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Dodd-Frank: A Catalyst for Competition in the Money Transfer World

Posted on Jun 05, 2012

It’s no surprise that in today’s economy, everyone is working harder to make ends meet. And with the economic downturn spreading across the globe, more US immigrants are pressured to send cash back home to their families.  However, sending money back home isn't as simple or affordable as putting a few twenties in an envelope, dropping it in the mail and hoping it arrives safe and sound.  This is where the money transfer agents (think Western Union, MoneyGram, etc.) come into play. 

Money transfer agents are different from electronic payment processors since they move funds across borders on a near real-time basis and deal with currency conversion issues, all from convenient store-front locations.   Sounds like a pretty sweet deal, with one caveat.  These money transfer agents are raking in the dough from often disproportional service fees and hidden foreign exchange spreads.  According to an article in the New York Times, it costs $10 to send $50 to Mexico.  This high percentage fee is compounded by a less than favorable exchange rate on the peso.  While this is good news for the money-transfer industry, which boasts record profits despite both the shaky economy and increasing regulation, it is taking a bite out of consumer spending.

So how, in this world of increasing financial regulation, can money transfer agents continue to operate in this seemingly wild west mode?  Well to start, money transfer agents are regulated by the state in which they operate. Lack of federal regulation and subsequent standardization makes it difficult for competitors to mount a significant challenge to industry leader, Western Union, which boasts 18% of the market.  The nearest competitor, Money Gram, has a mere 4% share of this highly profitable market.   

The Dodd-Frank act starts to impose some federal regulations on this industry by requiring more disclosure on transfer fees and exchange rates, a practice that industry leaders Western Union and MoneyGram already claim to follow.  Plus there is a provision that consumers can get a full refund within 30 minutes of completing the transfer. Unsurprisingly, with the new regulation comes controversy. Consumer advocates claim that the new federal regulations aren’t strict enough as they don’t set a cap on transfer fees and exchange rate spreads, while those in the industry claim the transparency in rates is enough to spur competition.

No doubt, transparency and competition is just what this industry needs. While regulation is not necessarily a good way to stimulate innovation, it may be the catalyst needed in this situation. In addition, standardized regulations and increased transparency will shed some light on this arcane service that has quietly turned into a highly profitable billion dollar industry.  

With the money transfer industry expected to reach the $437 billion mark in 2012, goliaths like Western Union are not eager to rock the boat. 

Source:  The New York Times - June 1, 2012