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“Interconnecting ACHs Across Borders”
Elizabeth McQuerryFederal Reserve Retail Payments Office
Exploring Frontiers in Payment System Development
World BankMay 29-June 1, 2007
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Outline
o Federal Reserve Banks and Retail Payments
o Building the ACH Inter-Connectionso The Experience of Directo a Méxicoo Directo a México and General Prin-
ciples for International Remittances Services
o Lessons Learned
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Federal Reserve Banks and Retail
Payments
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Mission
o Foster the integrity, efficiency, and accessibility of U.S. dollar payments and settlement systems, in support of U.S. financial stability and economic growth in a global context
o Federal Reserve Banks – FedACH Services®o Nation’s largest ACH operator with nearly 40
years of experience and ACH expertiseo http://www.frbservices.org/Retail/fedach.html
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International ACH
o 1999 – Rivlin Report stated that Federal Reserve should enhance its own infrastructure to support cross-border ACH transaction and work with the industry to develop robust ACH cross-border capability.
o On-going needs to meet evolving international payments needs in cost-effective, electronic format
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Building the ACHInter-Connections
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Objectives-Payments System
Develop efficient and low cost interbank mechanisms to transact payments (corporate, individual, government) between countries that will be available to all financial institutions.
oConnections should reach ALL banks in destination low-value payment system
oStrive for no beneficiary deductions
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Development-Legal (1)
o The operating rules of each central bank/payments system rules govern their respective payments system. o NACHA formats and rules in the US
o Provides sound, predictable, nondiscriminatory, and proportionate legal and regulatory framework.
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Development-Legal (2)
o Agreementso Joint service contract that includes
formats, timeframes, technical specifications, operating rules, warranties, treatment for exceptions (rejects, cancellations, complaints, etc.)
o Contract periodically updated as service is enhanced.
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Development - Technology
o US banks originate payments in NACHA cross-border formats.
o Edits performed by FedACH.o Format converters created to translate NACHA
to local format.o CPA 005 in Canadao SPEI in Mexicoo SWIFT-like Eurogiro format in Europeo Tropicalized NACHA in Panama
o Receiving Gateway Operator make conversion and perform edits for local payment system rules.
o Periodic modifications required as enhancements are implemented.
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Development - Marketing
o Sales materials / activities created to:
o Inform U.S. financial institutions about services
o Educate financial institutions about international payments and foreign payments systems
o Facilitate usage of international ACH (tool kits, white-branded marketing materials)
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Trajectory
o 1999- Canada pilot
o 2001 – Canada Service opened
o Fall 2003 – Government payments to Mexico
o 2004o Spring – Commercial payments to
Europe and Mexicoo Fall 2004 – Government payments to
Panama
o 2006 – Government payments to Canada
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FedACH International® Serviceso Reaches accounts in countries representing
53% of global GDPo http://www.frbservices.org/Retail/intfedach.html
o Receiving Gateway Operators:o Canada – Bank of Nova Scotia
o Europe – Eurogiro Member Institutions / Eurogiro Network connectivity and processing
o Mexico – Banco de Mexico
o Panama – Banco Nacional de Panama / Telered for connectivity and processing
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Directo a México
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Origins
o September 2001 – Partnership for Prosperity between Presidents Bush and Fox stated:o The Banco de México and the U.S. Federal
Reserve agreed to study the possibility of setting up an automated clearinghouse system (ACH). Once established, there will be an efficient interbank mechanism to carry out payments between both countries that will be available to all financial institutions
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Beginning
o Service based on same logics as “domestic” ACHo Federal Reserve role somewhat like a
utility companyo Private sector role to commercialize
o International ACH a similar animal but has different stripes
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Payment Characteristics
Beginning Improvements
Type Account to Account Account to Account
Funds Availability 2 business days Next business day
FX FIX – 1.00% FIX – 0.21%
Currency USD-MXN USD-MXNMXN-MXN (in development)
Flow US to Mexico US to MexicoMexico to US (in development)
Fee to U.S. Financial Institution
$0.67 $0.67
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Directo a MéxicoSM
o White-brand concept launched in Fall 2005 (formerly FedACH International Mexico Service)
o Provides financial institutions with customizable, Spanish language materials oriented to consumer needs
o Color poster and brochure, lobby/tent cards, text of radio spot, FX Information Sheet
o Customer Guide (market and promotional ideas for financial institutions)
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Challenges
o Customers may need special marketing and customer service needs
o Money transfer businesses dominate remittance market
o Potential customers may not have traditional documentation and may be unbanked
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Innovation
o Beneficiary Account Registration (BAR) websiteo Developed by Bansefi to pre-open low-
cost accounts in Mexico over interneto Remittance transfer provides incentive to
formalize account and become bankedo Collaboration with the Federal Reserve to
facilitate ease of use by USFIs and link with economical Directo a México payment channel
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Lessons Learned
o Branding to Directo a México important step in facilitating offer by financial institutions and commercial acceptance by consumers.
o More financial education needed.
o Account to account payments are transparent and carried out between highly and routinely regulated financial institutions.
o International ACH slowly taking hold in industry mindset but change in financial sector can be slow.
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Directo a México and General Principles for
International Remittances Services
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1. The market for remittances services should be transparent and have adequate consumer protection.
o All fees paid by payment originator.
o Ensure no beneficiary deductions by using electronic payment system.
o Foreign exchange rates posted on internet: http://minneapolisfed.org/fedachfx/
o Consumer protections apply as part of general banking regulations.
o Consumer information brochures in English and Spanish included in promotional materials.
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2. Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged.
o Payments to any deposit or debit account in Mexico. Funds available via branch or ATM withdrawal, POS, electronic transfer.
o Bansefi’s website facilitates entry to banking system for Mexicans in Mexico.
o L@ Red de la Gente credit unions being added to the website – greater distribution and financial access.
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3. Remittances services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework in relevant jurisdictions.
o Directo a México available from financial institutions (banks and credit unions) in the U.S. which are highly and routinely regulated and operate under payment system rules
o Payments received by Mexican institutions which are highly and routinely regulated and operate under payment system rules
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4. Competitive market conditions, including appropriate access to domestic payment infra-structures, should be fostered in the remittance industry.
o Directo a México allows any U.S. financial institution to offer an efficient, secure, low-cost electronic transfer to Mexico
o $0.67 surcharge to U.S. financial institution
o Fee to consumer determined by each financial institution
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5. Remittance services should be supported by appropriate governance and risk management practices.
o Banks and credit unions in U.S. are highly and routinely regulated
o Risk management for cross-border payments should be evaluated within framework of overall institutional risk and business itself (volume, value, originators, receivers, etc.)
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Lessons Learned
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Lessons Learned
o Connectivity and technology are the easy part.
o Central banks can only encourage savings and better options in the market. Establishment of new ideas requires financial institution and consumer and behavior to change.
o Banks and credit unions can now offer low-cost cross-border transfers to their customers but they are not yet used to doing this.
o Customers originating and receiving transfers must trust and learn to use financial institutions to attain a range of benefits.
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Ongoing Challenges for Inter-Connecting ACHs
o Lack of person-to person payment model in U.S. (remittances)
o Lack of trust in financial institutions and consumer financial education in some receiving countries
o Growing concern over regulatory environment for financial institutions – regulations expand by the number of end points.
o This is new.
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Contact
Elizabeth McQuerryAssistant Vice President
Federal Reserve Retail Payments Office404/498-7888
elizabeth.mcquerry@atl.frb.org
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