To quote Warren Buffett, “Risk comes from not knowing what you’re doing”. When unknown risk is channelled through the IPTMA programme the risk becomes calculated allowing a bank to stop focusing on unknown risk and start a culture of informed calculated risk leading to financial reward – which is the fundamental businesses practice behind banking. But what exactly are the benefits of banking a client with high AML/CTF exposure and how can a bank access them?
The two obvious avenues to explore are FX and Bank charges with the less obvious, hidden rewards being MSB Referrals with regard to bank loyalty, PR benefits and allowing financial inclusion.
Australian MSBs transfer billions of dollars annually, which need to be converted into another currency. As a direct result of the de-banking policies currently in place, Australian MSBs are not utilising Australian FX markets to convert funds to be transferred instead they are transferring Australian dollars to be converted overseas. This results in Australian banks losing valuable FX revenue as they are effectively gifting foreign banks with an income stream.
To put this into perspective a portfolio of MSBs transacting $5bln AUD a year, with an AUD/USD bank margin of 5 points, provides an income of $2.5m USD. By not utilising the calculated risk platform that IPTMA provides this revenue stream is being collected overseas.
AUSTRAC reports that even with de-banking MSBs still make millions of transfers a year with international transfer fees ranging from $0-$30 AUD. Due to the high volume of transfers made by remitters a bank usually offers a wholesale rate. Acting on the premise that a bank offers a rate of $5 AUD and understanding that in practice most of these payments are grouped together to reduce costs – a conservative estimate being 200,000 transfers – an additional MSB income of $1mil AUD is lost.
This totals missed revenue by Australian banks to more than AUD $3.5 million per annum. Added to this total can be the hidden income revenue MSBs bring to a bank via referrals.
MSB Referrals/bank loyalty
To bank MSBs effectively banks need a greater understanding of how MSBs function on a day to day basis. It is foolish to underestimate the influence MSBs exert over their client base.
The perception of MSBs in the banking industry appears to be the basic business principle that remitters facilitate payments, from a payee in local currency to a beneficiary abroad in a different currency, with low costs due to economies of scale achieved when grouping all transactions together. This is correct. However what banks really need to understand is that for a community remitter the interaction with a client is a personal one. The relationship between the MSB and the payee is unique to the remittance industry. The payee will take the advice of the MSB to secure the fastest payment possible for the best price. The MSB enjoys a huge degree of trust and an influential relationship with the payee.
In an effort to reduce costs and increase the speed of a transaction MSBs are vocal in supporting the bank they use. In practice this means the majority of their clients will transfer their banking business to the same bank as their MSB. It is generally accepted that the cost of attracting new business to a bank is up to seven times higher than the cost of retaining business.
Supporting the remittance industry could realistically result in 200,000 new or reactivated accounts for a bank bringing a value beyond that of all other avenues mentioned combined. New/reactivated accounts would bring with them extra account fees, higher liquidity for the holding bank which in turn would allow a bank to increase lending starting a snowball effect on revenue.
Financial Inclusion and PR
The Australian remittance industry provides more than 6 times the amount of financial aid of the Australian Government. Any bank facilitating more foreign aid than the Australia nation would be in a unique position. The subject of Financial Inclusion is being debated all around the world. Banks are historically held in low esteem by the general public and are regarded as corporate money making machines with little, or no, moral compass. Any bank saving Australian taxpayer dollars, (where is the extra financial aid deficit to be found?) whilst aiding third world countries, raising living standards, supporting local communities and working towards financial inclusion will benefit.
As in all areas of life the greatest rewards come from correctly managed risk. The general consensus is that without risk there is no gain and risk is needed to advance. All great innovators take risk. Correct safety procedures are what makes risk acceptable. No one should jump without a parachute. IPTMA provides the banking industry with the tools to successfully manage risk leaving the banking industry in the position to explore the potential benefits of banking MSBs.