Outlier Briefing: TransferWise’s head of policy Nick Catino on the CFPB’s final Remittance Rule

Takeaways

• When you move money, you should know how much it costs to get from one place to another. That really isn't the case -- it's not the industry standard.
• Consumers don't know what they pay and that keeps fees artificially high. It costs consumers billions.
• In the CFPB's final rule on remittances, community banks were carved out and are exempt from more explicit fee disclosures.
• Something like 80 percent of remittances go through the major banks.
• In the U.S., a lot of banks will have a zero next to the fee. As a consumer, you're like, wow, this is great -- there's no cost to send money! And then, they jack up the exchange rate, sometimes as much as 5 percent.
• The Remittance Rule requires banks to disclose fees with money transfers but community banks and credit unions have been effectively safe harbored.
• There's a lot of forward-thinking countries modernize their payments systems in a way that the U.S. hasn't. There's an opportunity here to learn from what other countries are doing.

Listen to the full briefing

The role of policy

We work in jurisdictions around the world -- just like our footprint -- to make sure laws and regulations help us serve our customers best as possible. Our objective is to build a world where money has no borders and where we can move money instantly, conveniently, and transparently. We're trying to get costs to zero -- we call it Mission Zero.

We try to work with policymakers around the world to make that possible -- money should be like moving an email. It's just data moving from one system to another.

I spent the last decade on Capitol Hill. I worked on the Senate Banking Committee where I worked on international trade and finance. I authored a number of laws, including one that made significant changes to Dodd Frank. After that, I was ready for a new challenge and opportunity. I was really drawn to financial technology and fintech. I was also eager to work on modernizing our payment systems.

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The changes in policy

When you move money, you should know how much it costs to get from one place to another. That really isn't the case -- it's not the industry standard.

There was an important part of Dodd Frank that dealt with remittances. Previous to Dodd Frank, states regulated the consumer protections and how discolosures worked when money moved from one place to another. Dodd Frank included a really important section called the Remittance Rule.

The Remittance Rule requires banks and providers to disclose the amount of money being sent, the exchange rate used, and the fee associated with it. This was a lot of progress and added transparency to the process, but there was one important piece that wasn't included.

In the CFPB's final rule on remittances, with some recent modifications in May, community banks were carved out. They've broadened the safe harbor. So now, most community banks are exempt from a lot of these disclosure requirements. We think fees should be more like the World Bank or new European Union rules which require total cost to be disclosed.

Moving in the right direction

In the U.S., a lot of banks will have a zero next to the fee. As a consumer, you're like, wow, this is great -- there's no cost to send money! And then, they jack up the exchange rate, sometimes as much as 5 percent. As a consumer, unless you conduct a complicated calculation, you would have no idea of the real cost of the transaction. TransferWise believes you should know how much it costs when you send money. We show the real time, mid market rate and calculate a fee off of that -- no hidden fees. The EU has new rules that went into effect in April that require something similar. We think this should be the world standard. We're optimistic that this will change -- but it hasn't yet.

We're moving in that direction as a company, and the banks that use our APIs -- N26, Novo, Monzo -- have fully transparent fees. Consumers don't know what they pay and that keeps fees artificially high. It costs consumers billions. This isn't just remittances -- it's foreign exchange students, people buying property abroad, making payroll, that kind of stuff.

As an example, the World Bank estimates the average remittance price is close to 7 percent to send money abroad. At TransferWise, our average fee is .7 percent.

Structural opacity

Banks have openly admitted that because of the way correspondent banking works, they don't even know how much money the end recipient receives. There are questions with the compliance about the end recipient amount that a lot of people have raised throughout the years. If they don't know, they should be more upfront about what they're charging the sender.

TransferWise does know how much the recipient receives at the other end because we're connected to local payment networks.

Does this feel like a step backwards?

The most powerful advocacy group is the community banks and credit unions. They're in every elected official's district and state. They're politically active and used to visit us six times a year. This became a top lobbying issue for community banks and credit unions. It became a way, if you're the CFPB, to be responsive to an important group.

We think something like 80 percent of remittances go through the major banks, especially with small businesses. We try to be transparent and show costs associated with TransferWise and our competitors on our homepage. A consumer can compare and sometimes we're not the cheapest option. We think there should be more transparency on pricing than less.

Transparency across the world

We've certainly raised awareness. The first step is making sure people understand what we do and why we're different. Word of mouth is our biggest acquisition channel. It's not clear if customers come because of the strength of our service or technology or our transparency. But once you're here, if you're a TransferWise user, customers have a good understanding about how fees work and how much it costs to send money abroad.

More policy changes

We've seen a lot of forward-thinking countries modernize their payments systems in a way that the U.S. hasn't. There's an opportunity here to learn from what other countries are doing. Faster payments is pretty obvious -- we're seeing that now with some of the stress in the economy and the need to distribute government aid quickly.

We are trying to broaden the way access to the payments system works. The UK created an e-money license. There are digital payments charters and conversations in Europe, Canada, Singapore, and others. In the US, some of our banking laws were written during the Civil War -- they weren't written for modern companies that work all over the world.

You have to work with 50 states and territories in the U.S. Maybe there should be a national, digital payments charter in the U.S. because it removes barriers to entry for new market participants. That boosts innovation and competition by not having to go state by state.