Most people associate the word ‘passport’ with a leather bound document enabling individuals to travel to foreign countries.  For the people at hyperWALLET and those at other international payments companies, the term passport often means something else, especially when discussing payments in Europe.

Under the member state regulations issued pursuant to Europe’s E-Money and Payment Services Directives, licensed and regulated alternative financial services providers may provide their services throughout the EU, so long as they have properly ‘passported’ their license wherever they wish to do business.  Passporting a financial services license is accomplished through a fairly quick and easy application process in all the other countries where the authorized institution wishes to operate.  It is a much better approach than applying for distinct licenses in each country.

In addition, through a patchwork of EU member state laws, governments regulate ‘Electronic Money’ somewhat differently than mere ‘Payments Services’.  The line between Electronic Money and Payments Services can be difficult to ascertain when commission payments flow from hyperWALLET’s patented e-wallet platform to payment cards (widely considered Electronic Money) and bank accounts (widely considered payment services) and other means.  Understanding the regulatory nuances when a single commission payment is delivered to a direct selling company’s European sales representative with an address and prepaid card registered in the UK and a bank account registered in France is a requirement, not an option.

In addition to navigating the shifting sands of Europe’s payments regulations, hyperWALLET follows the payments laws in other jurisdictions where we help our clients deliver their commission payments.  Untangling the web of international payments regulations is no small task.  Through its own accounts, those of its clients and its network partners, hyperWALLET sends a combination of local bank transfers, international wire transfers, prepaid cards, Western Union cash pick-ups and so-called mobile money payments to 170+ countries.  While this requires significant operational and technical prowess, our banks, card issuers and other network partners (and their financial services providers!) frequently mandate that we explain and substantiate our regulatory positions in many exotic locales and of course, Canada.

In the United States, payments and cards are regulated through a combination of not-always-uniform state laws and federal regulations.  In Canada, new card laws are pending and significant revisions to anti-money laundering regulations are on the way.  Did we mention Hong Kong?  Or Singapore?  Or Malaysia?  Or Australia?  Or Russia?

When making payments around the world through a multitude of technologies, one doesn’t always need a passport, but a solid foundation in international payments law and next generation payments law is a must!

[Sponsored post. Use code "HW200" when registering for $200 off]

PaymentsTalk.com readers — here are two upcoming prepaid conferences which may be of interest:

Prepaid Card Compliance
Tuesday, January 29 to Wednesday, January 30, 2013
Washington Hilton, Washington, DC

American Conference Institute’s 7th National Forum on Prepaid Card Compliance will bring together an unparalleled faculty of regulatory and enforcement officials, compliance experts from industry leaders, and outside counsel specializing in prepaid card regulatory compliance who will provide you with best practices and targeted guidance in these most uncertain times for the industry.

This event has become the nation’s premier, must-attend forum focused solely on the industry’s legal, regulatory, and compliance concerns. You will not want to miss this unparalleled opportunity to find out how others are approaching the challenges facing the prepaid card industry while networking with the industry’s leaders.

NBPCA’s Power of Prepaid
June 26-28, 2013
Washington, DC.

Power of Prepaid is the prepaid industry’s primary annual platform for industry to reach across companies, government, consumer advocates, and media to communicate, influence and collaborate – to the benefit of the Prepaid and payments industry.

It is the delivery channel for Prepaid to deliver our key messages – critical to the survival and success of the Prepaid industry. From previous events, feedback from attendees across prepaid companies, government, consumer advocates, media and vendors has been exceptional and the conference provides great value and industry insights for company leaders and staff.

Square Reader - in both official languages

I went to the downtown Vancouver Apple store yesterday to buy an iPad mini so hyperWALLET’s development team could see how our IOS apps will operate on the mini.    It was only day 2 of a new product launch so predictably Apple was out of stock.  Disappointed but determined not to come away without any candy, I asked for ‘one of those new square readers’.   The genius brought me a square-shaped power adapter.  Ermm, not quite.  After a few genius toing and froing, victory was mine!

