I used to work in the money transfer industry. Years ago, my team and I built many of the systems that Banorte uses to link the organizations mentioned in the article to paying locations in Mexico (and other regions).
I left the industry shortly after we sold our company to Banorte in 2007. I left the industry for the same reason that we sold the company: a nearly intollerable level of regulatory risk. It got to the point in 2006 where a number of our profitable and otherwise-healthy competitors went out of business just because they couldn't keep their bank accounts open. Their bank would get a visit from an OCC examiner, or would ask the FDIC to approve a merger, and instructions would be issued to close all of the money transmitter accounts.
In other words, much of what this article talks about is not new. Here's a very similar article from nearly a decade ago (some of the same people being quoted):
What is new here--what's interesting--is the fact that the banks themselves seem to be shutting down their own remittance services. I had always attributed previous "crackdowns" to regulatory capture: certain banks saw a wealthy, highly-fractured niche, and used their connections in DC to turn up the heat on the non-bank players in order to weaken them and take market share. One of the most infuriating things about what we saw happening in 2005-2007 was that while banks were closing the accounts of non-bank service providers, the banks themselves began offering the same services to their own customers, often through the same networks that the non-bank financial institutions were using. Bank of America was the most prominent actor in this regard; but now, even they have stopped offering money transfer service. Go figure.
It's really unfortunate that such a cool area of tech (international remittances) draws such negative attention from regulators. If it weren't for that regulatory risk--existential in nature, really--I would still be working in the space. Ironically, this is also why I don't think that Bitcoin is a solution for international remittances.
See, the problem here is cash. No one is complaining about the lack of availability of SWIFT-based wire transfers between bank accounts. The transactions being discussed here transit through a secondary banking network that sits atop SWIFT; it is faster (seconds vs. hours), cheaper ($5-$10 per wire vs. $30-$50) and more available (24x7 vs bank hours) than SWIFT, but most significantly, because most of its payouts are made using cash, its participants don't need bank accounts.
Cash payouts are made out of necessity. The majority of international remittance recipiants don't have bank accounts, and the cash they receive from their emmigrant relatives goes to immediate consumtion needs (as mentioned in the article). Unless those recipients, many of whom live in rual areas, were able to cash out their bitcoins on the spot, a bitcoin transfer would be worthless to them. And the bitcoin ecosystem faces the same challenges with regards to bank access as the remittance industry does.
If you want an explanation as to what is driving this "crackdown", I would attribute it to some desire to significantly curtail the use of cash in these kinds of transactions. The low-income people who depend on remittances are collateral damage in service of that objective.
Very insightful. Even with the gov't/bank crackdowns and manipulation, I can see this being an excellent area for tech development. I'm thinking about "low-income people who depend on remittances," you mentioned.
Obviously, avoiding regulatory bullying would be paramount and that might be possible by using bitcoin. Just off the top of my head, I can picture a PayPal-ish website that money changers could use. (Money changers are everywhere!) They could open an account on the website to monitor, track, and verify transfers and payout cash to the receiver. And just like PayPal, if there were issues like fraud or laundering, the money changer would be accountable.
This idea is so obvious, I wonder if it's already being done.
SWIFT is not $5-$10 per wire - it's $30 to $60 in my experience (apart from Interactive Brokers who give you one free one per month). The costs are partly because that is a fixed fee whether you are wiring $1000 or $10m. Also it is still a semi manual process often involving humans at both the receiving and sending banks. This is partly because it is an old system dating from 1973 and also with the $10m transfers there is some fraud / cock up risk and so they check things out a bit. It also allows you to send money from say Jersey CI to the Bank of Bhutan who may not have compatible computer systems. I did that one and got my money stuck in Bank of Bhutan a bit rather with the travel agent I intended it for due to a cock up on my part. Also they do provide human customer support when you do such things. Also now they have to deal with a bunch of anti money laundering bureaucracy. Apparently in the EU the regulations are stack of paper about a foot high so no one has actually read it all so they kind of wing it. There are costs.
In fact thinking about it on a typical $50,000 transfer I imagine a $30 fee would actually be a loss leader if you imagine how much you'd have to pay for a compliance officer to read the laundering regs and file paperwork illustrating the transfer is kosher. Against this they typically try to overcharge you on FX (.5% is possible) and also give you 0 interest on your money when they are getting say 5%pa on it so they may make typically 2%*50k on that = $1000 which would cover costs but I'm not sure $30 would.
