VCM BLOG

Making the Case for MSB’s, February 14, 2018

Feb14

For many thousands of workers in the United States, the end of the week renews a weekly ritual; payday. For those workers who are expatriates, payday renews another ritual, the trip to the local money transmitter also known as Money Service Businesses. Money Services businesses are defined by FinCEN as follows:

The term “money services business” includes any person doing business, whether on a regular basis or as an organized business concern, in one or more of the following capacities:

(1) Currency dealer or exchanger.

(2) Check casher.

(3) Issuer of traveler’s checks, money orders or stored value.

(4) Seller or redeemer of traveler’s checks, money orders or stored value.

(5) Money transmitter.

(6) U.S. Postal Service.

For many years MSB’s have served the needs of the expatriate workers who are sending money home. The remittance market is a multi-billion-dollar business serving a large population of the people who tend to be underbanked or unbanked.

Storm Clouds

In 2013 the US Department of Justice initiated Operation Chokepoint. This initiative was described in a 2013;

Operation Choke Point was a 2013 initiative of the United States Department of Justice, which would investigate banks in the United States and the business they do with firearm dealers, payday lenders, and other companies believed to be at higher risk for fraud and money laundering.[1]

The Justice Department’s decision to focus on the activities of MSB’s directly impacted their treatment by banks. Soon, MSB’s became persona non-grata; the major theme was that these organizations have potential for money laundering and therefore had to be given scrutiny.  There was a second theme that was less prominent; the better the monitoring the lower the risk.  Eventually the regulators were forced to cease the initiative. Unfortunately, a great deal of the stigma associated with MSB’s remains.

Community Banking Transitions  

Today community banks are experiencing shrinking margins in traditional business lines. Competition for C & I and CRE has become fierce, shrinking margins and making lending in these areas more expensive.  In the meantime, the main reason for community banking- serving the underserved is still an area that has a great deal of space for growth.  In 2016, the FDIC estimated that 27% of all households were unbanked or underbanked.

The Remittance Market

Remittances are a growing market that continues to grow according to the world bank statistics $138,165,000,000 in remittances was sent from United States to other countries in 2016. In 2018, the market is expected to grow more than in the previous two years for several reasons.  The average size of an individual remittance remains $200.00.  There are a number of money transfer business that have developed systems that are familiar to the customers and efficient in their delivery. The forces created by operation chokepoint and growing remittance market are creating great opportunities. Despite the huge demand and potential for fee income, many MSB’s are in search of a banking relationship.

Why Should a community bank consider an MSB relationship?   

Because of the history we have already discussed for many banks, the term MSB ends the discussion. However, for those banks that are looking for ways to improve overall profitability; there are several positives to consider

  • Fee income: Because the business model is built on small dollar transactions, there is a large volume of transaction. Each transaction has the potential to generate fees. The experience of banks that offer accounts to MSB’s has vbeen a steady reliable source of fee income.
  • Small expenditures of capital: The expenditure of capital that is necessary is largely dependent on the strength of your overall BSA compliance program. At the end of the day, the financial institution must dedicate sufficient resources to monitor the activity of the MSB.
  • Extremely Low Cost: The costs of the resources mentioned above can and often is covered by the client MSB.
  • Serving the underserved:  As we previously noted, the vast majority of the customers using MSB’s are part of the larger underbanked and unbanked population.
  • Opportunities for new markets, projects and a whole new generation of bank customers:Today’s MSB customer can easily be tomorrow’s entrepreneur who opens a large business account at your bank.

MSB’s and Risk

For many institutions the decision has been made that the regulatory risk associated with Money service Business is too great to justify offering the product. Of course, most of make this decision harken back to the strict scrutiny of Operation Chokepoint.

The fact that so many MSB’s lost their banking relationships caused the FDIC (the main “tormentor of financial institutions in this area) to issue FIL 5-2015 which was directed at the mass “de-risking” that that banks were forcing on MSB’s.

The FDIC is aware that some institutions may be hesitant to provide certain types of banking services due to concerns that they will be unable to comply with the associated requirements of the Bank Secrecy Act (BSA). The FDIC and the other federal banking agencies recognize that as a practical matter, it is not possible for a financial institution to detect and report all potentially illicit transactions that flow through an institution.  Isolated or technical violations, which are limited instances of noncompliance with the BSA that occur within an otherwise adequate system of policies, procedures, and processes, generally do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to BSA compliance. When an institution follows existing guidance and establishes and maintains an appropriate risk based program, the institution will be well-positioned to appropriately manage customer accounts, while generally detecting and deterring illicit financial transactions.[2]

Put another way, the regulators were noting that despite the appears otherwise the principles for  managing the risks of MSB’s still applied; the better the monitoring, the lower the risk.  When considering whether to offer an MSB a bank account, your financial institutions should be able to administrate the account to keep risks low. In addition to the guidance published by the FDIC, FinCen, the FFIEC and the other banking regulatory agencies have all published guidance making it clear that there are no absolute regulatory restrictions on banking MSB’s.