Now all I needed is something to sell. Horrendous downpour season began last week in Vancouver.  That means that even though Starbucks is only 3 doors down the street in one direction, 7-11 is next door, etc, it’s still a hassle to interrupt your day and get your feet wet just to get a coffee.  So I decided that a Sneakernet Café could formalize the  adhoc runner/cash system that has evolved in the office. I activated my Square reader (5 minutes), downloaded the square register application to my ancient iPad (2 minutes), verified my identity and linked my bank account (4 minutes), populated my store with items hyperWALLET staff want to commission someone to fetch for them at various points in the day, and added the usual baby/event contribution collection rounds that happen in any office.  That step took the longest – about an hour.

The Sneakernet Cafe Services Menu

I’m in business – I charged my hyperWALLET-powered Paylution Visa card the first $12 worth of transactions, and made my husband swipe and pay before I agreed to make the Starbucks run for him this morning.

First Sale Receipt

Total Time:  2 hours

Total Cost:  $10.00

Experience:  Delightful

From Square’s perspective, Lisa’s Sneakernet Café is almost certainly bound to be a –ve ebit generating exercise since it will consist of low value, infrequent swipes.   I’m not even sure Square will ever make back the $10 credit provided to the Café.    The fact that Square’s volume is heavily weighted to this micro-merchant segment is highlighted in an info graphic which arrived in my inbox this week, which makes one pause and think about the current multi $B valuation and $350M of invested Venture Capital.

Linke to View Full Square Infographic from TSG

But, based on my experience, from the sole-proprietor’s perspective, all that VC money actually has produced something magical.  There is a whole world of commerce sitting between the Sneakernet Café’s of the world and the Fixed Retail chains like Starbucks.  In hyperWALLET’s core vertical, Direct Selling, customized versions of the Square register-like applications will be appearing within a year or so.  Game on.

[SPONSORED POST -- All Paymentstalk.com readers will receive a $200 discount when registering for the conference using code "HW 200". ]

American Conference Institute announces inaugural International & Cross-Border Payments Forum

American Conference Institute (ACI), creator of the renowned Prepaid Card Compliance and Emerging Payment Systems conferences, is proud to announce its premier Advanced Forum on International & Cross-Border Payments, to be held in New York City on November 27-28, 2012.  This is the next installment in ACI’s Payments series of conferences, which have quickly established themselves as the gold standard for the payments industry.

ACI’s Advanced Forum on International & Cross-Border Payments will bring together an unparalleled faculty of renowned international payments professionals, including in-house counsel and compliance experts, senior executives from leading companies in the global payments market, high-level regulatory and enforcement officials, and top payments counsel from around the world.

Staffed by industry specialists, lawyers and other professionals, American Conference Institute operates as a think tank, monitoring trends and developments in all major industry sectors, the law, and public policy, with a view to providing information on the leading edge.

For more information or to register for the event, visit http://www.americanconference.com/internationalpayments.

I have been following the recent debate started by Virginia Sole-Smith and her article ‘The Pink Pyramid Scheme’.  The article about Mary Kay, the pink hued grande dame of Direct Selling, appeared in Harpers on July 16, 2012.  It concluded that although much is promised in terms of earning potential, only a handful of Mary Kay consultants at the ‘top of the pyramid’ earn the big dollars, and furthermore, they do so off the backs of those working at the lower levels.   There has of course been considerable reaction from the Direct Selling industry, and I see yet more comment from Ms Sole-Smith in a blog for The Investigativefund on July 27.

I am sure Ms. Sole-Smith’s work is well researched, similarly most of the rebuttals to her blog appear measured and considered.  As is so often the case in life it would appear that there are two sides to the story.  Having never worked in the Direct Selling industry I cannot add to the debate with personal experience.  The closest I came was some 20 years ago when my mother became a Mary Kay consultant.  She did not transform our lives with an abundance of supplemental income, however from what I remember the experience was positive and fun.  Her dream objective was the legendary Mary Kay pink car (as I understand it the pinnacle of sales success in the world of Mary Kay), sadly a dream that never came to reality in our household.  However I have seen these pink cars around, indeed there is one in my small hometown, and lets just say I hail from a place most of you have never heard of (in rural Canterbury, New Zealand).    It is a long way from Texas, and surely nowhere near the ‘top of the pyramid’ yet clearly there is a consultant doing well enough to earn a pink car.  To me that says something about distributed success.