SWIFT refers to the network used in sending standard international bank wires, which I am contrasting to the family remittance network, an ad hoc network that links entities that facilitate the capture and delivery of international family remittances.
Sending a standard international bank wire will cost $30-$50 typically, not $5-$10. I don't really know how that price is "justified" as such, except to say that any bank account that is sending international wires increases the AML compliance cost of that account for a bank, and because surprising aspects of the bank wire transfer system are manual, a human being will frequently need to get involved. I would imagine that the incremental cost of sending a bank wire is frequently tiny compared to the cost, but it probably varies significantly from bank to bank (for some, it might even be a loss-leader).
The fees associated with sending a wire via the more ad hoc family remittance network are determined by a competitive marketplace, and are typically $5-$10. Providers are not all banks (although banks do get involved in a large percentage of transactions) and include non-bank companies like Western Union, MoneyGram and Xoom, and smaller players like ViaAmericas (mentioned in the article). People who send money will shop around for the best deal (often, different services are offered within the same retail agent location), and senders will from one month to the next switch providers if the FX rate is better, or if the fees are lower. The bank oligopoly holds no sway here, and if prices could be lower, they would be lower.
Your reaction is a typical one, and one that I remember encountering repeatedly: "why do these transactions cost anything at all?" The truth is, there are significant costs that underlie a family remittance transaction. At least half of transaction fees, and often 80%, are claimed by the retail agents that capture or pay out the remittance. There, you have all of the costs associated with retail, combined with the costs of handling large amounts of cash. On the capture side, many banks will charge retail locations a percentage fee for processing the cash they deposit, and if armored car services are used, they will also change fees for handling. On the payment side, logistical challenges may be even greater, given local conditions.
The amount of money that remains goes to pay for secure and highly-available computer systems, AML compliance processes (which require a significant amount of human involvement), other regulatory compliance costs (security, bonding, record-keeping, reporting, examination fees and assessments), fraud coverage, customer service costs (a call center must be maintained), marketing, and general corporate overhead. Really, what you would imagine it would take to run a remittance network if you thought about it.
If you compare remittance fees as a percentage of a typical US-Mexico transaction ($5 to send $350), they are comparable to other retail payment transactions that involve similar levels of risk and require similar infrastructure. However, volumes are much, much lower than ATM or credit card transactions, so economies of scale yield a much lower benefit, which also adds to the cost.
Are there any kind of odds that the U.S. will join a fully-automated transfer network with at least other western countries? I recently did my first EU->US money transfer and was amazed at how much worse the experience & cost was compared to doing a Denmark->Germany transfer. Within Europe, even across borders and currencies, the transfers are now cheap and fully automated: you just identify the destination account by IBAN, and it's routed automatically. It doesn't seem like it would be impossible to link up U.S. accounts to allow IBAN-identified fully electronic transfers too, versus the current really primitive system where you enter a bunch of information and some humans eventually enact the transfer. But afaict there's no movement in that direction. There's talk about an EU/US free trade area, but why not a rationalized transactions treaty?
The US banking industry has shown no interest in even setting up a more modern intra-country wire transfer system. It's pretty unlikely they would support a better international system anytime soon.
Isn't it incredibly naive to assume that this price is somehow driven by supply/demand driven market when the reality is banking is monopolistic and riddled with fraud?
If the cost of the transfer actually was determined in a competitive environment I'm sure it would be considerably lower. Unfortunately on such fees it's not in the banking industries interest to act competitively with one another.
> [...] assume that this price is somehow driven by supply/demand driven market
I didn't say that. Intelligent actors tend to avoid any real competition. The price is what enough clients are willing to pay to make the whole scheme profitable. There doesn't need to be any fairness for this to happen.
Going back to the original point, the price is set in a non competitive environment with the chance of the introduction of new competition is basically nil.
This is monopolistic, anti-competitive and wrong, and the less wealthy sections of the population suffer the most (as per usual).
