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Money-service businesses seek new banking suitors as regulations bite

Greater regulatory vigilance, reputational risks and the rising cost of compliance mean large banks are less willing to provide banking facilities to money transfer companies – but there are still banking opportunities out there.

The difficulties involved in accessing bank credit have become all too familiar for many companies since the start of the financial crisis – but money-service businesses (MSBs) are facing a more fundamental challenge.

Last week, the Financial Times reported that Barclays recently gave some of its money-service company clients 60 days to move their business to another bank. Meanwhile, HSBC is withdrawing from offering banking services to the segment – and RBS is understood to be reviewing its relationships more frequently, although the bank has not withdrawn from the sector.

A spokesperson for HSBC says: "As a result of a strategic review of the money-services business sector, HSBC is withdrawing from offering banking services to this segment. This withdrawal represents further progress in HSBC's execution of the global strategy set out in May 2011, and demonstrates the group's commitment to driving growth and improving returns by exiting businesses that do not meet its investment criteria."

Arkady Fridman, senior analyst at Aite Group

MSBs include companies engaged in activities such as money transfer, cheque cashing and foreign exchange. Under the Money Laundering Regulations 2007, HMRC defines MSBs as companies that act as a bureau de change, transmit money or any representation of money, and/or cash cheques which are payable to their customers. It is no coincidence that the recent account closures have come in the wake of the record $1.9 billion fine imposed on HSBC in the US last year. The Senate Permanent Subcommittee on Investigations found that the bank had not put in place adequate anti-money-laundering (AML) controls and as a result was used by terrorists, drug cartels and rogue governments.

While the HSBC fine was related to the bank’s own AML controls, rather than those of its customers, the size of the fine has focused banks’ attention on the importance of ensuring that adequate AML controls are being deployed by their clients as well as by themselves.

The AML controls put in place by MSBs vary considerably and might do little to prevent money from being sent around the world between unidentified people – or indeed to prevent criminal activity from flowing through those companies. The issue is particularly relevant for smaller companies, which might not be able to afford to put the proper controls in place.

One commentator argued that regulators have opted not to tackle this issue directly but instead have focused their attention on the banks, adding: “If you want to fine someone, fine someone who has got money.”

Competitive threat

While AML concerns may be at the root of banks’ concern about this sector, other factors could also be playing a role in their decision to stop providing services. Arkady Fridman, senior analyst at Aite Group, says some of the MSBs might not have sufficient volume to be attractive customers. “There’s a pure cost-benefit-analysis issue,” he says. “They may not be generating enough revenue for the banks.”

In addition, Fridman points out that MSBs also pose something of a competitive threat to the UK’s high street banks – which could have an impact on how willing banks are to work with these types of companies.

“I don’t believe that the high street banks in general are necessarily afraid of the competition, but certainly the influx of so many different players in this space, particularly in the last five to seven years, has in aggregate started to pull some business away from those banks,” he says.

Fridman suggests high street banks might have taken notice of the threat posed by MSBs and that there seems to be an effort under way by UK banks to begin fighting to get some of that business back, particularly in the area of cross-border money transfers.

“I wouldn’t go so far as to call the withdrawal of banking services a direct attack on this sector, but there is certainly a hint of that,” he says.

Craig James, a director of the Prepaid International Forum

Others are more emphatic about the role being played by competition in the account closures. “This is a competition issue,” says Craig James, a director of the Prepaid International Forum. “It’s nothing to do with money laundering – money laundering is being used as a blind and a screen.”

He argues that the risks being attributed to these companies must be inherent either within the products they are selling or within the providers themselves.

“If the risk is inherent with the provider, it’s the FCA’s [Financial Conduct Authority] responsibility to deal with that, because the FCA authorized them in the first place and it’s the FCA’s job to manage risk within the sector,” he says. “It’s not for banks to start regulating the sector through the back door, which is what they’re doing. If it’s inherent within the product, why are banks still offering these same products themselves?”

James adds that the account closures are not only affecting money-service businesses but are also being applied to any third-party provider that arranges the transfer of funds electronically. “It’s money-service businesses, it’s prepaid cards, it’s electronic wallets, it’s merchant acquirers – it’s anyone with an electronic money or payments service," he says. "They are shutting down prepaid card issuers as well.”

New options

Whatever the reasons for the shift, it is clear that access to banking services is becoming more problematic for MSBs. Having a bank account is a fundamental requirement for such businesses – so many will be considering what they can do to retain their banking relationships or develop a new strategy.

For companies concerned about this issue, there are actions that can be taken to make themselves more bankable. Essentially this means putting in place more stringent AML measures.

While the cost of doing so might be prohibitive for some smaller companies, an unconventional approach could be to club together with other businesses in a similar position to pay for AML controls on a joint basis.

For companies that find themselves without a UK bank, other options might also be feasible, such as opening an account in a different jurisdiction. This might not be necessary: different UK lenders might take a different view of the risks associated with money-service companies.

Nevertheless, it is clear that MSBs might find it more difficult to secure banking services than in the past – and with banks facing increasing regulatory scrutiny on the subject of AML controls, this could be a longer-term trend.

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