The Federal Reserve may force money-transfer firms to more fully disclose fees and exchange rates, which may lower costs for customers and reduce earnings at Western Union Co. and MoneyGram International Inc.
The rules will be among the first changes in consumer finance to emerge from the Dodd-Frank regulatory overhaul signed by President Barack Obama in July. The Fed has begun discussing the regulations with industry and advocacy groups because the Consumer Financial Protection Bureau is not yet in place, according to three people briefed on the matter.
Western Union and MoneyGram are the biggest players in cross-border remittances often used by foreign workers to send money home. Customers of money-transfer services sent $414 billion globally in 2009, the World Bank reported Nov. 8.
With little federal regulation of the transfers, “You put your money in and take your chances,” Elizabeth Warren, the White House special adviser charged with setting up the consumer bureau, said in a briefing last month.
“How much money comes out at the other end depends on what kinds of fees and what kinds of exchanges have been added in -- things that are not necessarily exposed to the consumer up front,” Warren said Oct. 22 at the State Department’s Foreign Press Center in Washington.
MoneyGram “supports the well-intentioned goals” of the law, Lynda Michielutti, spokeswoman for the Minneapolis-based company, said in an e-mail. “However, as written, we believe that these requirements will create unintended consequences such as reduced competition, fewer consumer choices, increased costs and limited innovation, which will negatively impact our customers,” she wrote.
‘Lot of Latitude’
Regulators have “a lot of a latitude here, so I can’t speculate on the impact on business,” said Tim Daly, senior vice president for government relations at Englewood, Colorado-based Western Union.
Remittance companies make money from fees and exchange rates. A Western Union customer who wants to send $100 to Mexico pays a $9.99 fee in the U.S., according to the company’s website. The recipient in Mexico would get pesos, and Western Union would make additional money on the spread between the wholesale and retail exchange rates.
The spread’s role in remittance costs has long been an issue. Western Union in 2000 agreed to change some practices and pay more than $400 million, mostly to Mexican immigrants in the United States, to settle a lawsuit alleging that the company’s advertising falsely represented the costs. Western Union resolved the claims without admitting or denying wrongdoing.
“What we did temporarily through litigation would be much better done via regulation,” said Matthew Piers, a lawyer with Hughes Socol Piers Resnick & Dym in Chicago, which brought the lawsuit on behalf of a group of immigrants from Mexico.
Consumer groups that lobbied for the provision in Dodd-Frank said the changes would prevent money-transfer firms from taking advantage of customers with limited resources. “People have to get the information before they actually commit the money,” said Janis Bowdler, deputy director of the wealth- building project at the National Council of La Raza, a Washington-based advocacy group for Latinos.
Western Union has about 20 percent of the global money-transfer market, said Manuel Orozco, director of the remittances program at Inter-American Dialogue, a nonprofit policy group in Washington. Remittances from the U.S. to Mexico totaled $21.1 billion in 2009, a 19 percent drop from 2008, Orozco said.
The Dodd-Frank law aims to lower costs for customers by promoting comparison shopping and thus more competition. Depending on the final language, the rules could cut into earnings. Consumer-to-consumer transfers accounted for 85 percent of Western Union’s total revenue in 2009, according to a filing with the U.S. Securities and Exchange Commission. Such transfers made up 76 percent of MoneyGram’s revenue that year, Michielutti said.
“Any kind of regulatory pressure could restrict margins and therefore the company may have less to spend on new initiatives, thereby thwarting top-line growth as well,” said Dave Novosel, an analyst with Gimme Credit, a research firm.
The changes come as Western Union and MoneyGram face increasing competition from new technologies such as pre-paid cards, Internet-based transfers and payments with cell phones, analysts said. Western Union’s “core money transfer business will be cannibalized by emerging alternatives,” Bill Carcache of Macquarie Group Ltd. wrote in a Sept. 30 research note.
Receipts and Delivery
The Fed’s rule-writers will specify how the firms must provide consumers with disclosures of fees and exchange rates before a transaction is completed. The law also requires that consumers receive a receipt that includes the promised delivery date of the funds and information on how to resolve disputes with the company. Remittance firms will also have to provide contacts for state regulators and for the new consumer bureau.
Western Union has been talking with Fed officials about how rules may affect its business model, which uses a network of licensed agents to handle transfers, Daly said.
So-called storefront disclosure rules -- such as a requirement that fees and exchange rates be posted outside the agent’s location -- may be difficult carry out since exchange rates fluctuate constantly, Daly said. Western Union is concerned that the new rules could make the company liable for actions of independent agents, he said.
The Fed may formalize the new rules by July; if not, the consumer bureau will take over when it opens its doors that month, said one of the people briefed on the matter, who declined to be identified because the process hasn’t been made public.
Western Union and MoneyGram, the top two global firms by volume handled, face competition from smaller private firms that focus on certain countries or regions. Those firms could be even more vulnerable to higher operating costs, since new regulations may require technological upgrades, Orozco said.
David Landsman, executive director of the National Money Transmitters Association, said the smaller players group represents see the new rules as an unnecessary burden.
“I don’t know any money-transfer business that does not fix the rate of sale in Mexican pesos at the point of sale. There is no issue there,” Landsman said. “This whole thing is a solution in search of a problem.”