Session I – Remittance markets’ resilience through enabling environments
- Ceu Pereira, Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA), European Commission
- Antonia Esser, Engagement Manager, Centre for Financial Regulation and Inclusion (CENFRI)
- Thomas Lammer, Member of the Secretariat, Committee on Payments and Market Infrastructures (CPMI)
- Tom Neylan, Secretariat of the Financial Action Task Force (FATF)
Moderator and discussant: Harish Natarajan, Lead Financial Sector Specialist, Finance, Competitiveness & Innovation, World Bank
Track III focused on the key policy constraints identified during the crisis that impede competition and innovation in the remittance market. The dialogue explored potential interventions needed, as well as adapted policy and regulatory measures that can contribute to risk mitigation and improve the security of the remittance ecosystem for remittance families.
|Updated World Bank data from 2020
|On the sending side||On the receiving end|
|o Incremental decline of cash-based services, which have become more expensive to manage, and of bank account transfers availability.
o Boost in mobile money services, paired with a significant decline in costs in 2020 (Q2 and Q3, less in Q4)
|o Drop in service availability came with a lag of one quarter, given that the pandemic hit net-sending countries first. As a result, the only affected services in Q2 2020 were some bank account services.
o Mobile money services on the receiving end increased by 20 per cent on a year-over-year basis in Q3 and 63 per cent in Q4, and the cost went down by 18 per cent and 19 per cent in the last two quarters.
- In many countries, remittance services were declared essential during lockdowns.
- The bulk of the market remains generally cash-to-cash. Yet, when the crisis comes to an end, it is difficult to predict to what extent – and how long – the shift from informal channels to formal will continue.
- The pandemic highlighted both progress and shortcomings in payment systems. It led to a fundamental change in retail payments by accelerating the shift towards digital channels with lower costs associated. The main reasons for this shift include:
- Discouraging the use of cash as a potential transmitter of the virus, coupled with an active encouragement of the public to switch to digital services, and even to the use of stable coins.
- Precautionary holding of cash due to lockdowns, shop closure and movement restrictions translated in a shift to e-commerce and digital payments.
- Besides remittances, the volume of government’s social payments has increased in response to the pandemic through the introduction of social spending measures (either one-off or recurring) mostly relying on credit transfers. This offers an opportunity for increased financial inclusion, though it could leave aside those without transaction accounts.
- A second trend that resulted in an enhanced role of digital remittances: specific regulatory measures were enabled to establish secure connections, stop on-site inspections, allow for increased remote reporting, waive interbank fees, and relax the mobile wallet transfer limits.
“We all share the ambition to make payments more efficient – often this means making them digital. But we must not leave the vulnerable segments of the population behind.” Thomas Lammer, CPMI
- COVID-19-related risks disproportionately impact the poor and disadvantaged. It is important to maintain access to stimulus payments, which have helped migrants maintain relatives in other countries.
- For more than 10 years, the European Commission (EC) has facilitated a more competitive, innovative and transparent remittance market, particularly during the pandemic, whereby there is a plethora of options in terms of digital remittances.
- In terms of transparency, there was an evolution from the second Payment Service Directive (PSD2) to the latest cross-border payment regulations in terms of making currency conversion charges more transparent, at least within the EU. For electronic payments, this is still being implemented, so the market is being observed very carefully. In light of this, and to draw some results, at the end of this year the EC will take the opportunity to launch a review of the PSD2.
“Financial inclusion starts with payments. Payments are a kind of gateway to broader financial services, and the core of payments (retail payments) is the transactional account that can be used for a variety of payment needs.” Tom Neylan, FATF
Going forward: challenges and opportunities
- Considering remittances services as essential services during lockdowns helps to maintain the flow of these funds when they are needed the most. Overall, there is a need to maintain all critical financial infrastructure and services running in the aftermath of shocks.
- Risks associated to financial crimes change fast, hence the private sector plays a key role in remaining vigilant on the type of changes that specific shocks and crisis may bring to the financial ecosystem. For instance, the COVID-19 pandemic has resulted in an increase of cybercrimes.
- The implementation of risk-based approaches, which tailor the measures applied by public authorities and financial institutions to the proportionate level of risk, can promote lighter controls for low-value and low-risk transactions such as government benefits and regular remittances, ensuring that controls do not disproportionately impact the poor and disadvantaged. FATF will soon release new guidance on risk-based supervision, aimed at facilitating the understanding of risk and providing the tools to shift to risk-sensitive supervisory plans, and how to make use of off-site supervisory tools.