While I have not worked in Direct Selling I do have considerable day-to-day experience in one aspect of the operation.  We at hyperWALLET are in the business of Payments, both domestic and cross border.  Amongst other industries, we do the commission payments for many Direct Selling Organizations (DSO’s), both start ups and large established companies.   hyperWALLET provides pre-paid cards to consultants / distributors so that their commission earnings can be paid instantly and made available in local currency.   The DSO’s we work with are truly concerned about paying their distributors in a timely and convenient manner.  We are constantly adding new DSO customers, however right now we make more than 260,000 individual commission payments each month.  While I cannot comment on how far the money cascades down through each organization the fact is that real money is being earned by real people.  Without jumping into the fray of this debate may I suggest that 260,000 payments each month from hyperWALLET alone indicates that there is a considerable community out there earning money through Direct Selling.  Is it really necessary to find fault with that?  We don’t think so.

As a rooky attendee of the recent Direct Selling Association 2012 Annual Meeting I was swept away by the sheer enthusiasm of the participants.  Direct Selling is a sometimes misunderstood sector, yet it really shouldn’t be as it encompasses the get-up-and-go spirit that made America great.

While a few conservative financial observers are occasionally queasy about the sector there can be no doubt that it provides critical supplemental income to millions of people worldwide.  And whats not to love about that?  In good times and bad, any industry that allows people to earn money by working around their other obligations has to be a good thing.

It is an industry that radiates positivity and can-do attitude.  Its literature is peppered with exclamation points, and packed with motivational success stories.  Most importantly though, it allows those marginalized by the mainstream world of commerce to start their own businesses and in so doing take a little more control of their own destiny.

As a supplier to this impressive sector hyperWALLET has had the good fortune to work closely with some of the top Direct Selling Organisation’s (DSO) in the world.  At the other end of the spectrum, we have worked with many DSO start-ups.   It is a competitive environment and not all start-ups succeed, however we have seen some explode onto the scene as the new darlings of the sector – and when this happens we know that real people out there are improving their lives.

In Canada and around the world, a little-considered industry is dying a slow death.  The Canadian government can save and revitalize this industry, and perhaps spur a new technologies revolution in the Great White North.  What would require this change?  The Canadian government would simply need to ensure that the intentions of a well-meaning group of diverse government representatives are carried out and not distorted, at least in Canada.

In the last two decades governments and private entities around the world have funneled significant resources into the detection and prevention of money laundering and terrorist financing.  Like many other countries, Canada’s Department of Treasury established a national agency to combat money laundering and terrorist financing.  The Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) is Canada’s financial intelligence unit, created to collect, analyze and disclose financial intelligence on suspected money laundering and terrorist financing activities.  FINTRAC regulates life insurance companies, securities dealers, casinos, banks and others, including the lowliest of financial services providers, money services businesses (“MSBs”).  MSBs are usually providers of alternative financial services, such as currency exchangers, cheque cashers and money transmitters like Western Union.

FINTRAC may impose significant penalties on MSBs, banks and other financial services companies (“Financial Institutions”) with deficient anti-money laundering controls.  While FINTRAC’s fines to date have not been intimidatingly large, financial services companies of all stripes are subject to fines which may run into the millions of dollars, as well as criminal prosecution of senior management, which could lead to prison time.

The threat of fines, prison and reputational damage resulting from a poor FINTRAC audit result looms over Financial Institutions.  In particular, the people at Financial Institutions tasked with ensuring a predictable and glowing FINTRAC audit result are the daily grinders in their compliance departments.  While other Financial Institutions staff members, such as commercial lenders, traders of all stripes and C-suite executives perform their jobs with a dual focus on risk and reward, compliance department staff sees the world more starkly.  They balance risk and more risk.  The first risk is the actual risk of money laundering and terrorist financing.  The second risk is the risk of fines and reputational damage to their institution.  Each poses a material risk to their employment – the third risk.

As a result of this institutional reality, all business deemed to have a high risk of money laundering or terrorist financing is turned away.  Who decides where this high risk business is to be found?  The Financial Action Task Force (the “FATF”) does.  The FATF is “an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing”.  The Task Force is therefore a policy-making body and its policies have become dogma.  These policies include a set of guidelines known as the FATF Recommendations and the FATF Special Recommendations (collectively the “Recommendations”).  A critical component of the Recommendations is the running theme imploring Financial Institutions to perform customer due diligence, also known as know-your-customer reviews (“CDD” or “KYC”).  An emphasis is placed on the value of face-to-face business relationships.

