MSB Insider

Money Service Business Banks & Regulators Enter Multi-State Contract

February 14, 2018

Money service business banks and state regulators are forging ahead with a multi-state licensing process for MSBs. The new agreement will standardize core parts of the money service business licensing process. This is just one of the changes affecting MSB-friendly banks and their clients in the coming year. Keep reading to learn more about this agreement and other trends affecting the MSB industry.

Multi-State MSB Licensing Agreement

According to a new multi-state licensing agreements, one state will accept another state’s findings during the money transmitter license application process. When a business applies for their money transmitter license, the state works to ensure that they have a business plan, clean background check, and that they are in compliance with the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements.

Additional states are expected to join Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington as the compact gains steam. This compact is the first step towards a streamlined MSB licensing process. Experts are hopeful that this is the start of a 50-state licensing program. Money service businesses, money transmitters, payment service providers, currency exchangers, and fintech companies will benefit greatly from this integrated approach.

Tennessee Department of Financial Institutions Commissioner, Greg Gonzales, notes “With this initiative, state governments will be able to be responsive to business innovation while ensuring regulatory compliance. This Department has advocated for a more coordinated approach for the licensing and regulation of MSBs for nearly thirty (30) years and it is satisfying to be among the first states to take this step toward an integrated nationwide system.  This is a global industry and its supervision must be addressed in a way that allows consumers to take advantage of a broad array of products while ensuring appropriate regulation.”  

OCC Semiannual Risk Report

A few times a year, the Office of the Comptroller of the Currency (OCC) releases a risk report highlighting the strategic, credit, operational, and compliance risks facing the United States’ banking system. The OCC’s National Risk Committee (NRC) is a group of officials who issue guidance for financial institutions that help them comply with current AML and BSA requirements while promoting financial security. The group includes senior level officials from the supervisory, legal, policy, and economics departments.

Their fall 2017 report centered around cybersecurity and financial crime. Cybersecurity was the main focus of the report, specifically as it pertains to AML and the federal banking system. As the speed and scope of cybersecurity threats increases, banks are continually facing threats to their personnel, processes, and technology.

Some of these threats aim to exploit personal information and intellectual property for fraud. “Phishing” schemes and other criminal data breaching techniques point to a need for robust software and extensive employee training. Long story short, banks are being urged to invest more time, money, and manpower into their fraud-prevention and compliance programs.

While the current fintech explosion is bringing new advancements that financial institutions can use to strengthen processes, these same advancements are opening the door to new risks. The risk environment itself is growing increasingly complicated alongside this technological boom.

As the financial sector embraces technology for compliance, they are also using it to boost customer service, increase convenience, and expand access to their financial services. These new applications create a need for new and updated regulations. As new regulations are handed down by FinCEN, money service business banks must review and refine their compliance programs in order to keep up with the latest requirements.

New FinCEN Requirements for MSBs & Banks

The United States Treasury’s Financial Crime Enforcement Network (FinCEN) announced the creation of the FinCEN Exchange at the end of 2017. The Exchange is designed as a voluntary platform for information sharing on financial crimes issues and AML efforts. The Exchange also formalizes roughly 40 special briefings that FinCEN has conducted for financial institutions and law enforcement agencies since 2015.

The new platform is accompanied by FinCEN’s plan to facilitate periodic briefings between itself, law enforcement agencies, and industry players. These briefings will center around the identification and exchange of information relating to specific threats, like the development of new money laundering methods.

In May 2018, FinCEN’s new customer due diligence requirements will go into effect. The Final CDD Rule, as it is known, requires financial institutions to collect, maintain, and report beneficial ownership information. The Federal Register clarifies this further, saying that all banks and broker/dealers “must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted).”

When it comes to customer due diligence, FinCEN focuses on these four elements:

  1. Customer identification and verification
  2. Beneficial ownership identification and verification
  3. Understanding the nature and purpose of customer relationships to develop a customer risk profile
  4. Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information

The Final Rule seeks to prevent money laundering and terrorist financing by closing any and all existing loopholes. FinCEN has the power to require financial institutions to record and file reports as a part of the U.S. Treasury under the BSA, which was amended by the Patriots Act.

The Final Rule focuses on beneficial ownership, which FinCEN defines as:

  1. Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer
  2. A single individual with significant responsibility to control, manage, or direct a legal entity customer, including:
    1. An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer)
    2. Any other individual who regularly performs similar functions
  3. If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, the beneficial owner shall mean the trustee

MSB-friendly banks and MSB owners will need to keep an eye on FinCEN and changing requirements in the year ahead.


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How Kenya Revolutionized Financial Inclusion

January 11, 2018

In the United States, more than 9 million households are unbanked and roughly 20% of all US households are underbanked. The fintech and money service business industries are helping bridge the gap with alternative financial services, but progress is slow. Across the world, Kenya is making huge positive strides in financial inclusion. Kenya experienced a 50% increase in financial inclusion between 2006 and 2016. Their unique approach to solving the financial inclusion crisis is an example for countries across the globe struggling to foster an inclusive financial system.