>Cash payouts are made out of necessity. The majority of international remittance recipiants don't have bank accounts, and the cash they receive from their emmigrant relatives goes to immediate consumption needs
Are (US) dollar bills a workable substitute for pesos at the receiving end? I mean, can a rural Mexican without a bank account buy what he or she needs with dollars? Or does her or she need pesos?
(Not rhetorical: I really don't know.)
In other words, sure, I understand that BTC are not useful in rural Mexico because many have not heard of them, and most who have heard of them do not trust them, but surely everyone in Mexico knows that US dollar bills retain their value.
In every case I'm familiar with, the receiving bank can convert the cash to another currency. For example, if I'm visiting Mexico and withdraw money from my own American account, then the entry is shown in US Dollars on my account records, but the ATM will dispense Pesos. There are rates for these conversions (https://duckduckgo.com/?q=international+currency+converter) for example, using today's GO currency rate, $100 US would be equal to 1296.75 Mexican Pesos. There are frequently fees for this service.
One important distinction is that Bitcoin wallets are free where bank accounts aren't. Phones that can display QR codes have become cheap now.
Ignoring fees for a moment, if there are Bitcoin ATMs on both ends of the remittance transaction, it's pretty easy for the participants. Probably even competitive.
The problem with Bitcoin ATMs is the logistics of cash.
A Bitcoin ATM network that operates at a scale large enough to displace or even compete with the remittance networks in Mexico (and other beneficiary countries) would by necessity draw on the banking system to supply it with cash. This is because all of the cash being withdrawn would have as its ultimate (albeit intermediated) source Bitcoin purchases in the US (or other sending countries).
Think of it like this: the Bitcoins being sold in Mexico in exchange for pesos at these ATMs are being purchased by the ATM owner, who will then need to sell them in order to resupply the ATMs with pesos. Who does she sell them to? Without a massive (i.e. hundreds of millions of pesos per day) local demand for Bitcoins in Mexico, her buyers are going to have to be foreign--most likely the the immigrants in the US who are sending money home.
So, she sells those Bitcoins to Mexican immigrants in the US, for dollars. And now she needs to buy pesos, in the form of bills/notes, in exchange for dollars--at which point she is in the exact same situation as any standard remittance provider today!
Everywhere in the world, one of the primary roles of banks is to manage cash logistics, and to act as the retail face of the central bank, which acts as the ultimate sink for excess cash, and as the ultimate source of cash in the event of a shortage. As a result, the banks, and then ultimately the central banks, regulators, and governments generally, act as gatekeepers for any large-scale financial enterprise requiring the disposal and generation of physical cash.
What's more, when you are talking about billions of dollars exiting the US in favor of Mexico, there is only one way that money can move, which is through the central bank, via the banking system.
The only way that Bitcoin can displace the current remittance providers is if a large local demand for Bitcoins already exists in beneficiary countries, such that the inflow of Bitcoin could be absorbed locally, or used by recipients without being cashed in. Either that, or central banks and regulators will have to embrace it--or at minimum tolerate it.
That's not to say it can't happen. It just can't happen without official sanction first, before a local bitcoin market has established itself.
Potential demand for Bitcoin in these countries could be companies that buy from the US and receive a discount for paying with Bitcoin. An intermediary buys Bitcoin for the receiver of remittances and sells to those companies.
That could work. Some guy with a shop in Mexico selling say used iphones could provide a cash sevice giving people pesos in exchange for payment in bitcoin and then use the bitcoins to purchase iphones from the US. Assuming there are sellers in the US who will ship goods to Mexico for bitcoin.
Why would you ignore fees? Fees are the core factor of any payment/remittance business. The possibility of such an 'Bit-ATM' network doesn't depend on any technical issues, but on the amount of fees that can be extracted; only the volume and rate of fees determine if it's realistic or not.
Bank accounts also are generally free or near-free worldwide, it makes sense for every minimum wage earners to have a bank account, around here they do unless they're working illegally. If they're unaffordable in some places, then maybe that's the thing to solve - it doesn't actually cost much money to keep a "account" & some digital records; and the clerk-face-time of making such a record is comparable to the clerk-face-time of current money remittance services.
Decentralized P2P bitcoin transfers are not easily regulated; It would be like regulating other P2P technologies like BitTorrent or encryption software. Of course, if a centralized business is in the middle, you can regulate that, but it's not a necessary piece of the solution.
