Report to the Congress on the Use of the ACH System and Other Payment
Mechanisms for Remittance Transfers to Foreign Countries
Discussion of Remittance Transfers to Foreign Countries
In 2012, the two U.S. ACH operators handled 16.8 billion ACH transactions, of which 42.4 million (or 0.3 percent) were commercial IATs.10 The ACH operators do not track which commercial IATs are initiated by a consumer, and the portion of IATs that are "remittance transfers" under section 1073(a) is not known.
From 2011 to 2012, commercial IAT volume grew 50.8 percent, whereas overall ACH volume grew 4.2 percent. Although the ACH operators processed all of these transactions, for the vast majority (99.6 percent) of commercial IAT payments, depository institutions--not the ACH operators-- acted as the gateway operator.
Today, the Reserve Banks are the only U.S. ACH operator providing gateway operator services to other countries. The data in table 1 on FedGlobal payments reflect the subset of IAT payments that the Reserve Banks handle as gateway operator.
Table 1. International Automated Clearinghouse Transactions (IATs), 2010-2012
(number of transactions, except as noted)
|2010||2011||2012||2012 median value|
|Total IAT volume|
|FedGlobal IAT volume|
Note: Sources for the IAT volume data in the table are the two ACH operators, FedACH and EPN. Median value was not available for all IAT payments. The data include "inbound" and "outbound" IAT payments.
Evolution of FedGlobal Service
The Reserve Banks have continued to explore methods for expanding FedGlobal's geographic reach and for providing additional service options, including those that assist depository institutions in complying with existing and potential future regulatory requirements.
Although total commercial IAT volume in 2012 was 42.4 million transactions, FedGlobal's commercial IAT volume in 2012 was 151,244 transactions.11
The Board's July 2011 ACH remittances report noted several specific factors that could be contributing to low FedGlobal volume, including FedGlobal's limited geographic reach and ability to deliver funds to foreign recipients that do not hold accounts at depository institutions. In an effort to expand Fed-Global's geographic reach, the Reserve Banks have sought to partner with foreign gateway operators (FGOs) that can act as "hubs" for the distribution of payments into multiple countries within geographic regions.
In 2010, FedGlobal was successful in expanding its reach to 22 European countries through use of Deutsche Zentral-Genossenschaftsbank (DZ Bank) as an FGO counterparty.12 Since then, FedGlobal has continued its efforts to identify additional partners for expansion.
To address the issue of unbanked foreign recipients, the Reserve Banks introduced the FedGlobal A2R (account-to-receiver) service, which permits recipients in Latin America (including Mexico) to pick up transfers in cash at specific nonbank locations. While the service has enabled the Reserve Banks to assess depository institutions' appetite for an international payments product that reaches the unbanked, only a few hundred payments have been sent through the service since its inception in 2010.13 The Reserve Banks have not offered A2R services in additional countries.14
The Reserve Banks continue to strive to increase FedGlobal volume, and are exploring an expanded FedGlobal business model. The revised business model would include a focus on outbound business-payment volume expansion, increased opportunities for inbound payments to the United States, and an international payments hub model to route payments to and from foreign countries. The revised plan also reaffirms the Reserve Banks' ongoing support of remittance payments. In furtherance of the expanded business model, the Reserve Banks issued a request for information (RFI) in late 2012 regarding various international payments products and services. The RFI will primarily enable the Reserve Banks to explore methods for expanding FedGlobal's geographic reach and for providing additional service options in areas FedGlobal already covers.
The Regulatory Environment and FedGlobal Compliance Efforts
In its 2011 ACH remittances report, the Board noted that economic sanctions and anti-money-laundering regulatory requirements might have caused depository institutions to take a cautious approach to offering remittance transfer services through the ACH. Since that time, depository institutions have concentrated their efforts in the area of international ACH payments on assessing and planning for their new compliance obligations under section 1073(a) of the Dodd-Frank Act and the CFPB implementing rule, which, when effective, will require depository institutions to provide disclosures and error-resolution assistance to consumers who send remittance transfers.
Section 1073(a) of the Dodd-Frank Act generally requires a remittance-transfer provider to provide a written prepayment disclosure to the sender that contains the exchange rate, fees, and the amount to be received by the designated recipient in the foreign country. The remittance-transfer provider is also generally required to provide a written receipt, which must include all the information from the prepayment disclosure as well as the promised date of delivery of funds to the recipient and information regarding the sender's error-resolution rights under section 1073(a).
The Dodd-Frank Act provides depository institutions with a temporary exception from the requirement to disclose the exact amount to be received by the designated recipient; this exception was included to allow these providers additional time to achieve compliance. The exception, which applies only to certain transfers sent by remittance-transfer providers that are depository institutions, permits estimates when the provider is unable to know, for reasons beyond its control, the amount of currency that will be made available to the designated recipient.
