The sad state of affairs in the pursuit of access to banking for MSBs / MTOs
Earlier I wrote an article (The Sandstorm that is blanketing the operations of money transfer companies) on how difficult it was to get access to banking if one were an Money Services Business (MSB) or a Money Transfer Operator (MTO). The problem isn’t getting any better. Even established businesses are now losing bank accounts at a rate never seen before. UK, US and Australia have been particularly hit. I’ll give you four brief examples below:
Australia: A money exchange business lost access to banking earlier this year. The family owned money-transfer business had been operational for the last 22 years and suddenly found themselves out of business. The owner had the following thing to say to me “I know nothing about anything else (business). Money transfer is what my family has been doing for years and today, we will have to close shop. Despite being a legit business, despite the clean record, despite the regulator saying it is not fair that banks are closing our accounts, nothing has changed. I don’t know what I will do”
United Kingdom: A money transfer operator that has been in business since 1968 with four retail locations is now seriously considering of starting something else. The owner had the following quote: “To say it has been painful, is an understatement. Unless you have 100s of Million of Pounds (GBP) in assets, Banks will not pay any heed to your past transactions or performance. We have repeatedly knocked on every door and sought help from everyone, but the end result is, we don’t have a bank account. We are now piggy-backing on someone else’s account and this too is a temporary arrangement and we are losing 60% of our profits in the revenue share. It is just plain unfair!”
United States: An MSB that recently acquired a money-transmitter license in a well populated State cannot seem to find a bank that will open an account for them. “My partner and I have reach out to over 100+ banks. We’ve been denied banking by all of them. No reasoning is provided for. We managed to get accounts opened in two, and when they found out we got our MSB license, our accounts were closed. This is bullshit! On one hand FinCEN is citing that banks should open accounts for MSBs, the reality is very different. All this time and money spent in getting a license, and now, no bank account.”
Canada: “We are a small startup in Canada in the fintech space. Our product is based around domestic (Canada only) person to person payment services. We are registered with Fintrac and have obtained all the requisite licensing and business permissions. We didn’t even think opening a bank account would be an issue. We have approached every bank in Canada, only to be denied. Never expected this. Now we are thinking of abandoning this market if we cannot find access to banking”
Access to Bank Account – The problem is real.
These four examples are not theoretical. These are real people. Real business. Hardworking folks who are now getting extremely frustrated. These are the kind of problems startups, fintech companies and money transfer companies are facing on a daily basis. The system is now very much against small to medium players. New entrants, simply do not have a chance, especially if their paid-up capital and financials are small.
The situation is not all that grim. One can still get access to banking, but it is extremely difficult. Most of the relationships being fostered are through personal connections. The top-down approach, but even that has its limitations. You might be approved if you are non-cash, and are dealing in territories that are deemed less risky for the bank. Introduce into the equation that you would like to send money to India, Bangladesh, Pakistan, Vietnam, Liberia, Cameroon, Mexico, Argentina, etc. and soon enough, the offer is retracted. Mention cash as part of your transaction flow, and they will politely show you the door. Mention Bitcoins and the conversation is up.
A handful of US financial institutions do offer access to banking, but the rates being charged eat into profitability amongst other conditions (like average daily balance, etc.)
Will MSBs ever find access to banking?
So, what’s the short and long term solution?
Well, a few astute investors have decided to step into the game. The opportunity for setting up a commercial bank that would on-board money service business and money transfer operators is huge. One of the main elements that banks are hesitant to on-board MSB as customers is because their own systems are not positioned to handle transactions in which transaction visibility can be provided to the bank. 95+% of the banks today are just looking at aggregate line items and they do not have access to the breakdown of the transactions, nor do they have flagging parameters set in to deny transactions based on their own AML/KYC rules.
In addition to this the bank becomes party to the transaction, so no more aggregating deposits and channeling them out to other accounts, etc. The new MSB friendly banks will be having a reasonable share of the transaction. For example on money-transfers they might ask for $0.20 + 0.15% per transaction. This is a whole lot different from the aggregate amount of say $0.30 they might have charged previously for 1,000 transactions bundled together.
The game has changed, so have the rules of engagement.
Will such a relationship work? Having polled over 20 or so companies who have approached me over the past 6 months for access to banking, everyone loves the idea.
Think about it: An MSB Friendly Bank. Your partner.
Not only would these MSB friendly banks be your financial institution of choice, they would also be providing the much needed money transmitter license coverage. For the right candidates, the Bank would provide FBO (For Benefit Of) Accounts to those business that qualify. The goal? To make them go to market earlier rather than these businesses spending tons of money and time in obtaining their own money transmitter licenses.
Before you ask, this is still a few months away. Right now, of the three parties who are engaged in owning banks for themselves, all of them cite at least one year before they would be able to offer such services. That is not too bad considering the alternatives on-ground today.
Personally, I think the squeeze on MSB businesses is unjust and one that needs to be addressed by the Federal and State Regulators immediately. Access to banking is the very basic requirement for being able to conduct business. When such limitations are placed in the path of genuine businesses, guess what happens?
Money goes underground.
Money laundering methods like hawala, hundi, fei ch’ien, and chit will come into play (especially in the money transfer business). The no-play-with-you policy by banks, will force growth in the grey/black market for money movement.
Regulatory halls are echoing with the issues that MSBs / MTOs are facing, but the banking corridors are silent. They don’t want anything to do with MSBs / MTOs, which is sad.
It is hoped that sanity will prevail and someone within the incumbent players will pay attention to cry for help. Else, just patiently wait for a couple of months before a new breed of MSB friendly banks come out.
Ones who would welcome your business!
This page was last updated on July 6, 2015.