- Filling the knowledge gaps around e-KYC may help the industry effectively implement innovative approaches around digital on-boarding. Targeted guidance on e-KYC may speed up the technological change required, and may also help avoiding over-compliance, as both regulators and financial institutions understand best the risks involved to avoid sanctions.
- The COVID-19 crisis is putting more emphasis on digital identity-proofing options that can promote financial inclusion even further, building on technological advancements promoted by the increasing non-face-to-face business initiatives. Tools such as collaborative customer due diligence, enhanced screening and monitoring, tiered customer due diligence or limited function accounts are an appropriate way of granting people access to basic services even if they lack identity documentation while coping with the level of risk involved in this process.
- The decline in corresponding relationships has been pronounced over the last decade, especially in emerging market economies, small island developing states and dependent territories, which are typically more reliant on remittances. Although there is no data available for 2020 yet, it is expected that the COVID-19 crisis has accelerated changes in the corresponding banking landscape. Moving forward, public and private stakeholders should pick up on this collaboration to ensure a corresponding banking relationship.
- There is scope to promote improvements in the execution time, meaning the time it takes to transfer the remittance funds to the recipient, for example by setting maximum execution times and improving the predictability of the execution times.
- Allowing non-bank entities to send and receive remittances may reduce the average transfer cost in certain corridors, especially in countries with high penetration of mobile money, and increase the choices available for customers.
- There is an increasing need to interlink payment systems between the EU and third countries, and secure direct access of RSPs to payment systems while removing any legal barriers. This matter has been included in the G20 road map on cross-border payments.
- Financial innovation is one of the success stories of recent years. The more developed and larger financial institutions have been rolling out new technologies, including machine learning, AI tools, smarter screening and real-time risk assessments, offering an easier customer experience that would support greater financial inclusion. Through technology, there is a great potential to strengthen AML/CFT effectiveness, including e-KYC, and to ensure supervisors understand them.
- Close collaboration between the private and the public sector is key to ensure innovation and promote necessary measures in response to the changing ecosystems. For example, waiving mobile money fees or interbank fees could help ensure that remittances keep flowing in times of crisis.
- Central banks need to navigate policy trade-offs. The latest topic under discussion is retail central bank digital currencies, the potential these have for financial inclusion and for cross-border payments, and also for digital identification, which can contribute to financial inclusion.
“The pandemic has accelerated a change that is probably for the better.” Harish Natarajan, World Bank
“Some of the issues are new but the crisis is far from over, and more support is required in countries where people count on remittances as a lifeline.” Thomas Lammer, CPMI
Best practices and reports
- The G20 Presidency has established a working group to coordinate and develop a road map aimed at facilitating the enhancement of cross-border payments. The working group identified seven frictions affecting remittances:
- Fragmented and truncated data formats;
- Complex processing of compliance checks;
- Limited operating hours;
- Legacy technology platforms;
- Long transaction chain;
- Funding costs;
- Weak competition.
- To address these seven frictions comprehensively through a holistic approach, the working group identified a set of 19 building blocks grouped in the following five focus areas:
- Public and private sector commitment
- Regulatory, supervisory and oversight frameworks
- Existing payment infrastructures and arrangements
- Data and market practice
- New payment infrastructures and arrangements
- The European Commission has drafted a legislative proposal on crypto-assets and stable coins in the European Union that is currently being negotiated at the Council and EU Parliament level. The proposal for regulating crypto-assets includes the regulation of the so-called stable coins, and provides a licensing regime for them, which are given two different names: e-money tokens and asset-reference tokens. It is expected that a legal framework for stable coins will probably be in place next year.
- The European Commission has started dialogue with several central banks on Central Bank Digital Currencies (CBDC). This process, which is just starting, fits into the broader retail payments and digital finance strategy and aims to identify the main risks that arise with the issuance of CBDCs and the impact on key policy areas such privacy, data protection and macroeconomic policy.
- A set of positive examples on KYC and on-boarding policies are on the rise: in India, for example, the security regulators endorsed the use of video-based ID verification and electronic signatures. Ghana is upgrading its information-sharing process on KYC data, allowing such information transfer from the SIM card to open a mobile money account remotely, in the absence of a digital identity system. Malawi has also issued guidance in line with FATF´s remote on-boarding.
 To complement the Global Average and Global Weighted Averages described above, the World Bank introduced the SmaRT indicator in Q2 2016, which aims to reflect the cost that a savvy consumer with access to sufficiently complete information could pay to transfer remittances in each corridor.