Bank De-Risking Issue

Bank De-risking by definition means to disassociate anything that seemingly has risk attached to it. In the financial world of payments, this is somewhat of a by-product after the announcement of Operation Choke Point (announced in 2013).

So who comes under the umbrella of bank de-risking? Businesses that are classified as money exchange company, money transfer companies, money transmitters, check cashing, check processing with the ability to do check cashing, prepaid cards, bitcoin, cryptocurrencies, person to person (P2P) money transfer services, etc. are all considered high-risk.

Today, financial institutions (especially banks) want nothing to do with money services businesses (MSBs) as a direct result of Operation Choke Point and the snowball effect it created.

Bank De-risking is not just a US phenomenon. It is affecting MSBs and MTOs worldwide, especially in Europe. It is becoming increasing difficult for MSBs & MTOs alike to obtain access to banking.

There are many reasons for banks not willing to on-board MSBs / MTOs as customers, a few of which are discussed below:

Banks are used to simple transactions, give a check in, cash it out. Take a payment in, deposit it, grant a loan, etc. However, the problem arises when banks become part of the value chain of becoming a financial intermediary.

The bank may not necessarily have all the data-points to assess the risk associated with the transaction. This is a huge issue. If someone in say Austin, TX is paying an MTO in the US to send money to their sibling in Mumbai, India, the bank in the US would also see limited transactional data for the transaction. They (the bank) will not see who the beneficiary is, who the payout partner is, etc. Because they have partial information about the transaction, per existing standards, the transaction is a high-risk transaction, hence the client is a high-risk client.

Most banks (I can safely say in the US, almost – 95% of every state charter bank and credit unions) do not have the adequate software or control mechanisms to record these missing pieces even if the information was provided to them. Doing so, would require investment into software, hardware, training, human-resources, domain knowledge and possibly enhancing the AML/KYC program. To do so, requires money and time. If by taking an MTO client a bank nets in only say $300,000 in fees per year, the CFO may decide it is not worth the risk, hence the bank will decline the business.

Rather than saying, “hey! sorry, we’re not equipped to handle it” banks use a more skewed nomenclature for it, they term it as bank de-risking themselves from the money services business.

The snowball effect starts with the larger banks. Once a larger bank de-risks, then the other banks wonder if they should be following suit and pretty much, just because the larger banks are de-risking, the medium and smaller banks follow suit. What eventually happens, is that a trend and practice is set in the banking world, without deeply studying as to the root cause for denial of banking by the larger banks.

Dilip Ratha, who is the oracle of all things remittances at the World Bank, is the Lead Economist on Remittances & Migration data. He cites and I quote:

…even though there is little data, to support any connection, any significant connection between money laundering and these small remittance transactions.

Dilip Ratha, Lead Economist – Migration and Remittances, Head – Global Knowledge Partnership on Migration and Development,  (KNOMAD), Development Prospects Group, World Bank.

This issue of de-risking has become a serious issue not just in Australia (where the MTOs were extended this benefit till 31st of March 2015), but other countries as well, UK, US, Canada, NZ, etc. it is so very difficult to get banking if you are an MSB.

However, not all hope is lost. For MSBs and MTOs affected by bank de-risking, we offer paid referral services, where in most cases we can help you find a bank who is willing to work with you. Click here to fill out an application for an MSB Friendly Bank.

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This page was last updated on February 8, 2017.