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.

Financial Institutions rely on proprietary datasets drawn from a variety of sources to be consolidated and pre-conditioned to be suitable for automated name screening in account opening, account maintenance, and transaction processing scenarios.

Civil libertarians and privacy advocates have raised concerns that the screening processes adopted by Institutions have become opaque, and practitioners worry that the proprietary list data they rely upon for their processes expose their institution to litigation risk.

hyperWALLET is proud to be one of the founding sponsors of the  Open Sanction Data Project.    An idea formulating in my mind since about 2007, the catalyst for actually  moving on the idea was a recent  Privacy Commissioner of Canada report (pdf ), which examined private sector anti-money laundering databases for possible areas of concern in relation to Canada’s Privacy Act.

The Open Sanction Data Project’s Subscription Service  will be launched in beta in October, 2011.  The service seeks to improve transparency within the financial services industry by providing a free and open source alternative to commercial, closed-source feeds of globally-consolidated Sanction List databases.

The project will publish and make accessible without charge a transparent global Sanction database, together with:
- Source code of all routines used to condition original data
- URLs of all original data sources
- Names and Roles of team contributors

If you are a data analyst, software engineer, or compliance practitioner I encourage you to check it out and perhaps think about contributing as a service developer or beta tester.

On Septebmer 27^th the Washington Post ran an article which began: “The Obama administration wants to require U.S. banks to report all electronic money transfers into and out of the country”.

Setting aside its enormous privacy implications for anyone conducting cross-border payments, this proposed legislation is a terrible idea because it unfairly financially punishes US immigrants and their dependents around the world.

Burdening Financial Institutions with additional reporting requirements for cross-border transfers, or even considering the possibility that such requirements may come into play, results in Fear Uncertainty and Doubt in the minds of bankers. Regulatory FUD further erodes the already marginal appetite of banks to make low-value electronic remittance services available to their account holders.

From North America, the fee to send $200 abroad still averages over 10%. Even in high volume and high competition remittance corridors like USA–>Mexico, the average cost for individuals to send money has been going up over the past 3 years, not down. According to world bank’s online international remittances tracking tool, in 2008 the average USA–>Mexico cost was 5.8%; in the first quarter of 2010 it was 7.4%. As a sector, the payments community really can’t congratulate ourselves with data like these. Each 1% in fee represents $2 in lost economic benefit to the national economy of the beneficiary country.

Remittance service participation on the part of sending and receiving financial institutions is important in order for the costs borne by remittance senders and receivers to be meaningfully and permanently lowered. Legislative changes like the contemplated electronic money reporting act in the USA will reduce such participation and should be opposed by our industry.

As hyperWALLET‘s Director of Treasury, I was delighted to attend this conference to learn from both peers and industry. Despite a rather small group just shy of 60 participants, the session leaders did not disappoint; they provided some excellent presentations with abundant food for thought.

The event understandably focused on international payments from a “US looking out” perspective and offered some unique insight into the issues faced by US based entities seeking to engage in international payments, whether for their customers or for themselves. I’d like to touch on some of the key trends brought up during this event, namely:

1.  Convergence
2.  Continued growth in worldwide remittance
3.  Increasing emergence of non-traditional players and payment channels

Convergence
Convergence is a recurring theme and can be witnessed in everything from payment networks, to the move towards standardization of messaging and file formats to convergence in Travel Rule-like regulatory requirements outside of the US.

The distinction between low value and high value payments systems is blurring with more and more low value payments being settled using traditionally high-value payment networks. Practitioners are now more likely to classify payments systems according to settlement time (urgent versus non-urgent) as opposed to value (low value versus high value).

A good example of convergence in payment systems is the UK’s Faster Payments Service (FPS). FPS is a low value (up to 10,000 GPB per item) settlement network for ACH type payments that utilizes the country’s existing ATM network (i.e. convergence between cards and ACH). Settlement is irrevocable and often same day and clearing is available 24/7. Hence FPS is ‘almost’ a RTGS for low value payments and has many wondering about the future of BACS (the UK’s non-urgent 3-day, with recourse, clearing system).

Corporates in the States and elsewhere are pressuring their banks to adapt the XML ISO 20022 standard as a messaging format.  SWIFT is also utilizing ISO 20022 to gradually replace their existing MT messaging format. Adoption of this standard will reduce the complexity of corporate to bank communications and increase the straight through processing rates.

Regulatory requirements for cross-border payments is another area where convergence is becoming apparent. The essence of the USA’s BSA Travel Rule (requiring originator information to “travel” with a payment ) is spreading to other markets thanks to the FATF’s Special Recommendation VII (wire transfers) requiring all members countries to institute similar requirements. This recommendation, by the way, reads as follows:

http://www.fatf-gafi.org:
“Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Countries should take measures to ensure that financial institutions, including money remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number).”

