweden 1 1 n.a. Yes Switzerland 1 1 n.a. 72% United Kingdom 14 14 n.a. Middle East Saudi Arabia 2 2 n.a. United Arab Emirates 6 6 n.a. Asia India 2 2 n.a. Philippines 4 4 n.a. Australia 3 3 n.a. Total 53 51 2 Note: n.a. = not aplicable. 18   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions Figure A.2 Table A.2 Number Country Currency Name of bank Date 30 1 United States USA n.a. 2003–12 27 2 Canada CAD n.a. 2010–12 25 3 Germany EUR n.a. 2009–12 4 Switzerland CHF n.a. 2011–12 20 5 United Kingdom GBP n.a. 2011–12 Note: n.a. = not aplicable. 15 14 10 8 7 5 5 3 3 2 0 Y N Y N Y N Y N Y N United United Sweden Switzerland Other States Kingdom Note: Y = successful; N = not successful. Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   19 Bank Access Questionnaire Name of Company: Country of Operation: Type of Organization: All answers are totally confidential and will not be attributed to any person(s) 1. Have you recently tried to open a business bank account for your organization?   Yes   No 2. If so, when? (Year) (Month) 3. Please provide details on the country(ies), currency(ies) and name of the bank(s) that you have tried to open accounts in / with? Successful Country Currency Name of Bank (Yes / No) 1 2 3 4 5 6 7 8 4. If no, can you please provide the reason why? Bank Reason Why? 1 2 3 4 5 6 7 8 20   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions 5. Have you recently had any of your business bank accounts closed by your bank? If yes, please give name of the Bank, the currency of the account and the country the account is based in? Country Currency Name of Bank Date 1 2 3 4 5 6 7 8 6. If you have been advised that your bank account will be closed or it has already been closed what was the reason given by your Bank? 7. Please briefly outline your banking requirements in respect of the following: -­‐ Domestic services, e.g. Cash deposit, direct debits etc. -­‐ International Payments, e.g. Currency accounts, payments, etc. 1 Domestic Services 2 International Services   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   21 APPENDIX B Payment System Infrastructure General Principle 2. Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged. Domestic payment infrastructure Remittance services, except perhaps those that are entirely cash-based, depend at some stage on the domestic pay- ment infrastructure for settlement (and sometimes also for transfer of information). In some countries, in particular many receiving countries, such infrastructure remains underdeveloped. For example, non-cash payment services may be available only in urban locations. RSPs could often make better use of the payment infrastructure that has been developed if there were greater standardization of payment instruments, more automation of their processing, and increased interoperability of the associated networks. As discussed in General guidance for national payment system development, improvements in transaction infrastruc- tures such as ATM or EFTPOS networks can be achieved through the adoption of common and preferably interna- tionally agreed standards for instruments (e.g., payment cards), the adoption of common equipment and software standards to allow interoperability at point of sale among competing networks (e.g., ATMs, card readers) and the fa- cilitation of interconnectivity among the proprietary networks for handling the transactions. Greater automation may be able to reduce costs and provide improved services to users. It may also be possible to make improvements in the clearing and settlement infrastructures through the use of common information technology which makes it easier to interconnect existing infrastructures or even centralize or consolidate them. Such action could help achieve improved national coverage in a receiving country and reduce the effective cost to end users of a remittance (i.e., in addition to the direct price charged by the RSP, the cost of transport to urban centers to receive a remittance, as well as the time spent in such tasks and other related costs). Where relevant, the authorities in countries where infrastructure is weak or has limited geographical coverage may therefore want to encourage improvements to their domestic payment infrastructure, which may include new infrastructures or better use of existing infrastructures. Such improvements would of course be of general benefit, not just for remittances. Cross-border payment arrangements The safety and efficiency of remittance services can be affected by payment systems in the relevant markets and the way that these systems are accessed and used by RSPs or by banks acting for RSPs. In addition to improvements in the domestic payment infrastructure as noted above, the safety and efficiency of cross-border remittances may be further improved by the coordination and/or adoption across the relevant payment systems of, for example, communication standards and payment message formats that facilitate greater interoperability as well as rules, procedures and operat- ing hours that support straight through processing. 22   Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions It may also be possible to link the relevant domestic retail payment systems of sending and receiving countries, particularly where the domestic payment systems in both countries are well developed and have wide geographical coverage and where remittance volume between the countries is high. However, given the complexity of such links, it is important that there is a careful analysis of whether the likely benefits will justify the costs. Sometimes such ini- tiatives may be undertaken by the market itself. However, given, first, the diverse nature of the institutions involved and thus the potential for conflicting interests and, second, the uncertainty about the scale of future flows and thus whether investment in the initiative is justified, in many cases the authorities, and in particular central banks, may want to facilitate the consideration of these possibilities. In general, cross-border or cross-system initiatives require a high level of bilateral (or possibly multilateral) cooperation on technical, regulatory and oversight matters and, ac- cordingly, the involvement of central banks, regulators, payment system operators, RSPs and industry associations from both jurisdictions. In some cases, central banks themselves have established bilateral cross-border links between the