In speaking at various bank and credit union events about the banking of Money Service Businesses (MSBs), one common theme is clear: that despite changes in the regulatory landscape, the process for banking MSBs has remained the same. As a result of systematic de-risking, MSBs across the country have been losing access to the financial system. But with a driving force behind de-risking, Operation Choke Point, now officially ended, it is time to assess the aftermath of de-risking, and specifically how financial institutions can service MSBs in this new environment. For this to happen, institutions must be ready to discard legacy concepts and practices associated with banking MSBs and embrace a new approach. De-risking created a wealth of new opportunities with respect to the banking of MSBs. As many large financial institutions have exited the MSB market, small and regional institutions are poised to fill the void left by them. For MSBs themselves, losing access to financial institutions represents an existential threat to their businesses, regardless of how long they’ve been around or their adherence to regulations. This means there are many responsible MSBs desperate to regain banking access, and many financial institutions open to serving them. Nonetheless, much of the MSB industry remains underserved. So, what is the problem? The answer may be found in some of the most common reactions heard from financial institutions about the prospect of banking MSBs:
- “I don’t have the staffing to bank MSBs”
- “We don’t have the tools to properly bank MSBs”
- “We don’t know where to start”
- “How do you bank MSBs in a profitable manner?”
- “My compliance officer says we can’t do MSBs”
The consistent thread in these responses is compliance and cost. And while they are related, I’ll address these concerns separately and explain how they can be overcome with a new approach to banking MSBs. Compliance: The exit of large financial institutions from the MSB market exposed a problem with legacy compliance technologies – that they were not built to address the unique challenges of banking MSBs. And yet, many institutions banking MSBs keep repeating the same mistakes by relying upon these ill-suited compliance technologies. In one telling example, we were speaking with a bank that had been in and out of the MSB market many times while using legacy compliance technology. When asked what the primary problem was, the answer was “everything” – initial underwriting and due diligence, risk analysis, documentation, transaction monitoring, site visits (or lack of), baseline analysis, and expensive manual processes. This institution finally realized that the old approach to MSB compliance had become outdated, and that a new approach, with the help of Hypur’s technology, was needed. Contrary to conventional wisdom, the success of an MSB banking program does not depend upon the size of a financial institution. We have seen large, well-known, institutions sanctioned for insufficient MSB compliance, and relatively small institutions successfully process $100 million per month in MSB volume. The key is having the requisite capabilities necessary for the compliance challenges posed by MSBs, which increasingly requires the use of technology. The right compliance technology can minimize the errors and maximize the efficiencies associated with banking MSBs. Our financial institution clients, including the one identified in the previous paragraph, utilizes Hypur’s technology to address the unique challenges of banking MSBs through automation and granular-level transparency. When coupled with appropriate training, policies, and procedures, technology can enable banks and credit unions to responsibly, sustainably, and profitably bank MSBs. Cost: The imbalance of supply and demand around banking MSBs – with the latter vastly outstripping the former – gives financial institutions significant pricing leverage. From the financial institution’s perspective, they can justify higher fees because of the additional risks and costs associated with banking MSBs. From the MSBs’ perspective, the choices are rather stark – pay higher fees to obtain or maintain an account, or risk losing the entire business. A pricing dynamic rarely gets more favorable than this for financial institutions. And yet from what we have seen, financial institutions have been slow to seize on this opportunity. At a recent banking association conference, we asked the audience how many had MSB clients, and about 40% said that they did. We then asked whether they had different fee schedules for their MSB customers. Surprisingly, only 10% of the group said they charged their MSB customers more than their standard account and analysis fee schedules. The rest continue to charge “normal” fees because, as many said, “that is how we have always done it.” Put simply, the concept of free or low-cost compliance for the banking of MSBs is an outdated model that ignores current regulatory and economic realities. Risk analysis should be conducted on each MSB customer to determine an appropriate fee schedule that properly accounts for the cost and exposure to the institution. But we still see time and again institutions that throw FTE’s and manual processes at problems and then wonder why their margins are so low. De-risking has caused significant disruptions to the banking industry, but also significant opportunity. But while the landscape has changed, many financial institutions continue to utilize an outdated playbook when it comes to banking MSBs. The combination of new technologies, including our company’s, and commensurate pricing, offers the promise of both enhanced compliance and increased revenue. By adopting this new approach to banking MSBs, financial institutions can turn the disruption caused by de-risking to their advantage.