The Struggle for Financial Inclusion

Financial inclusion refers to access to financial products and services. Furthermore, the principles of financial inclusion state that these products and services should be useful, affordable, responsible, and sustainable. Financial inclusion is important because it promotes the economic mobility of low income households.

The opposite of financial inclusion, naturally, is financial exclusion. This occurs when the barrier of entry to the traditional financial system is too high for people to join. This can also happen when banks redline low income neighborhoods, pulling their bank branches out and leaving individuals “financially stranded.” For low income households without a car, it is difficult (if not impossible) to make it to the bank during business hours using public transportation (without missing time at an hourly job that the family relies on). When physical access is possible, hidden fees and account requirements present another hurdle.

Alternative financial services are often vilified as predatory or expensive. In reality, the individuals who rely on these services are smart consumers who prefer the upfront pricing and simple transaction to the unexpected fees levied by big banks. Check cashers, money service businesses, and fintech companies are filling a void in the banking landscape. Delivering financial products and services to low income households promotes financial inclusion and benefits society as a whole.

In the US, financial exclusion is the result of strict regulation and the mitigation of risk and cost by banks. In Kenya, financial exclusion is the product of an unstable government and unreliable central banking system. Their fintech solution, however, shows that the power of innovation can change the financial landscape for an entire population.

Kenya’s Innovative Response

In 2007, Kenya’s presidential elections unleashed a surge of violence that left more than 1,300 people dead. As faith faltered in the government and the banking system remained scarce, an innovation saved the day. M-PESA was launched in March of 2007 and it revolutionized the way Kenyans transfer money. Prior to M-PESA, Kenyans relied on shady and insecure methods to move their money, including sending it with taxi drivers to neighboring towns. Lacking a reliable central banking system, they were in desperate need of a secure way to store and transfer funds.

M-PESA was launched by Vodafone’s Kenyan counterpart, Safaricom. The “M” stands for money and the “PESA” represents that Swahili word for money. M-PESA is an electronic payment and store of value system that operates using a mobile phone network. Customers register at an authorized M-PESA outlet, where they are assigned an individual electronic account. This accounts is linked to their mobile phone number and accessed through a mobile app. A network of money service agents, or retail stores, allow Kenyans to deposit or withdraw cash from their M-PESA accounts.

Once funds are in an M-PESA account, they can be easily transferred to other M-PESA users or non-registered individuals, used to pay bills, and traded for mobile airtime credits. Every transaction is authorized and recorded in real time. The only limitation to M-PESA is that transactions are capped at $500. Despite the inherent differences, these accounts fill a similar gap that check cashers and money service businesses fill in the United States. The difference is the sheer percentage of the population relying on M-PESA for financial inclusion and the lack of a trustworthy central banking system.

While the total percent of adults with a bank account in Kenya hovers around 75%, the statistics reflect that over 71% of adult women and over 73% of people living in rural areas have bank accounts. These numbers show that people across demographics are enjoying financial inclusion. Of the poorest 40% of individuals in Kenya, only 63% have access to a bank account. While this number is trails higher income statistics, Kenya is closing the financial inclusion gap.

M-PESA is one of the primary drivers of Kenya’s increased financial inclusion. Between 2013 and 2016, the number of Kenyans not using any for of financial service dropped to 17.4% (down from 25.1%). Over 71% of adults are using mobile money services and almost one third of Kenyans have a mobile money account by the time they turn 18.

One thing that’s still holding Kenya back is the lack of transparency in the costs associated with bank accounts in Kenya. The average consumer struggles to compare accounts and understand the true cost associated with doing business at different banks. Mobile banking and additional fintech solutions will hopefully bring more transparency. Finally, sending money in Africa is more expensive than anywhere else in the world with an average transaction cost of 10%.

What the US Can Learn from Kenya

The US has a greater overall rate of financial inclusion than Kenya, but they can still learn from the African country’s success. M-PESA delivered value and innovation to customers by removing the primary barriers of access and creating an intuitive process. Kenyans sign up for M-PESA at conveniently located authorized dealers and use something they already have, a mobile phone, to conduct transactions. The M-PESA system uses retail locations throughout Kenya as a service network.

In the US, check cashers are also using retail locations to expand operations and reach customers where they are already shopping. Retail check cashing provides convenience by allowing customers to bundle errands together: fill up the tank with gas and cash your paycheck, pay bills, and load a prepaid debit card all in one stop. By continuing to offer services in convenient locations and expanding mobile money services, check cashers can support financial inclusion and expand their reach.

NCC supports retail check cashers with reliable check cashing business bank accounts, supported check cashing services, and advanced POS check cashing technology. In addition, our team of check cashing compliance experts are on hand 24/7 to resolve problems and help you scale your business.


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Financial Inclusion in 2018 and Beyond

December 13, 2017

MSB technology and innovative banking services are promising to bolster financial inclusion around the world. As social media connects people across the world, the financial technology sector is catching up with their own solutions.  Peer-to-peer payment applications, the adoption of cryptocurrencies, and the rise of alternative financial services are bringing much-needed solutions to the under and unbanked populations of the world.

