Americans shouldn't have to endure blocks and delays when wiring money globally

By Saema Somalya and Matt Cameron

Other countries give nonbank payments providers direct access to their nation's financial system

In this age of digital transformation, people around the world are benefitting from technologies that can increase the accessibility, affordability and reliability of financial services. Nowhere is this more true than in the remittance industry - this $860 billion category of global payments surpasses the size of foreign direct investment and development aid, and is commonly a critical lifeline for friends and family receiving such payments.

Yet, despite the fact that leading digital remittance providers and technologies are based in the U.S., contrary to developments around the globe, these nonbank providers are not directly integrated into our national payments system. This is stunting the modernization of payments in the U.S., undermining easy access to the U.S. dollar (DX00) (the primary global reserve currency), and leading to more expensive and inefficient services for consumers.

More specifically, unlike in a growing list of countries, well-regulated digital remittance providers in the U.S. are required to work through a bank in order to access the national payments system. This is both unnecessary and expensive. By adding an intermediary, the current system requires payments to route through incumbent banks without adding substantial benefit to consumers or the financial system. It also increases the risk of critical delays, adds to consumer confusion around where in the system their payment currently resides, and results in higher costs to send funds.

Many other countries and regions around the world are taking a different path by modernizing their national payments systems to allow direct participation by well-regulated nonbank payments providers. These countries are enabling such nonbank participants to directly connect to central banks without an intermediary, including when such payments systems are upgraded to allow real-time transfers. Indeed, the United Kingdom, Singapore, India, Brazil, Switzerland, Canada, and the European Union have authorized, or are in the process of authorizing, such nonbank access to national payments systems.

In granting nonbank payment companies direct access, the Bank of England stated that supporting such innovation leads "to cheaper, safer, and faster domestic and cross-border payments." Similarly, in Brazil, the Pix instant payments system, which includes direct nonbank participation, has made small-dollar digital transfers more viable and accessible by increasing speed of payments, enhancing access to online retail for consumers in retail deserts, and facilitating use of digital technologies and interfaces. The modernized Brazilian payments system has been adopted by two-thirds of the population - many of whom had previously been unbanked.

The U.S., as a global leader in payments technologies and total volume of remittance payments, must follow suit in order to remain globally competitive and reduce complexity, delay and costs for consumers. The U.S. Treasury's 2022 report on "The Future of Money and Payments" rightly highlights potential benefits, noting that "[w]hile nonbanks can participate in instant payment systems through a bank, offering direct access could provide additional competitive or access benefits."

This paradigm shift can de-layer the number of intermediaries that money must pass through to reach end users, which reduces costs and delays associated with long transaction chains to the direct benefit of consumers. These benefits are even more compelling in the context of FedNow, the Federal Reserve's recently launched real-time payments system. It could also provide digital remittance providers the opportunity to enhance financial inclusion and counter de-risking by more effectively tailoring compliance programs to remittance customer profiles, so that certain perceived higher-risk customer segments do not unnecessarily lose access to services - a plight too many consumers have unnecessarily suffered.

Against this backdrop, there are two immediate initiatives that U.S. policymakers should prioritize:

First, with appropriate guardrails, well-regulated nonbank remittance providers should be granted direct access to Federal Reserve payments infrastructure. These providers are already subject to licensure, examination, and oversight by various regulatory bodies, including state financial regulators and the Consumer Financial Protection Bureau (CFPB), which means that they must adhere to rigorous rules around safety and soundness, protection of customer funds, and good governance that are similar to those applicable to their larger banking counterparts.

Such access will help to de-layer the transaction chain for consumer transactions and thereby enable them to move more affordably and quickly through the financial system. It will also expand financial inclusion by enabling remittance providers to more effectively tailor compliance programs in order to avoid unnecessarily excluding perceived higher risk populations commonly disfavored by traditional intermediaries.

Second, in support of payments system modernization and the Federal Reserve's FedNow real-time payments network, policymakers should explicitly embrace the benefits of digital technology. Digital remittance providers can bring consumer-friendly technologies and interfaces to consumers, and seamlessly provide access to FedNow's real-time payment solutions - something being enjoyed by tens of millions of consumers in other countries around the world.

In addition, expanding the utility and reach of digital technology can substantially improve financial access for the unbanked in both rural and urban communities by giving them a viable on-ramp to the formal economy and its protections. For consumers who live paycheck to paycheck or otherwise live in areas without physical bank branch density, this can substantially improve financial inclusion. Incorporating such providers will also result in lower costs and avoid a scenario where only the most affluent consumers can afford real-time payments.

Financial inclusion requires breaking down legacy barriers and frictionless global access to U.S. dollars. The U.S. must keep pace and cement its role at the center of global payments, to better serve individuals at home and communities worldwide.

Saema Somalya is executive vice president of legal and risk at money-transfer service Remitly Global. Matt Cameron is head of Remitly Global's policy and regulatory affairs.

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-Saema Somalya -Matt Cameron

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05-11-24 0909ET

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