Factors that Facilitate and Impede Cross Border Payments Carol Clark Payments in the Americas Federal Reserve Bank of Atlanta October 7, 2004

Scope of Study I. Cross border payments marketplace excluding securities transactions II. Detailed information on 16 countries that have considerable ACH volume III. Policy issues related to international payments IV. Future considerations

Key Points Projected growth in cross border payments Payment barriers Players in global electronic marketplace Two cross border payment models

Key Points Payment networks are two-sided markets Challenges for new payments providers –Establishing critical mass –Aligning incentives for each of the payment participants

Projected Growth in Marketplace U.S. largest sender of remittance payments in world Last half of 1990’s remittance flows to Latin American countries doubled Remittances to Mexico, El Salvador, Guatemala, Honduras, Nicaragua will increase from $10.2 billion in 2000 to $18 billion in 2005 (Pew Hispanic Center)

Projected Growth in Marketplace Global retail payments projected to grow –10.2% by 2010 –7.8% in the Americas (Boston Consulting Group) Cross border payments may double (Unisys, Global Concepts, Talson) Media attention on providing inexpensive, reliable remittance services

Cross Border Payment Barriers Banks and end users view cross border payments as costly and cumbersome Incentives to develop faster and lower cost systems do not exist Small payment volumes present challenges to developing critical mass

Global Payments Marketplace Marketplace concentrated among a few players –Financial Institutions –Non-Bank Providers –Central Bank or Privately Owned Payment Systems Infrastructure costs may drive further consolidation

Two Payment Models Correspondent/Network Relationship Model Tiered Relationship Model

Correspondent/Network Model Institution A Institution B Sender Receiver Bilateral Accounts

Tiered Relationship Model Institution A Supra-Regional Entity Institution B SenderReceiver

Institution Sender Receiver Two Sided Markets

Factors that Influence Senders Consumer/Business Cost –Proximity –FX Conversion

Factors that Influence Senders Cost –Timing –Standards Reliability

Factors that Influence Senders Financial Literacy –58% immigrants do not have bank accounts –For those with accounts, less than one quarter use them to send remittances –Documentation concerns

Institution Concerns Regulation Payment Revenue

Institution Concerns Costs –Technology platform –IT investment –Liquidity

Institution Concerns Standards –Interfaces –Formats –New Procedures –STP

Factors that Influence Receivers Timing Reliability Cost –Proximity –FX –Institution

Conclusions Concentrated and two-sided market High unit costs relative to domestic markets Standards vary more than in domestic markets Challenges in developing critical mass and aligning incentives

Conclusions Regulation may unintentionally and inadvertently impact sender Business Case Education

Questions?