The time is now for community banking institutions to consider the possibility of banking relationship with MSB’s

[1] Zibel, Alan; Kendall, Brent (August 8, 2013). “Probe Turns Up Heat on Banks”The Wall Street Journal

[2] FIL 5-2015

Reimagining Compliance – Part Three May 16, 2017

May16

In the first two parts of this series we talked about the reason we have so many far-reaching regulations in compliance. The pattern these regulations follow is the same. Bad behavior by a number of financial institutions leads to a large public outcry which eventually results in regulations directed to addressing the bad behavior. The Truth in Lending Act, The Equal Credit Opportunity Act, and HMDA, all were implemented this way. Despite ongoing complaints from bankers about how burdensome these regulations might be, they are here to stay and are a part of doing business in financial services. However, by taking an optimist’s view of consumer regulations, one can find that there are many positives. These regulations add a level of stability to the banking industry and level the playing field for banks. Not only consumers but financial institutions have come to know what to expect when offering consumer products. Federally insured financial institutions have the same set of rules applied to them. Consumer compliance regulations are going to be a fact of life for financial institutions for the foreseeable future. However, all is not lost. Today there is a unique opportunity to reimagine the purpose of the compliance department. In fact, with the right change of focus, compliance can go from a cost center to a profit center.

Changes Have Come to the Banking Industry

In part two of this series we talked about the major factors that will drive change in the financial services industry in the very near future. Major forces are not only impacting the way financial institutions will do business in the future, they are directly impacting the meaning of compliance. Consider that the number of unbanked and underbanked people in the United States is at an all-time high. According to the FDIC there are more than 30 million people that fall into one of these two categories. Not only is the number of people striking, the composition of the group should give a moment’s pause to financial institutions doing strategic planning. The people in the unbanked and underbanked group include millennials, and people who simply have decided that it is better to stay outside of the banking system for assorted reasons.

Even though the unbanked and underbanked don’t have relationships with financial institutions, they DO have banking needs. Fintech companies have recognized the banking needs of this group and are developing the means to deliver. The smart phone is a gateway to banks even for persons that don’t want to have traditional accounts. Products such as Venmo and PayPal are the first generation of these companies. But in large part, these require a banking connection; today there are many ways to transfer money without a bank account. The second generation of Fintech’s allows customers to maintain a digital wallet1. The digital wallet allows the customer to maintain value (money) and store

the value on the smart phone. In other words, the new Fintech’s are making it more and more likely that the unbanked can stay unbanked and thrive.

Yet another hidden factor is the demand for the financial services provided by money service businesses (“MSB’s). MSB’s are companies that provide financial services including foreign currency exchange, check cashing and most important remittances. The constituency of MSB’s includes large populations of the unbanked and underbanked. During the period starting in 2010 through 2013, the Department of Justice along with the FDIC instituted Operation Chokepoint, which focused strict scrutiny on the administration of MSB’s. The result was that many financial institutions decided that they would no longer offer banking services to MSB’s. The need for banking services did not go away simply because Operation Chokepoint made it more difficult for MSB’s to get bank accounts. In many respects, Operation Chokepoint has created a significant opportunity for financial institutions who “step outside the box” and consider MSB’s as a source for non-interest income.

Misaligned Compliance

For many institutions, the ability to take advantage of the opportunities presented by underbanked, financial technology and MSB’s is severely limited. While each of these businesses present a reliable source of potential income, they all come with a level of risk. Compliance departments at financial institutions must be able to properly project the levels of risk and develop systems that will allow the institution to mitigate the risk.

Today’s compliance department tends to be misaligned with the strategic planning structure of financial institutions. Because compliance is viewed as a necessary (but unwanted) cost of doing business, the approach is often to get by with the minimum to meet the regulatory requirements. In extreme cases, some institutions simply calculate the costs of noncompliance into the operating budget.

Compliance programs are most often designed to be reactive. Compliance Officers make changes only when there is change in a regulation that impacts the institutions ability to keep the same products and services. For example, when the valuation rule was implemented, many compliance officers were tasked with figuring a way to document that the customer had received a copy of the appraisal or valuation used to establish collateral value. A more proactive approach might have been to partner with a Fintech company that could produce the required documentation electronically and efficiently, which will allow for significant cost savings.

The vast majority of compliance departments have limited resources and requests for budget increases are denied. Many Compliance Officers are forced to get by on their own grit and determination (in addition to lighting candles and praying). It is also common for a Compliance Officer to have several other duties including operations, security, BSA and IT to name a few. In the end, the best that a misaligned compliance depart can do is to try to keep its head above water.

Towards a More Proactive Compliance Department

Could you imagine the compliance department at your institution as a source of fee income, new clients and ongoing growth at your institution? Though it may sound farfetched, there is a possibility that this can be the case. There is a two-step process that must occur to get to this point.

First, recognizing the opportunities that exist; too many financial institutions write off MSB’s because they fear the compliance burden. However, the regulators have made it clear that with the right compliance program, there is absolutely nothing to fear from MSB’s. Making an investment into your compliance department that allows the necessary resources to properly monitor and administrate MSB’s will yield a positive return. In addition, by being able to offer banking to MSB’s your bank can access a group of potential clients that have given up on banking

Fintech companies have been developed to specifically meet the money movement needs of their customers. For many a fintech firm, there is a limited focus on compliance. One of the main things that vexes these companies is the need to get MSB licenses in each state in which they transact business. For many of` these firms a partnership with a Bank is a solution to this problem. Once again, by investing in your compliance department, the ability to engage in these partnerships can be realized.

By reimagining the compliance department of your institution, the door can be opened to additional income, customers and sustainable growth.

Your Partner in Balancing Compliance