Making the Case for MSB's
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.
(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
o
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.
o
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.
o
Extremely
Low Cost:
The costs of the resources mentioned above can and often is covered by
the client MSB.
o
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.
o
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 struct 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
baking 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