Continued growth in worldwide remittance
The second trend emphasized during NACHA’s Institute of International Payments was continued strong growth in worldwide worker’s remittances. This market has increased 63% over the past 5 years. In 2008 recorded workers’ remittances totaled nearly $400 billion US. This amount is expected to decrease to $290 billion in 2009 due to the financial crisis and a big drop in remittances from US to Mexico and Latin America. Nevertheless, most agree that significant growth in this sector will resume again going forward.

The main sending countries are the US, Russia, Switzerland, Saudi Arabia, Germany and Spain. The top recipient countries are India, China, the Philippines, Mexico and Poland. Interestingly, banks service only about 10% of this market with the likes of Western Union, MoneyGram and others, dominating.

Increasing emergence of non-traditional players and payment channels
All banks and remittance providers, however, are facing increased competition from the emergence of non-traditional players and payment networks, which is the third trend I wanted to touch upon. Examples of some of these new providers include mobile operators, web-based electronic wallet providers, supermarket chains, and card-based remittance services.

The most fascinating example of non-traditional players I heard about during this event was the case of certain Latin American supermarket chains who accept cash from their customers to make bill payments, cross border remittances and grocery purchases for them.

Instead of utilizing a bank to settle each transaction separately, some of these chains are aggregating individual payments into one single payment per day per supplier, significantly reducing transaction costs (an example would be aggregating all customer payments to a local utility into one payment to that utility and then providing the utility with reams of remittance data for all of the individual entries that make up that particular aggregated payment).

Most of the non-traditional players still rely on the traditional financial service backbone for actual settlement and hence strong banking relationships are a must. However some new players are even breaking away from this by enabling customers to exchange a form of stored value that does not necessarily equate with ‘money’ in the traditional sense of the word. Some examples include remittances of mobile airtime minutes, electronic or mobile vouchers that may be transferred P2P and redeemed for actual goods or services, and Second Life’s Linden Dollars.

Looking Forward
It will be interesting to watch these and other developments going forward. Moreover, it will be great fun to participate in them. For an innovative payments technology provider such as hyperWALLET geared towards enabling low-cost payments to the far reaches of the globe, the trends in international payments outlined above are certainly good news.

• Direct link: http://www.slideshare.net/secret/ugaxIPUInr07Na
• Download PPT: http://www.slideshare.net/secret/ugaxIPUInr07Na/download

As the Compliance Officer for hyperWALLET Systems Inc., I was looking forward to meeting fellow compliance officers and learning how they are coping with the latest FINTRAC regulation changes, which state:

“Effective June 23, 2008, all reporting entities under Canada’s anti-money laundering & counter-terrorism financing (AML/CTF) legislation must ensure that their “…compliance regime includes an assessment and documentation of risks related to money laundering and terrorist financing [and] … focus resources on where they are most needed to manage [those] risks” on an ongoing basis.”

Over the course of three days, 15 group sessions and 6 plenary sessions were held to discuss these updated regulations, including:

• Assessing the effectiveness of a Risk Management Program.
• Preventing fraud, a proactive guide to controlling its impact on your organization.
• Implementing a risk assessment program for at-risk customers.
• The impacts of Canada’s Market Enforcement Teams.
• Identifying geographic risks for customers living in Canada.
• Compliance with Bill C-25: what have the regulators found since June 2008?
• Case studies — more real life examples of what is emerging from the reports submitted by reporting entities

Dissecting risk to strengthen compliance
This year FINTRAC, OSFI and the RCMP stressed the importance of MSBs maintaining a rigorous risk management regime. To ensure active compliance and provide valuable data to assist with identifying potential money launderers, the regulatory authorities stressed multiple times the importance of MSBs having an effective AML (Anti-Money Laundering) policy, and submitting unusual activity reports to flag suspicious entities.

One of the most informative sessions was ‘Managing Risk: A Two Headed Coin’, which discussed the need for businesses to ensure an organized approach to managing risk and K.Y.C compliance requirements from an MSB’s perspective. The two key takeaways from this session were that a regulated business should:

1. Work with external partners (including corporate partners and banks) to secure compliance information, monitor risks, and perform on-going assessment of all existing client relationships.

 

2. Assign internal staff the specific tasks and responsibilities (ie, categorization, enhanced due diligence, application reviews) necessary to perform strict KYC on all potential clients, prior to establishing a business relationship. 

Both of these points reinforce the fact that businesses should have internal processes that can identify potentially suspicious customer applications. Once in place, such processes enable potentially suspicious clients to be flagged at an early stage, helping organizations mitigate risk. 

Conclusions
This conference provided insights into how MSBs can implement an organized approach to developing policies and procedures, to effectively manage risk as their client relationships grow. The overall consensus seemed to be that in an ever-changing technology and business environment, an organization’s implementation and modification of compliance procedures is certainly a challenging task, but one that is attainable through disciplined approach to risk management.

For hyperWALLET, it was a great opportunity to meet and learn from regulatory authorities, fellow compliance officers from various financial service industries, and build on established partner relationships with Canadian Credit Unions. We look forward to participating in future events that educate and bring together compliance-minded professionals and related topics.