What Is Financial Inclusion?

Financial inclusion is the ability of financial services to meet the needs of their users without discrimination or limitation. Across the world, over 2 billion working age adults do not have access to the financial services they need on a daily basis. Among the poorest households, over 50% are unbanked. In the US alone, roughly 20% of households are underbanked. This points to widespread financial exclusion, a phenomenon that is closely linked to poverty and economic immobility.

The pillars of financial inclusion are:

  1. Access to a comprehensive range of financial services (deposit institution, savings, payment services, insurance, and credit opportunity).
  2. A competitive marketplace that ensures choice and affordability.
  3. Continuity and certainty of investment through sustainable financial options and institutions.
  4. Responsible and safe financial institutions governed by clear regulations and industry standards.

For those who are banked, these pillars are taken for granted. A reliable bank account affords you the opportunity to deposit your paycheck, transfer money to different accounts or people, pay your bills, save for the future, and request a line of credit. Financial inclusion requires participation and prioritization from the entire financial industry. When financial inclusion is achieved, individuals and households have the tools they need to improve their situation. In communities where financial inclusion remains elusive, households are often trapped in a low income cycle.

Benefits of Financial Inclusion

Financial inclusion is categorized as an enabler for 7 of the 17 sustainable development goals outlined by the United Nations. In 2015, UN countries adopted these goals as a part of their mission to end poverty, protect the planet, and ensure prosperity for all as part of a new sustainable development agenda. The World Bank Group also places a high value on financial inclusion and pinpoints the phenomenon as a key to reducing extreme poverty while boosting shared prosperity.

On a micro level, financial inclusion enables upward mobility, which has a direct and positive impact on both individual households and their community at large. Financial inclusion promotes financial stability, independence, and economic empowerment. In addition to increasing savings, reducing income inequality, increasing employment, and reducing poverty, financial inclusion is also beneficial for financial institutions.

Recent studies show that there is a strong association between financial inclusion and bank stability. In fact, greater financial inclusion has a positive effect on risk management for banks. How can this be? When banks use technology to provide a wider range of services to a wider range of people, they are increasing the scope of their business. More business across a wider range of economic agents works to improve operational efficiency while reducing risk and costs.

Threats to Financial Inclusion

The top threats to financial inclusion are banking services that exclude low income households from participating and discriminatory banking practices. The act of redlining, when banks close or refuse to open bank branches in low income neighborhoods, directly impacts access to banking services. Households with adults working more than one job and without a designated family car are unable to use public transportation to reach a bank branch during business hours. This severely limits their physical access to financial services. Assuming they do have physical access to a bank branch, account limits may still keep them from banking services.

Low income households who can secure a traditional checking account may still encounter trouble. Hidden account fees and overdraft charges can quickly eat away at an account balance and even plunge it into the red. The unexpected nature of these fees turns many households off of traditional banking entirely. In fact, over 59% of unbanked households globally cite not having enough money as the reason they don’t have an account. Financial products that aren’t designed to meet the needs of low income households and those that are designed specifically to exclude them are a clear threat to financial inclusion.

Money service businesses often bridge this banking gap with alternative financial services. Due to the threat of derisking by their depository financial institutions, which they rely on to provide their services, MSBs are often forced to close down operations. When an MSB closes, it further shuts off access to financial services within the community it serves.

The Future of Financial Inclusion

Luckily, the widespread adoption of mobile phones and the blossoming digital technology (fintech) industry are helping support financial inclusion across the globe. Fintech is specifically supporting financial inclusion through these trends and their associated benefits:

  1. Digital identification makes it easy to open an account
  2. Digital cash payments are bringing transaction accounts into the mainstream
  3. Mobile-based financial services bring convenience to even the most remote areas
  4. Increased customer data allows providers to tailor their financial products to fit the needs of the underbanked and unbanked.

In addition to mobile money and digital apps, cryptocurrencies are offering a new way to bring financial inclusion to  underserved communities around the world. Digital currencies like Bitcoin eliminate reliance on third-party centralized authorities. Instead, financial transactions occur on a decentralized digital ledger. In developing countries, Bitcoin is currently being used as a means of exchange and stored value. In Nigeria, Paxful is helping individuals leverage Bitcoin to access the global financial system and protect their money.

MSBs and Their Role in Financial Inclusion

MSBs and alternative financial services help bridge the gap for households who do not enjoy access to traditional banking services. While fintech continues to develop new solutions, MSBs will be on the front lines, directly serving the unbanked. Households rely on MSBs for payroll check cashing, convenient bill pay, prepaid debit cards, money transfer, and more.

NCC supports MSBs with real MSB bank accounts, advanced POS technology, MSB compliance expertise, and 24/hr customer service. NCC keeps your MSB up and running with redundant financial partners to protect you against derisking and enable you to serve your community.


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The MSB Insider

Money Service Business Banks & Regulators Enter Multi-State Contract

Money service business banks and state regulators are forging ahead with a multi-state licensing process for MSBs. The new agreement will standardize core parts of the money service business licensing process. This is just one of the ...(read full article)

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