Anyone involved in the money transfer business will tell you how difficult it is to obtain access to banking if you are an MSB. MSB-friendly banks are few and far between, with most of them de-risking themselves from the vertical altogether. Most incumbent MTOs have lost access to their MSB business account. While others have still managed to hold on to banking relationships, no one knows how long that will last.
Truth be told, the words MSB, Money Transfer Operator, Money Exchange, and so on, have become synonymous with the plague. No one wants it. No one wants to touch it. No one wants to speak about it. Even within the money transfer vertical, there are essentially two different types of company:
- person-to-person (P2P or C2C) money transfers
- business-to-business (B2B) money transfers.
Understandably, the perceived risk associated with P2P money transfers is higher than B2B transfers. Yet, even for B2B operators, finding access to banking in various markets (for purposes of settlement and disbursement) is difficult.
Various operators who are, say, based in the UK, UAE, Australia, Hong Kong, US or Canada are finding it almost impossible to get bank accounts opened in other countries to carry out their activities. Something they were able to do not so long ago is now an impossible task.
Despite the extensive KYC documentation provided on the corporate entities, and in many cases, clients that are well known, banks still refuse to provide an MSB business account to these entities. Risk is always cited as the root cause, without explaining the root cause further.
The frustration over the contraction in banking relationships is worrisome for many. In one particular example, a client of mine was processing US $200m to the US per month. Then the banks pulled the plug. Imagine the revenue loss. Eight months have passed and the client hasn’t been able to find an MSB-friendly bank that would offer them banking services, along with Swift messaging. They have essentially been locked out from the US economy. US-based dollar clearing is something they cannot execute profitably any longer. They must rely on third-party providers to execute their transaction, that too with limits and much reduced profitability.
Another client based out of the UK processes payroll for companies you and I can relate to. Yet, for them to get a bank account opened in Dubai or New York or Sydney has become a major moot point. Despite the excellent references, elementary visibility into the transaction (from its origination), banks still refuse to provide banking services to such operators. The net loss? This client is now no longer processing payroll activities, which were previously £60m a month.
One might question, “Well surely they can go to an FX provider and do business with them?”. The answer is the following:
- The operator’s clients deal directly with the FX provider and they see no reason to continue doing business with my client.
- FX providers reach out to the client directly (since they have a direct relationship – a key requirement for taking on business).
- The margins are reduced. If my client was previously working on a 20-basis-points spread, they’re lucky to walk away with five basis points when working with FX providers who channel their business.
Without hope, many clients have thrown in the towel, and others are starting to foster more innovative methods to do transfers.
The easiest solution is netting off transfers with other B2B payment providers. This has huge trust issues, but in this day and age of access-to-banking-vacuum, one really doesn’t have much choice.
The problematic aspect of netting off transfers is to have uniform bilateral flows, which is extremely difficult. Heck, companies such as TransferWise started on this premise. But when you go B2B, the flows are anything but bilateral and uniform. However, MTOs are realising the potential of bitcoin, which can enable digital movement of value within minutes, and anywhere in the world.
A traditional bitcoin-based buying/selling for money transfer purpose would look like this:
While the above diagram may seem very nice, it does have some serious drawbacks.
- Even for very high-volume-based trades done on bitcoin exchanges, the minimum fee is 0.1%. For a buy/sell trade, this would mean a very minimum of 0.2% (20 basis points) that would be deducted from the price of the transfer.
- Liquidity is an issue. If an MSB in HK wants to suddenly buy US$7.3m worth of bitcoins, it could affect the overall buy price. Sometimes, sellers will be short, hence this poses a problem.
- Likewise, after the transfer of bitcoins, the MSB selling these bitcoins may not have enough buyers on the other end, and may have to take a loss on the BTC trade.
- The rates are ever-fluctuating on both sides for BTC.
- Not very practical when it comes to doing day-to-day B2B business. The sudden volatility can be costly.
- The B2B market size is between US $23tn and US $28tn a year (no one knows exactly how big it is).
- US $10bn market cap of bitcoin cannot be expected to fulfil even a fraction of the B2B money transfer market.
What will eventually happen
Sooner or later, an alliance of sorts will come about to issue their own digital equivalent of a bitcoin, something that has value tied to the US dollar and would be accepted and traded between partners. Either this, or a new coin will emerge, backed by adequate capital that would allow small and medium B2B operators to latch on to it and do transfers worldwide, among the members in various different cities.
B2B transfer coins can be utilised to send value from one country to another. Once the transfers are complete, the coins can be liquidated on various exchanges worldwide. Because the coins would be mapped one-to-one, say against the US dollars, operators are assured there will be no price volatility in buying/selling. In simpler words, a private label, globally accepted, digital/crypto IOU would be issued.
As these IOUs are issued against a backed currency (ie the US dollar), there’s no reason to question the value of these coins. They have a one-to-one map on the USD (this is inherently different from bitcoin itself). The blockchain (public or private) in this case, would always be able to keep track of the transactions and issuance. Not to mention, there is adequate liquidity.
This is the only logical method insofar as I can think, that will help deflate the B2B money transfer woes in the current atmosphere of banks de-risking. It’s only a matter of time before such a solution is adopted by B2B operators.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: Who is Danny, Shutterstock.com