Special Recommendation VI places a clear target on “money or value transfer services” (read: MSBs), which “have shown themselves vulnerable to misuse for money laundering and terrorist financing purposes.”  Special Recommendation VI goes on to recommend that MSBs be regulated, which is reasonable enough. However, the MSB industry’s reputation was decimated when the FATF described MSBs as “vulnerable to misuse”.  Perhaps with the exception of 800 pound gorillas such as Moneygram, Western Union and Pay Pal, MSBs became the scourge of Financial Institutions the world over.  “Vulnerable to misuse” became “risky”, which became “high risk”, which became “not worth losing my job over – sorry tourists, you’ll have to pay a king’s ransom to exchange money at your hotel” (hotels never register as MSBs even though they probably should); and “sorry online MSBs other than Pay Pal, you must live in constant fear of losing your banking relationships.”  The fact that the Recommendations merely promote regulation as a preferred policy somehow got lost in the shuffle.  In recent years many, many MSBs have dissolved as a result of lost banking relationships.  Parties wishing to establish new MSBs have found it virtually impossible to find a banking partner, not only in Canada, but in most first world countries.

Let’s assume the Financial Institutions, and the people running their compliance departments are correct in every way.  The risk of providing banking services to MSBs is usually not worth the limited revenue that may come from an MSB other than the 800 pound gorillas.  If something goes awry, someone could lose a job by failing to terminate the services provided to a company labeled ‘high risk’.

Can anyone do anything to assist Canada’s helpless, honest and tarnished MSBs?  In this case, the governmental agencies that participated in drafting the Recommendations can step in to support their own policies.  After all, the Recommendations provide that MSBs should be regulated, not decimated.

The FATF website lists a number of Canadian governmental agencies as participants in the FATF.  These include the Department of Finance, the CRA, the RCMP and many others.  What if the Department of Finance or FINTRAC were willing to indemnify Financial Institutions against any liability resulting from their dealings with regulated Canadian MSBs?  As a policy matter, what effects would this have?  Probably good ones, including:

• More small and honest MSBs would be able to keep their banking relationships and stay in business
• Some informal MSBs may register with FINTRAC
• New MSBs would receive banking services, keeping money transfer and foreign exchange prices lower for consumers and creating some degree of competitiveness among MSBs
• Canada could become a launching point for new MSBs with a focus on new technologies – e-wallet and m-wallet companies might pass over foreign jurisdictions with larger populations to first open their doors in Canada because of its reasonable regulatory environment
• Financial Institutions would have no risk from their dealings with companies regulated by FINTRAC; if an MSB is found to have facilitated money laundering or terrorist financing FINTRAC can shut it down and penalize the MSB’s owners and staff appropriately

Currently, FINTRAC audits MSBs sporadically.  This leaves the compliance departments of financial institutions relegated to a place where they can only hope that their MSB clients are not being used for money laundering or terrorist financing.  However, if an MSB could voluntarily subject itself to frequent FINTRAC audits, bi-annually, quarterly, etc., then the Financial Institutions could take comfort that the government watchdog is ensuring that MSB best practices are followed.  MSBs may even be willing to pay for increased audits as a form of insurance against lost banking relationships.  In this situation, Financial Institutions would almost certainly welcome back MSBs.

In conclusion, the FATF’s Recommendations provide that MSBs should be regulated because they are vulnerable to money laundering and terrorist financing.  This Recommendation has led Financial Institutions compliance departments to stop their institutions from accepting MSBs as new customers, and in many cases, to terminate their existing relationships with MSBs.  If Canada’s representatives on the FATF are serious about the policy of regulating MSBs instead of destroying MSBs, then they could save the industry’s smaller and Canadian-headquartered players by simply indemnifying Financial Institutions from any penalties resulting from providing services to regulated MSBs.  The Department of Treasury could add one simple line to the Regulations:  “No Financial Institutions shall be fined or otherwise penalized under these Regulations for providing services to a regulated money services business”.  The result of ensuring that the Recommendations are carried out as intended would result in a more diverse and therefore stronger financial services industry in Canada.

