Exploring Frontiers in Payment System Development World Bank May 29-June 1, 2007

1. Exploring Frontiers in Payment System DevelopmentWorld BankMay 29-June 1, 2007 “Interconnecting ACHs Across Borders” Elizabeth McQuerry Federal Reserve Retail Payments Office

2. Outline • Federal Reserve Banks and Retail Payments • Building the ACH Inter-Connections • The Experience of Directo a México • Directo a México and General Prin-ciples for International Remittances Services • Lessons Learned

3. Federal Reserve Banks and Retail Payments

4. Mission • Foster the integrity, efficiency, and accessibility of U.S. dollar payments and settlement systems, in support of U.S. financial stability and economic growth in a global context • Federal Reserve Banks – FedACH Services® • Nation’s largest ACH operator with nearly 40 years of experience and ACH expertise • http://www.frbservices.org/Retail/fedach.html

5. International ACH • 1999 – Rivlin Report stated that Federal Reserve should enhance its own infrastructure to support cross-border ACH transaction and work with the industry to develop robust ACH cross-border capability. • On-going needs to meet evolving international payments needs in cost-effective, electronic format

6. Building the ACH Inter-Connections

7. Objectives-Payments System Develop efficient and low cost interbank mechanisms to transact payments (corporate, individual, government) between countries that will be available to all financial institutions. • Connections should reach ALL banks in destination low-value payment system • Strive for no beneficiary deductions

8. Development-Legal (1) • The operating rules of each central bank/payments system rules govern their respective payments system. • NACHA formats and rules in the US • Provides sound, predictable, nondiscriminatory, and proportionate legal and regulatory framework.

9. Development-Legal (2) • Agreements • Joint service contract that includes formats, timeframes, technical specifications, operating rules, warranties, treatment for exceptions (rejects, cancellations, complaints, etc.) • Contract periodically updated as service is enhanced.

10. Development - Technology • US banks originate payments in NACHA cross-border formats. • Edits performed by FedACH. • Format converters created to translate NACHA to local format. • CPA 005 in Canada • SPEI in Mexico • SWIFT-like Eurogiro format in Europe • Tropicalized NACHA in Panama • Receiving Gateway Operator make conversion and perform edits for local payment system rules. • Periodic modifications required as enhancements are implemented.

11. Development - Marketing • Sales materials / activities created to: • Inform U.S. financial institutions about services • Educate financial institutions about international payments and foreign payments systems • Facilitate usage of international ACH (tool kits, white-branded marketing materials)

12. Trajectory • 1999- Canada pilot • 2001 – Canada Service opened • Fall 2003 – Government payments to Mexico • 2004 • Spring – Commercial payments to Europe and Mexico • Fall 2004 – Government payments to Panama • 2006 – Government payments to Canada

13. FedACH International® Services • Reaches accounts in countries representing 53% of global GDP • http://www.frbservices.org/Retail/intfedach.html • Receiving Gateway Operators: • Canada – Bank of Nova Scotia • Europe – Eurogiro Member Institutions / Eurogiro Network connectivity and processing • Mexico – Banco de Mexico • Panama – Banco Nacional de Panama / Telered for connectivity and processing

14. Directo a México

15. Origins • September 2001 – Partnership for Prosperity between Presidents Bush and Fox stated: • The Banco de México and the U.S. Federal Reserve agreed to study the possibility of setting up an automated clearinghouse system (ACH). Once established, there will be an efficient interbank mechanism to carry out payments between both countries that will be available to all financial institutions

16. Beginning • Service based on same logics as “domestic” ACH • Federal Reserve role somewhat like a utility company • Private sector role to commercialize • International ACH a similar animal but has different stripes

17. Payment Characteristics

18. Directo a MéxicoSM • White-brand concept launched in Fall 2005 (formerly FedACH International Mexico Service) • Provides financial institutions with customizable, Spanish language materials oriented to consumer needs • Color poster and brochure, lobby/tent cards, text of radio spot, FX Information Sheet • Customer Guide (market and promotional ideas for financial institutions)

19. Challenges • Customers may need special marketing and customer service needs • Money transfer businesses dominate remittance market • Potential customers may not have traditional documentation and may be unbanked

20. Innovation • Beneficiary Account Registration (BAR) website • Developed by Bansefi to pre-open low-cost accounts in Mexico over internet • Remittance transfer provides incentive to formalize account and become banked • Collaboration with the Federal Reserve to facilitate ease of use by USFIs and link with economical Directo a México payment channel

21. Lessons Learned • Branding to Directo a México important step in facilitating offer by financial institutions and commercial acceptance by consumers. • More financial education needed. • Account to account payments are transparent and carried out between highly and routinely regulated financial institutions. • International ACH slowly taking hold in industry mindset but change in financial sector can be slow.

22. Directo a México and General Principles for International Remittances Services

23. 1. The market for remittances services should be transparent and have adequate consumer protection. • All fees paid by payment originator. • Ensure no beneficiary deductions by using electronic payment system. • Foreign exchange rates posted on internet: http://minneapolisfed.org/fedachfx/ • Consumer protections apply as part of general banking regulations. • Consumer information brochures in English and Spanish included in promotional materials.

24. 2. Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged. • Payments to any deposit or debit account in Mexico. Funds available via branch or ATM withdrawal, POS, electronic transfer. • Bansefi’s website facilitates entry to banking system for Mexicans in Mexico. • L@ Red de la Gente credit unions being added to the website – greater distribution and financial access.

25. 3. Remittances services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework in relevant jurisdictions. • Directo a México available from financial institutions (banks and credit unions) in the U.S. which are highly and routinely regulated and operate under payment system rules • Payments received by Mexican institutions which are highly and routinely regulated and operate under payment system rules

26. 4. Competitive market conditions, including appropriate access to domestic payment infra-structures, should be fostered in the remittance industry. • Directo a México allows any U.S. financial institution to offer an efficient, secure, low-cost electronic transfer to Mexico • $0.67 surcharge to U.S. financial institution • Fee to consumer determined by each financial institution

27. 5. Remittance services should be supported by appropriate governance and risk management practices. • Banks and credit unions in U.S. are highly and routinely regulated • Risk management for cross-border payments should be evaluated within framework of overall institutional risk and business itself (volume, value, originators, receivers, etc.)

28. Lessons Learned

29. Lessons Learned • Connectivity and technology are the easy part. • Central banks can only encourage savings and better options in the market. Establishment of new ideas requires financial institution and consumer and behavior to change. • Banks and credit unions can now offer low-cost cross-border transfers to their customers but they are not yet used to doing this. • Customers originating and receiving transfers must trust and learn to use financial institutions to attain a range of benefits.

30. Ongoing Challenges for Inter-Connecting ACHs • Lack of person-to person payment model in U.S. (remittances) • Lack of trust in financial institutions and consumer financial education in some receiving countries • Growing concern over regulatory environment for financial institutions – regulations expand by the number of end points. • This is new.

31. Contact Elizabeth McQuerry Assistant Vice President Federal Reserve Retail Payments Office 404/498-7888 elizabeth.mcquerry@atl.frb.org