Regulators continue to work towards a closed loop of financial crime protection, detection, and prosecution. Banks, on the other hand, are fighting to compete with check cashers and mobile payments platforms. As regulators crack down, banks are pushing for relaxed compliance requirements. To understand this give and take, we will look at a recent regulatory crackdown and the trends that have banks scrambling for a longer leash.
In February 2017, the Financial Crimes Enforcement Network (FinCEN) fined Merchants Bank of California for violating the Bank Secrecy Act (BSA). Merchants Bank works with MSBs, including 165 check-cashers and 44 money transmitters. Many of these MSBs operated a large distance from the bank, including some along the Mexican border. FinCEN cracked down on Merchants Bank for failing “to establish and implement an adequate AML program.”
Merchants Bank was found in violated to all four of the recognized touchstones of an AML program. These include 1) a documented system of internal controls proportionate to the risks, 2) independent testing of these controls, 3) a designated responsible individual (or team) for day-to-day compliance, and 4) adequate training for all involved personnel. In addition to violating these 4 requirements, Merchants Bank was found to be actively interfering with BSA staff’s attempts to investigate compliance and report non-compliance.
This example of regulation in action shows that FinCEN is backing up their bank requirements. Should banks avoid MSBs or engage in indiscriminate derisking? Absolutely not. Banks working with MSBs can enjoy a profitable and friendly relationship with their money service business partners. The key is to implement a comprehensive MSB compliance program to prevent and detect financial fraud. By working to manage risk, rather than avoid or hide risk, banks and MSBs can engage in fruitful and compliant MSB banking relationships.
In addition to balancing compliance and profit, banks are starting to enter the money service business industry. Banks want to offer their own MSB-like solutions such as check cashing and money transfer. As mobile payment platforms like Venmo expand their reach, banks are rolling out a nationwide bank to bank platform. This payments system will allow account holders at major banks across the US to send money to other account holders using just their phone number. The new platform is called Zelle and aims to make money transfer more mainstream, while boosting bank profits.
Banks are also rolling out their version of check cashing. As it stands, banks do not offer immediate cash for deposited checks – even for account holders. In many cases, check account holders have to wait 24 – 72 hours before gaining access to the entirety of their deposited funds. For smaller checks deposited through accounts with a balance larger than the check total, immediate access has been a possibility. Banks are now offering check cashing for a fee to account holders and non account holders alike. Will this directly compete with check cashers? Not likely.
Most money service businesses are located in neighborhoods without bank branches. MSB fees are still lower, on average, than the fees charged by banks. Plus, individuals have relationships with their MSB tellers. MSB customer-teller relationships mimic the personal banking relationships that most of us lost in the 20th century.
As banks look to stretch their wings and enter new payments arenas, they are also hoping for loosened regulation. Many banks note that the threat of fines and punishment encourages them to fill out more SARs than necessary, increasing their paperwork burden. This increases the costs for already expensive compliance programs. It is unclear whether banks or regulators will get their way.
Money service business banks have to balance their regulatory burden against their bottom line and banking profitable MSB clients. Many banks have taken themselves out of the fight entirely by indiscriminately derisking, or shedding their MSB bank accounts. This choice to eliminate risk, rather than manage risk, has sent shockwaves through the MSB industry and the clients they serve, including American NGOs working abroad.
Banks are working to balance several priorities. First, they want to compete with mobile money platforms and stay relevant for a younger, less cash dependent generation. Second, they want to avoid raising red flags in the eyes of federal regulators. Third, they are working to balance the profitability of industries deemed as “risky” with the compliance costs.
Business owners providing MSB financial services have their own set of challenges. MSBs offering check cashing, money transfer, prepaid debit cards, money wire, and easy bill pay are affected by derisking. When MSB bank accounts are closed, the MSB owners are left scrambling to find a bank. Many of NCC’s clients called after having their bank accounts abruptly terminated by their longtime bankers. This confusion and chaos is causing MSBs to shut down and lose business. MSBs are also working to expand their reach in the community, compete with mobile money, increase foot traffic, and stay compliant.
There is a solution that helps banks and MSBs work together in a compliant, efficient, and profitable manner. NCC offers bank accounts for money service businesses that are reliable and backed by a network of financial partners. This means that MSBs can operate with peace of mind, knowing that they have a secure business bank account. On the other hand, NCC offers banks unprecedented MSB compliance capabilities. All of NCC’s MSB clients are thoroughly vetted and set-up with a proven system for compliance.
NCC’s banks have access to the full details of their MSB client transactions. This transparency and open communication fosters compliance and allows MSBs and banks to work together to fight fraud. NCC’s MSBs receive 24/7 expert support from experienced MSB industry veterans and former federal regulators. The NCC team works tirelessly to address issues, solve problems, and keep MSBs and banks free from financial fraud.