The Consumer Financial Protection Bureau of the United states is implementing new rules intended to make the opaque business of international money transfers more transparent.

This Reg-E extension will require consumer remittance providers to disclose 3 things for each transaction:

1. the fx rate applied,
2. the fees applied, and
3. the actual amount of money to be delivered.

Banks are given an extra year to comply, until Jan 2014, whilst everyone else in the industry must be in compliance by January 2013.

Why are banks given a break and an extra year?

Likely its because they would have no hope otherwise – given how SWIFTs are processed!  Intermediary correspondents clip transactions along the way, and recipient banks assess egregious lifting fees and fx spreads. The sending institution often has no visibility into the actual amount of money delivered, never mind the hapless consumer.  Cash-based MTOs like Western Union, Euronet, and MoneyGram who control both sides of the network just don’t have the same issues.  And hyperWALLET’s global bank transfer service is based on a global network of local ACH settlement relationships which are lifting-fee-free, so meeting requirements (1), (2), and (3) is not a problem for us.

The only new rule which is slightly irritating to hyperWALLET dictates that consumers must have ‘at least 30 minutes to cancel a transfer, & get their money back’.  We already have an undo button for all transactions prior to remote delivery, and its only a few lines of code to implement a fixed-duration posting delay, so its no hassle for us to meet this rule.  But  it is still irritating because many of our correspondents like Mobile Money schemes and even many ACHs are providing near real time clearing, so implementing  an arbitrary 30 minute processing delay arguably reduces our quality of service for the vast majority of customers who won’t want to cancel their payment.

But what of the banks,  who will have a lot of work to do to make their wire services compliant with the core fee transparency aspects of the legislation?  My prediction is that many of them will do the math and decide that they don’t have sufficient SWIFT-based consumer remittance volumes to justify the investment necessary to reach compliance. These banks may reclassify their wire services as available to ‘business’ account holders only, taking them out of the consumer remittance game altogether.

But there is a better approach, which would be for banks to leverage hyperWALLET’s Global Money Transfer Service.  This provides consumers with compelling, simple remittance services, in compliance with the new requirements, and a profitable new service for banks.

We believe consumers interact best with email and SMS messages, not MT103s.

hyperWALLET news! We’ve submitted a provisional patent which reads in part:

The innovation can help financial services companies and multi-nationals send money globally in a low-cost, low hassle manner, and in accordance with anti-money laundering and anti-terrorist financing best practices.    The software behind the patent permits a person to receive funds electronically without having to be a member of the system responsible for transferring the funds or being a member of the same system as the person sending the funds.

Probably the best way to explain the innovation is by way of example. Bob in the United States is sending money to Sally in Singapore.

Sender-Directed Payments work like this:
Bob provides Sally’s SWIFT bank account identifiers to his U.S. bank or Foreign Exchange Service Provider.  At the bank, He’ll pay a hefty international wire sending fee.  Sally receives no indication that the funds are on their way.  If everything goes well, Sally will see the funds in her Sing bank account in 2-3 days, less a hefty international wire reception fee.  If things don’t go well, (the SWIFT instructions are incorrectly entered by Bob, or incorrectly transposed by a correspondent bank along the SWIFT trail), Sally’s money won’t arrive and Bob and Sally have a painful, time consuming, relationship-impacting, and expensive experience ahead of them playing the trace game.  And for sender-directed first-time SWIFTS, “things don’t go well” 20% of the time!

Recipient-Directed Payments work like this:
Bob emails money to Sally through a 3^rd party payment service like PayPal, Western Union,  hyperWALLET. He’ll pay a nil or modest sending fee to his provider. The provider notifies Sally in real time that a payment has been received from Bob and is available for delivery.  Sally provides her local bank account identifier to the service.  If everything goes well, Sally will see the funds in her Sing bank account in 1-3 days, less a nil or modest local delivery fee.  If things don’t go well, (Sally’s instructions are incorrectly entered by Sally, or incorrectly processed by the provider) Sally’s money won’t arrive and Sally must deal with the provider to sort the issue out.  For recipient-directed first time instructions, “things don’t go well” in about 3% of cases.