payment systems they operate. There are several other initiatives in progress to evaluate ways to expand the use of existing international networks and platforms (e.g., the major international card networks, SWIFT) with a view to providing new or improved remit- tance services. Also particularly important could be international initiatives to standardize the message formats used by individual payment systems and the international banking community generally, since, even without direct links between domestic payment systems, standardized formats could do much to enable banks and other RSPs to process payment instructions without the need for expensive manual intervention. General Principle 4. Competitive market conditions, including appropriate access to domestic payment infrastructures, should be fostered in the remittance industry. The efficiency of remittance services depends on there being a competitive business environment. Competitive mar- kets can help limit monopolistic practices and lead to lower prices and improved service levels. In some places, or for certain remittance corridors, the demand for remittance services may be insufficient to support multiple RSPs but even here, provided the market is contestable—i.e., with only low barriers to entry—the benefits of competition should be felt. Competition can be assisted by discouraging RSPs from imposing exclusivity conditions on agents. This is important in both sending and receiving countries, but it is particularly important in receiving countries if a local market such as a small village has only one potential agent (e.g., the local shop) so that there is only one remit- tance service available if an exclusivity condition is imposed. As discussed under General Principle 3, authorities also need to be aware that their own regulatory regime may itself lead to market distortions and impose unnecessary costs, thus causing imperfect competition. To provide remittance services, RSPs usually need to be able to make use of the domestic payment infrastructure. Access to this infrastructure can be either direct or indirect. Both forms of access are capable of providing RSPs with suitable payment services, and their advantages and disad- vantages vary according to specific circumstances. Whichever form access takes, it is important that it is available to RSPs on a fair and competitive basis, not least because RSPs are in competition with each other and access may be a factor in their ability to compete. RSPs without direct access to core payment infrastructures should be able to use the payment services provided by institutions having direct access. Institutions with direct access to such infrastructures Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions   23 should provide all relevant payment services, including foreign exchange services, on an equitable basis to RSPs. In this respect, AML/CFT requirements such as know-your-customer requirements should be equivalent for Direct access means that the RSP is itself a direct participant in the system, submits its payment instructions directly to the system, and is responsible for settlement. Indirect access means that the RSP is not itself a direct participant in the system but instead uses another institution, which is a direct participant, to act on its behalf—i.e., the RSP is a cus- tomer of the direct participant. For more on this issue, see “The role of central bank money in payment systems”, ibid. In addition, banks and other institutions should not apply these requirements inappropriately to discriminate against other RSPs when providing payment services. Extracts from the General Principles for International Remittance Services Perhaps more serious are cases where non-bank RSPs face undesirable obstacles to indirect access to the payment infrastructure—i.e., where banks are reluctant to offer payment services to non-bank RSPs or will only do so under unduly onerous conditions. This may occur in individual cases if particular banks are reluctant to have competitors as customers. Banking markets are often sufficiently competitive that even if one bank will not provide such services oth- ers will, but the situation may be more problematic if the reluctance is the result of tough regulations concerning, for example, anti-money laundering and combating the financing of terrorism (AML/CFT) or exchange controls, or the result of the way such regulations are interpreted. Banks may have concerns about their ability to comply with regula- tions when their customers are RSPs and may therefore decide it is preferable to simply not provide services to them. Institutions with direct access to such infrastructures should provide all relevant payment services, including foreign exchange services, on an equitable basis to RSPs. In this respect, AML/CFT requirements such as know-your-custom- er requirements should be equivalent for all RSPs. In addition, banks and other institutions should not apply these requirements inappropriately to discriminate against other RSPs when providing payment services. RSPs, like everybody else, need to be able to use domestic payment systems. In most countries, only banks are al- lowed to be direct participants in such systems. Nonbanks have to access the systems indirectly, as customers of banks. There are arguments for and against this arrangement. On the one hand, non-bank RSPs sometimes argue that it puts them at a competitive disadvantage compared to bank RSPs. This could be the case if, for example, indirect access were more expensive (because of the extra cost of having to use a bank to gain access) or perhaps if there were confidentiality problems (because the bank, as a result of providing payment services to the non-bank RSP, obtains useful confidential information about the latter’s competing remittance service). On the other hand, the basic ratio- nale for restricting access is that it achieves an appropriate balance between safety and efficiency in the provision of payment services. Moreover, it is not necessarily more expensive to have indirect access. Indeed, in many countries, some banks themselves (especially small banks) choose indirect access because it is cheaper. The arguments for and against allowing direct access to non-bank RSPs thus need to be considered case by case in the light of the specific circumstances in each country. 1818 H Street, NW Washington, DC 20433 USA www.worldbank.org