MSBs and Banks
Money Service Businesses (MSBs) include currency exchanges, casa de cambios, and other similar businesses that offer a host of personal banking and business services, including check‐cashing, purchase of money orders, bill payment and remittance. Unlike traditional financial institutions, MSBs don’t hold onto money in the form of deposits, they provide a variety of services to help negotiate checks, make payments, and transfer funds. People using these services are often referred to as the “unbanked” or the “underbanked.”
Should patrons of MSBs be subject to Due Diligence checks, or possibly even criminal probes? Many say yes. One problem is the high volume of low dollar transactions, which makes the investment of time and resources necessary for proper Due Diligence cost prohibitive.
MSBs also use banks to clear checks they receive from their clients, and as a source of cash (currency) to distribute to their clients. MSBs have been put under a lot of scrutiny because government believes they pose a money laundering risk, which I think is misguided and unjustified. This perception is reinforced by the belief that they; 1) deal with people of “low repute”, 2) charge exorbitant fees, 3) make usurious payday loans. Let’s look at these issues.
People use alternatives to traditional banks for many reasons, ranging from unfamiliarity with the process to a lack of necessary forms or proof of residence required to open a bank account. For some, producing the proper paperwork to open a bank account represents a substantial burden, frustration, and often humiliation.
Banks do charge customers to hold their money. The average account generates about $425 annually in revenue to the bank. Bank revenue comes from monthly fees, check fees, ATM fees, overdraft penalties, check protection services, holds, and other charges. The typical cost of using a MSB is 1 to 3% of all transactions. Assuming an average 2% charge, you can transact $21,250 annually and have fees similar to the cost of an average bank account. Unfortunately, low‐income earners do not pay banking fees that are “average” – they pay a disproportionately high number of fees for banking services. It’s often an economic choice not to use a bank; it’s often a very wise choice.
A neighbor of mine who runs a plumbing company uses a MSB to clear checks. The MSB assumes the risk of the check clearing, there is no hold placed on funds, the services are more accessible than banks, and the service is more efficient. He has no need for a bank, as he can make more money investing capital in his business than by having it sit in a bank.
The high interest rates charged on payday loans has become a hot button issue, and legislatures around the country passed laws that have severely impacted MSBs in their jurisdictions. Who really charges high interest rates? A payday loan costs an average of 6% a week, or 312% annually. On a $1,000 loan the borrower holds for two weeks, there will be $120 in interest charges alone. Does that sound rational? Would it make sense to borrow money at 312%? Maybe. It really depends on what alternative a person has. Payday lenders are required by law to disclose the annual percentage rates of their loans. Many other creditors can hide their charges in fees that they’re not required to disclose ‐‐ and which can far exceed payday loan rates. Consider a landlord who charges a $75 fee for rent of $750 that’s a week late. That “fee” translates to an APR of 520%. I checked with our local electric company, when an account is shut off they charge a fixed reconnect fee of $85, plus additional deposits. If you have a $340 electric bill, that’s a 25% charge for what’s likely to be less than a week ‐‐ or an APR of 1,300% (If your bill is less, the rate is higher). Another way of borrowing money is with what bankers call bounced‐check protection, or “courtesy overdraft”. With bounced‐check protection an NSF check will be covered, but the account holder will have to pay a fixed fee, generally in the range of $25 to $40 per check, and must make the check good ‐‐ usually within a week (or additional fees apply). A $100 overdraft with a $25 fee would translate into a rate of 25% per week, or an APR of 1,300%. If the fee is $40 the APR is 2,080%. As a result of over‐regulating MSBs, many of the unbanked no longer have access to the 6% weekly option.
The government would like to move the unbanked out of MSBs and into the traditional banking system. The Feds have given a green light to banks, allowing them to close MSB accounts for no valid or substantive reason. This presented a moral hazard, as many banks figured that closing down MSBs would give them access to their clients. What actually took place is a textbook example of unintended consequences. People who had used MSBs in the past did not rush to traditional banks, they just moved further out of the system. Completely out of the system. They have learned to deal in cash. In an effort to combat fraud and money laundering, the last thing you want to do is move people away from accountable and transparent financial institutions – even if they are non‐traditional services. Believe it or not, many people do not like banks.