The temporary exception terminates on July 21, 2015, unless CFPB determines that termination of the exception would negatively affect the ability of depository institutions that are remittance-transfer providers to send remittance transfers. In such case, CFPB has authority to extend the exception up to July 21, 2020. CFPB finalized most requirements of Dodd-Frank Act section 1073(a) with a rule--with an original effective date of February 7, 2013--published in the Federal Register in February 2012.15
Since February 2012, CFPB proposed and finalized a second rule that, among other things, adopts a safe harbor from the definition of "remittance transfer provider" for small-volume remittance providers.16 Specifically, CFPB determined that an entity that does not provide more than 100 remittance transfers for consumers in a calendar year and did not provide more than 100 remittance transfers in the prior calendar year is not a "remittance transfer provider" that is required to comply with the rule, because such an entity does not provide transfers in the "normal course of its business."17
CFPB in December 2012 also issued a third proposal to address industry concerns related to disclosure requirements and error-resolution rights.18 The CFPB proposal would revise the February 2012 rule in three primary ways.
- First, it would give remittance-transfer providers (including depository institutions) additional flexibility to estimate foreign taxes and the fees that are imposed on the transfer by the recipient's institution (i.e., a depository institution or remittance-transfer provider located in a foreign country).
- Second, a remittance-transfer provider would be required to disclose (or estimate) only those taxes that are imposed by foreign national governments, as opposed to those imposed by foreign provincial or local governments.
- Third, the proposal would exclude from the rule's definition of error situations in which a remittance-transfer provider sent funds to the account number that the U.S. consumer had provided, but the transfer was then received by someone other than the designated recipient because the consumer provided incorrect account information for the designated recipient.19 The exclusion would apply so long as the remittance-transfer provider satisfied certain conditions, such as (1) giving the sender notice that provision of an incorrect account number could result in loss of the transfer amount and (2) using reasonable efforts to recover the amount deposited in the wrong account.20
In addition, CFPB suspended the original effective date of its rule and announced that it would determine a new effective date upon finalization of its latest proposal.21 The ultimate effect of the CFPB rule on the future development of cross-border remittance services provided to consumers through open-loop systems remains unclear.
In anticipation of a February 2013 effective date for the CFPB remittance-transfer rule, the Reserve Banks have taken steps to assist depository institutions in complying with the original remittance rule. For example, the Reserve Banks have informed depository institutions using the FedGlobal service that the Reserve Banks will strive to complete and respond to trace requests related to error resolution.22
In addition, the Reserve Banks will provide an estimated exchange rate (based on the previous day's rate) to U.S. depository institutions sending transfers through FedGlobal. The Reserve Banks also will provide depository institutions using FedGlobal with information regarding foreign taxes imposed at the national level for certain destinations, as made available by FGO counterparties. Finally, FedGlobal has generally structured its arrangements with its FGO counterparties to prevent the deduction of fees by intermediary institutions, although fees may still be deducted by the receiving institution.23
The Reserve Banks have worked with the Mexican central bank (Banco de México) to enable U.S. depository institutions sending remittance transfers through the FedGlobal service to Mexico, called Directo a México, to comply with future disclosure requirements. Banco de México has provided the Reserve Banks with specific information about applicable taxes and informed the Reserve Banks that no Mexican financial institutions that receive payments through FedGlobal will deduct fees.24
Further, CFPB stated in its February 2012 Federal Register notice that "remittance transfers sent via Directo a México currently would qualify for the permanent exception" to the requirement to disclose the exact foreign exchange rate and exact amount of funds that will be received by the designated recipient.25 By contrast, enhancements to the Reserve Banks' FedGlobal services to other countries may be necessary to facilitate depository institutions' compliance with future disclosure requirements after expiration of the temporary exception.
Rules and Formats for International Payments Through Depository Institutions
The banking industry has taken steps to implement formats and standards and revise industry rules that will help facilitate compliance with the CFPB regulation as originally adopted in 2012. For example, the ACH and wire-transfer networks have developed transaction codes that will help identify international payments that are "remittance transfers" under the regulation; use of these codes could help depository institutions comply with the disclosure requirements imposed on "remittance transfers" and track more closely the number of remittance transfers they handle.
Effective September 21, 2012, the ACH rules were modified to include an "REM" transaction-type code, which indicates to a depository institution that receives an IAT from another institution that the payment may have been originated by a “natural person” and should be treated as a remittance transfer.26 For the domestic portion of international wire transfers, the Reserve Banks' Fedwire Funds Service and the Clearing House Interbank Payments System have developed a voluntary market convention by which a sending depository institution that has a bilateral agreement with a receiving U.S. institution can indicate to the receiving institution (by means of a three-digit code) that a payment is a remittance transfer.27 These ACH and wire-transfer payment indicators enable the sending institution to flag that the institutions' agreed-upon methods for handling a payment that is a remittance transfer should apply to the transaction; for example, a predetermined exchange rate might be applied to the payment.