Recipient-directed cross-border payments are:

• easier for senders to initiate,
• much less expensive, particularly for lower-value payments
• provide similar or often superior end-end settlement timing to SWIFT services,
• provide better payment status transparency for both parties via email/text notifications,
• incur 6-fold lower error/exception/return rates

The BIG problem with recipient-directed payments is that both the sender and the recipient must be members of the same service in order to benefit from these advantages: banks or 3^rd party providers which are licensed and regulated in only the sending jurisdiction can’t offer services to Sally.

hyperWALLET’s innovation solves this problem, allowing  Bob’s bank or FX provider to offer international email payments which yield all the benefits of recipient-directed payments, but without requiring the foreign recipient to register for a 3^rd party (or any new) service. From a regulatory perspective, our solution allows Bob’s provider to receive and act upon instructions only from Bob, not the foreign beneficiary.

We’ve been utilizing this software for our own corporate customers for some time now, and are pretty excited about making the solution available to banks and other payment brands in 2012.

Another European Summit and disagreement once more, but this time the UK was the thorn in Europe’s side. United Kingdom Prime Minister David Cameron refused to sign a new EU treaty that was drafted by Angela Merkel and Nicolas Sarkozy imposing strict budget and debt rules to not only the eurozone states, but also the other non-eurozone members in the EU. Britain, one of the countries that sits outside of the eurozone (thank goodness), led by Prime Minister David Cameron, refused to agree to the new treaty, saying he wanted guarantees protecting the UK’s financial services sector, which relates to one-tenth of the UK’s economy. Sarkozy said that Cameron’s demands were unacceptable and so the UK was left “out in the cold” as 26 of the 27 EU states agreed in principal to the new treaty. It has been many years since a UK Prime Minister has stood up to Europe to ensure that UK interests are not brushed under the carpet, but by taking this stance Cameron risks the Eurosceptics within his own Conservative Party of raising the issue that Britain should hold a referendum on whether the UK should leave the EU altogether, which it joined in 1973. Cameron has stated that this not an option, as the effects on the UK economy would be horrendous, but it will be interesting to see how he deals with both his own party and the issue of Europe in the coming months.

After the above events were digested, the meeting turned towards resolving the eurozone debt crisis, with many thinking that this was the last chance to save the euro from collapse and financial meltdown spreading across the global economy. Decisions were taken yesterday on the permanent bailout fund, the European Stability Mechanism, which is due to be in force by July 2012. However, once again promises that had been made before the meeting fell short of expectations. The ESM’s threshold will be set at €500 billion euros, far less than had been pledged before the meeting. Germany also opposed giving the fund a banking license, as had been originally suggested by Herman Van Rompuy, the President of the European Council. The license would have allowed the ESM to access cheap funds from the ECB, and by not agreeing to this Daniel Gros director of the Centre for European Policy Studies think tank in Brussels said, “This is a great leap sideways. We now have a framework that in 10 years’ time could restore a degree of fiscal order to the euro zone. The German view is that this is all that is needed to convince markets to buy Spanish and Italian debt. I have my doubts that it will be enough. I think the tensions continue.”

The eurozone was however given a boost yesterday when the European Central Bank cut interest rates by 0.25% to 1% to help combat the debt crisis that has engulfed the region. The euro was sold off on the back of this news and also lost more ground when news of the summit agreement hit the markets. However, despite all of the bad news that has been emanating from Europe over the past few weeks the euro has been very resilient, but the failure to get Britain to agree to the treaty and the view from many investors that the additional €200 billion euros being lent to the IMF to help bailout the weaker eurozone countries is not nearly enough, are all negative factors for the euro in the months ahead. The uncertainty about whether the eurozone will be able to halt the crisis and bring stability to the region forced investors to dump higher-risk assets and commodity driven currencies such as the Aussie and Kiwi dollar, for the safe haven of the U.S. dollar.

As the summit came to a close today we are still left wondering whether the meeting has been any more successful in dealing with the eurozone debt crisis, than the other dismal attempts in the past few months. Yes they have agreed a roadmap for greater economic integration between EU members in the future, but once again they have failed to deliver a credible solution to the debt crisis that is threatening to engulf Italy and Spain. A Reuter’s poll of 57 economists taken before the summit began showed that even though 33 of them felt that the eurozone would survive in its current state, 38 expected the summit would fail to deliver a resolution to the debt crisis. It seems they have been proved right.