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.

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 financial

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 the 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 fierce competition for C&I and CRE while shrinking margins continue to make 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.  For example, in 2018, the FDIC estimated that 27% of all households were unbanked or underbanked.    

The Remittance Market 

According to the World Bank, remittances to low- and middle-income countries reached a record high in 2018, according to the World Bank’s latest Migration and Development Brief. 

The Bank estimates that officially recorded annual remittance flows to low- and middle-income countries reached $529 billion in 2018, an increase of 9.6 percent over the previous record high of $483 billion in 2017. Global remittances, which include flows to high-income countries, reached $689 billion in 2018, up from $633 billion in 2017.

Among countries, the top remittance recipients were India with $79 billion, followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion), and Egypt ($29 billion). 

The average size of an individual remittance remains $200.00.  There are a number of money transfer businesses that have developed systems that are familiar to the customers and efficient in their delivery. The forces created by operation chokepoint and the 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 transactions. Each transaction has the potential to generate fees. The experience of banks that offer accounts to MSB’s has been 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 the banks making 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 those 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 a 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 

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.

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 fierce competition for C&I and CRE while shrinking margins continue to make 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.  For example, in 2018, the FDIC estimated that 27% of all households were unbanked or underbanked.    

The Remittance Market

According to the World Bank, remittances to low- and middle-income countries reached a record high in 2018, according to the World Bank’s latest Migration and Development Brief.

The Bank estimates that officially recorded annual remittance flows to low- and middle-income countries reached $529 billion in 2018, an increase of 9.6 percent over the previous record high of $483 billion in 2017. Global remittances, which include flows to high-income countries, reached $689 billion in 2018, up from $633 billion in 2017.

Among countries, the top remittance recipients were India with $79 billion, followed by China ($67 billion), Mexico ($36 billion), the Philippines ($34 billion), and Egypt ($29 billion).

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 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