Such centralized businesses will be swiftly shut down by legislation if bitcoin cannot be regulated.
If shutting down the centralized businesses isn't enough, bitcoin will be outlawed. Identifying users is easy enough due to the nature of the network.
What will the government do with Bitcoin the day a report comes out that American citizens have been killed in a terrorist operation financed by bitcoin?
And yet a little "https" logo smiles at me in the address bar as we speak.
Point being that the government can't and doesn't ban everything that can be used for evil, be it from incompetence or rationality. Bitcoin will probably be heavily monitored though, as it is very suitable for that purpose.
HTTPS was crippled, since Netscape shipped only 40-bit RC4 internationally.[1]
PGP's source code was printed so it would fall under First Amendment protections, since binaries weren't legal for export.[2] (See also DJB's Bernstein v. United States)[3]
OpenBSD/OpenSSH is still based in Canada to avoid being subject to the laws.
Isn't it conceivable that the government would implement a similarly short-sighted (and ineffectual) policy if Bitcoins were seriously used to harm the US? :-P
I'm not sure identifying users of the network is quite as easy as you may think it is. If by users you mean those sending or receiving bitcoin transactions. It'd be an interesting challenge to identify the IP address originating even a single Bitcoin transaction. How can you tell whether a node is the originator or simply a relayer of a transaction? For added privacy, run Bitcoin over Tor.
You're not completely wrong. But without Bitcoin being accepted everywhere for everything, dollars will always be involved, and that's when're the regulation can and will live.
Absolutely insightful. Just today I discussed the BTC and other cryptocurrencies usability as remittance medium and felt that it is not globally feasible because of national regulatory risks. You just showed me the magnitude of the problem. For that I thank you.
I left the industry shortly after we sold our company to Banorte in 2007. I left the industry for the same reason that we sold the company: a nearly intollerable level of regulatory risk. It got to the point in 2006 where a number of our profitable and otherwise-healthy competitors went out of business just because they couldn't keep their bank accounts open. Their bank would get a visit from an OCC examiner, or would ask the FDIC to approve a merger, and instructions would be issued to close all of the money transmitter accounts.
In other words, much of what this article talks about is not new. Here's a very similar article from nearly a decade ago (some of the same people being quoted):
http://www.nytimes.com/2005/03/16/nyregion/16remittance.html
What is new here--what's interesting--is the fact that the banks themselves seem to be shutting down their own remittance services. I had always attributed previous "crackdowns" to regulatory capture: certain banks saw a wealthy, highly-fractured niche, and used their connections in DC to turn up the heat on the non-bank players in order to weaken them and take market share. One of the most infuriating things about what we saw happening in 2005-2007 was that while banks were closing the accounts of non-bank service providers, the banks themselves began offering the same services to their own customers, often through the same networks that the non-bank financial institutions were using. Bank of America was the most prominent actor in this regard; but now, even they have stopped offering money transfer service. Go figure.
It's really unfortunate that such a cool area of tech (international remittances) draws such negative attention from regulators. If it weren't for that regulatory risk--existential in nature, really--I would still be working in the space. Ironically, this is also why I don't think that Bitcoin is a solution for international remittances.
See, the problem here is cash. No one is complaining about the lack of availability of SWIFT-based wire transfers between bank accounts. The transactions being discussed here transit through a secondary banking network that sits atop SWIFT; it is faster (seconds vs. hours), cheaper ($5-$10 per wire vs. $30-$50) and more available (24x7 vs bank hours) than SWIFT, but most significantly, because most of its payouts are made using cash, its participants don't need bank accounts.
Cash payouts are made out of necessity. The majority of international remittance recipiants don't have bank accounts, and the cash they receive from their emmigrant relatives goes to immediate consumtion needs (as mentioned in the article). Unless those recipients, many of whom live in rual areas, were able to cash out their bitcoins on the spot, a bitcoin transfer would be worthless to them. And the bitcoin ecosystem faces the same challenges with regards to bank access as the remittance industry does.
If you want an explanation as to what is driving this "crackdown", I would attribute it to some desire to significantly curtail the use of cash in these kinds of transactions. The low-income people who depend on remittances are collateral damage in service of that objective.