Addressing the Remittance Challenge – By Aamir Hanif

“Addressing the Remittance Challenge – by providing greater access to Banking services through limited purpose accounts.”

With the FSB amongst others concerned about access to banking services for Remittances, and with the recent announcement from Facebook and others that Libra may be an answer, Aamir Hanif assesses these issues and proposes a possible alternative in this article called “Addressing the Remittance Challenge – by providing greater access to Banking services through limited purpose accounts.”

In many emerging economies, remittance payments are not simply a financial service; they are a financial lifeline. For millions of families who rely on remittances for large portions of their day-to- day costs, they are a critical source of income. For local businesses, flows from the many millions of migrant workers underpin domestic consumption. And for the broader economy, they have come to represent a vital engine for growth and development.

Access to remittance payments and Remittance Service Providers (“RSPs”) are challenged because of high costs and perceived high risks. It is well documented that RSPs have been exploited by organised crime and terrorist organisations as conduits to move and launder money, and finance some of today’s most damaging crimes. This has led to law enforcement action, including against Banks that have supported RSP’s and from policy makers who continue to flag RSP’s as high risk. As a result, many banks involved in international payments have responded by exiting – also known as ‘de-risking’ – RSPs, restricting business activity and/or increasing scrutiny over RSPs.This has increased costs and prices to 10% or more of the transaction value causing significant hardship to those least able to afford these costs thereby pushing financial flows underground to informal channels with potential adverse impacts on trade and economic stability, and financial transparency. Such informal channels include the physical transfer of cash and services offered by unregistered entities such as “Hawalas.”

With the recent announcement by Facebook and its partners that they intend to tackle, amongst other things, the 1.7 billion unbanked by creating a new global stable cryptocurrency called “Libra,” they are betting that new technology and innovation are solutions, to a problem that has been unresolved for too long, (albeit there are likely more profitable markets also targeted) despite being a priority for the Financial Stability Board.

Following the fanfare of the announcement of Libra, US Lawmakers, led by House Financial Services Chair, Maxine Waters urged Facebook to halt development of the Libra Network until hearings could be held to assess the proposition. Hearings are being held today in Washington. The Bank of England’s Governor, Mark Carney, confirmed that “central banks and regulators will want oversight of Libra, to ensure it is safe and does not allow money laundering or finance terrorism,” and that “Facebook cannot expect its new Libra currency to benefit from the same unregulated free-for-all that helped the company achieve a dominant position in social media.

In light of the challenges to be faced by Libra, the plight of migrant workers and remittance flows is unlikely to be solved anytime soon, and Libra is already seeing that lawmakers and regulators will expect robust AML/CTF programmes to be in place, and standards to apply that are equivalent to those affecting the Banks. 

This may well have an impact on the Libra offering itself but for sure on any likely go live of the Libra network. 

There is, therefore, still a window of opportunity for the Banks who already have invested in AML/CTF controls and can best manage these risks as the most trusted of financial intermediaries. In order to seize this opportunity any solution has, like Libra, to offer the prospect of reduced fees, but can already, unlike Libra be in a position to manage the risks.

This can be done, and it doesn’t require new technology or anything as inventive as a new global cryptocurrency. It does require a tailored risk-based offering, which provides simplicity and certainty for both the customer and Bank. For example, providing accounts that offer theoretically unlimited activity, in terms of volume and value from and to an unlimited number of remitters and beneficiaries, from and to almost any place on earth, drives a level of scrutiny and incurs costs that are uneconomic for migrants.  

So instead why not offer limited purpose accounts relying on simplified KYC and limiting amounts to within reasonable thresholds between pre-cleared parties and via non-high-risk corridors. By designing such a limited purpose account, together in partnership with a well-run RSP, costs involved could be significantly reduced as could risks. This could work but is not likely to be enough on its own to encourage new competitive capacity into the market. Confidence building measures, such as appreciation from regulators that risks can be mitigated but not eliminated and that use of these existing gateways are genuinely supported, could be the enticement needed to get the system working again.

In such a case, it’s at least possible that remitters could once again increase transparency and gain access for essential international payments at improved reduced prices via a well understood and controlled permissioned space; this would secure the cost-benefits promised by the new payment providers but within the existing system.

Aamir Hanif is the Head of FCC for MENA (excl UAE) for Standard Chartered Bank and is based in Bahrain. He joined SCB, as the Regional Head of the US Law Compliance Program for ASEAN and South Asia in Singapore. Prior to these roles, Aamir worked in corporate finance for Expedia and Boeing; as the Senior Economic Intelligence Analyst for the Middle East and South Asia for the US Department of Defense; and Senior International Trade Specialist for the US Department of Commerce’s International Trade Administration. Aamir has a Masters in International Policy from the George Washington University, an MBA in Finance from the Johns Hopkins University, and Bachelor’s in Finance and Information Systems from Washington State University.

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