For IATs, the U.S. gateway operator and its FGO counterpart must establish a payment-format translation between the payment systems of the two countries involved (for example, between the IAT payment format in the United States and the format of the receiving payment system in the foreign country), which can be complex. The International Payments Framework Association (IPFA), of which the Federal Reserve Bank of Atlanta is a founding member, has created standards for bridging national payment format differences. In 2013, one of the IPFA's planned areas of focus is adapting its rule set and message standards to address the requirements of the CFPB rule implementing Dodd-Frank Act section 1073(a).28
In addition, depository institutions expressed concern that certain warranties in the ACH rules for international payments were too broad. Specifically, a sending U.S. depository institution warranted that an IAT complied with the laws of the receiving country, and some depository institutions did not believe that they could reasonably ascertain whether payments comply with the laws of foreign countries. Institutions also noted that there is no equivalent warranty for remittances sent through wire-transfer networks. The ACH rules have since been revised, effective March 15, 2013, such that the sending U.S. depository institution now warrants only that, if the rules of the receiving country require authorization, the payment's authorization complies with those rules.
The Board is continuing to pursue the steps noted in its 2011 report to increase adoption rates of IATs for remittance transfers. In particular, the Federal Reserve plans to continue to (1) work on improved global reach for the Reserve Banks' FedGlobal service; (2) facilitate dialogue with depository institutions about regulatory compliance requirements associated with sending international remittances; and (3) encourage education and outreach by depository institutions to their customers about options for sending remittances. The Federal Reserve may also assess, where appropriate, possible future wire-transfer service options.
10. For the purposes of this report, "commercial" refers to payments initiated by a business or a consumer but not by the U.S. government. Return to text
11. The number of depository institutions that offer FedGlobal services has not increased materially in two years. At year-end 2010, about 422 depository institutions (representing less than 5 percent of institutions that originate ACH transfers) had enrolled with the Reserve Banks to offer FedGlobal services; at year-end 2012, about 446 had done so (5 percent growth). Return to text
12. At year-end 2010, eight depository institutions had enrolled in the Reserve Banks' FedGlobal service to Europe; at year-end 2012, 59 institutions had done so. Return to text
13. At year-end 2010, 13 depository institutions had enrolled with the Reserve Banks to offer FedGlobal A2R services to Latin America; at year-end 2012, 49 had done so. These figures do not include depository institutions enrolled in the FedGlobal A2R service to Mexico, because the Reserve Banks' enrollment process for that service is not separate from the process for FedGlobal's account-to-account Mexico service. Depository institutions enrolled in FedGlobal's Mexico service are included in the total number of institutions signed up for FedGlobal in footnote 11. Return to text
14. The Reserve Banks offer FedGlobal account-to-account services to Canada, Mexico, Panama, and 22 countries in Europe. The Reserve Banks offer FedGlobal A2R services to Argentina, Brazil, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru, and Uruguay. Return to text
15. 77 FR 6194, Feb 7, 2012. Return to text
16. 77 FR 50243, Aug. 20, 2012. See also77 FR 40459 (July 10, 2012) (technical correction). Return to text
17. Under the CFPB rule, entities that do not qualify for the safe harbor are still not remittance-transfer providers if they do not provide remittance transfers in the normal course of their business. Whether a person provides remittance transfers in the normal course of business depends on the facts and circumstances, including the total number and frequency of remittance transfers sent by the provider. 77 FR 50244 at 50285, Aug. 20, 2012. Return to text
18. 77 FR 71888, Dec. 31, 2012. Return to text
19. This portion of the proposal is of particular significance to depository institutions because within open-loop systems there are few if any economical methods by which a sending depository institution can prevent such situations by verifying in advance that the account number provided by the consumer is actually owned by the designated recipient. Return to text
20. 77 FR 71888, Dec. 31, 2012. Return to text
21. 78 FR 6025, Jan. 29, 2013. Return to text
22. Federal Reserve Bank Services, "FedGlobal ACH Payments: Disclosures on International Payments Readily Available" (www.frbservices.org/files/communications/pdf/fedach/091412_fedglobal.pdf). The reach of the trace requests, however, would vary by foreign jurisdiction, and the Reserve Bank may not be able to determine to which account at the receiving institution the payment was credited. Return to text
23. Under the CFPB rule of February 2012, the fees assessed by the recipient institution generally must be disclosed (or estimated) by the sending U.S. depository institution. The outstanding CFPB proposal to amend its rule would give providers additional flexibility regarding the calculation or estimation of such fees in certain circumstances. Return to text
24. Under Mexican law, however, the Banco de México cannot assume liability for the actions of receiving Mexican institutions. Return to text
25. 77 FR 6194 at 6246, Feb. 7, 2012. Return to text
26. Because the IAT code indicates only that the transaction is international, the REM code signals that the transaction is a remittance transfer. Return to text
27. Federal Reserve Bank Services, "Market Convention for Dodd-Frank Remittance Transfers," (www.frbservices.org/files/communications/pdf/fedwire/090512_dodd_frank.pdf). Return to text
28. International Payments Framework Association, "IPFA Focus in 2013," (http://ipf-a.org/news/ipfa-focus-in-2013-.html). Return to text