By Andre Herrera, EVP of Banking & Compliance, Hypur, and John Vardaman, EVP & General Counsel, Hypur (formerly with the Department of Justice and Cole Memo/FinCEN guideline author)
In speaking at various bank and credit union events about
the banking of Money Service Businesses (MSBs), one common theme is clear: that
despite changes in the regulatory landscape, the process for banking MSBs has remained
the same. As a result of systematic de-risking,
MSBs across the country have been losing access to the financial system. But with a driving force behind de-risking,
Operation Choke Point, now officially ended, it is time to assess the aftermath
of de-risking, and specifically how financial institutions can service MSBs in
this new environment. For this to
happen, institutions must be ready to discard legacy concepts and practices
associated with banking MSBs and embrace a new approach.
De-risking created a wealth of new opportunities with
respect to the banking of MSBs. As many
large financial institutions have existed the MSB market, small and regional
institutions are poised to fill the void left by them. For MSBs themselves, losing access to financial
institutions represents an existential threat to their businesses, regardless
of how long they’ve been around or their adherence to regulations. This means there are many responsible MSBs
desperate to regain banking access, and many financial institutions open to
serving them. Nonetheless, much of the
MSB industry remains underserved. So,
what is the problem?
The answer may be found in some of the most common reactions
heard from financial institutions about the prospect of banking MSBs:
●
“I don’t have the staffing to bank MSBs”
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“We don’t have the tools to properly bank MSBs”
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“We don’t know where to start”
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“How do you bank MSBs in a profitable manner?”
●
“My compliance officer says we can’t do MSBs”
The consistent thread in these responses is compliance and
cost. And while they are related, I’ll
address these concerns separately and explain how they can be overcome with a
new approach to banking MSBs.
Compliance:
The exit of large financial institutions from the MSB market
exposed a problem with legacy compliance technologies – that they were not
built to address the unique challenges of banking MSBs. And yet, many institutions banking MSBs keep
repeating the same mistakes by relying upon these ill-suited compliance
technologies. In one telling example, I
was speaking with a bank that had been in and out of the MSB market many times
while using legacy compliance technology.
When I asked what the primary problem was, the answer was “everything” -
initial underwriting and due diligence, risk analysis, documentation,
transaction monitoring, site visits (or lack of), baseline analysis, and expensive
manual processes. This institution
finally realized that the old approach to MSB compliance had become outdated,
and that a new approach, with the help of Hypur’s technology, was needed.
Contrary to conventional wisdom, the success of an MSB
banking program does not depend upon the size of a financial institution. I have seen large, well-known, institutions sanctioned
for insufficient MSB compliance, and relatively small institutions successfully
process $100 million per month in MSB volume.
The key is having the requisite capabilities necessary for the
compliance challenges posed by MSBs, which increasingly requires the use of
technology. The right compliance
technology can minimize the errors and maximize the efficiencies associated
with banking MSBs. Our financial
institution clients, including the one identified above, utilize Hypur’s
technology to address the unique challenges of banking MSB through automation
and granular-level transparency. When
coupled with appropriate training, policies, and procedures, technology can
enable banks and credit unions to responsibly, sustainably, and profitably bank
MSBs.
Cost:
The imbalance of supply and demand around banking MSBs –
with the latter vastly outstripping the former – gives financial institutions
significant pricing leverage. From the
financial institution’s perspective, they can justify higher fees because of
the additional risks and costs associated with banking MSBs. From the MSBs’ perspective, the choices are
rather stark – pay higher fees to obtain or maintain an account, or risk losing
their entire business. A pricing dynamic
rarely gets more favorable than this for financial institutions.
And yet from what I have seen,
financial institutions have been slow to seize on this opportunity. At a recent banking association conference, I
asked the audience how many had MSB clients, and about 40% said that they
did. I then asked whether they had
different fee schedules for their MSB customers. Surprisingly, only 10% of the group said they
charged their MSB customers more than their standard account and analysis fee
schedules. The rest continue to charge
“normal” fees because, as many said, “that is how we have always done it.”
Put simply, the concept of free or low-cost compliance for
the banking of MSBs is an outdated model that ignores current regulatory and
economic realities. Risk analysis should
be conducted on each MSB customer to determine an appropriate fee schedule that
properly accounts for the cost and exposure to the institution. But I still see time and again institutions
that throw FTE’s and manual processes at problems and then wonder why their
margins are so low.
De-risking has caused significant disruptions to the banking
industry, but also significant opportunity.
But while the landscape has changed, many financial institutions
continue to utilize an outdated playbook when it comes to banking MSBs. The combination of new technologies, including
our company’s, and commensurate pricing, offers the promise of both enhanced
compliance and increased revenue. By
adopting this new approach to banking MSBs, financial institutions can turn the
disruption caused by de-risking to their advantage.
If you have any questions, please
email Hypur
executives directly aherrera@hypur.com
and jvardaman@hypur.com.