Lessons from the US-Mexico Clearinghouse System Elizabeth Mc

Lessons from the US-Mexico Clearinghouse System Elizabeth Mc. Querry Federal Reserve Retail Payments Office The Directo a México logo and “Directo a México” are service marks of the Federal Reserve Banks in the United States and service marks of the Banco de México in Mexico

Outline o Origins o Development o Phases o Payment Characteristics o Market Experience o Challenges o Milestones o Lessons Learned 2

Origins o 1999 – Rivlin Report stated that Federal Reserve should enhance its own infrastructure to support cross-border ACH transaction and work with the industry to develop robust ACH crossborder capability. - US-Canada payments pilot began o On-going needs to meet evolving international payments needs in costeffective, electronic format 3

Origins o 2001 – Partnership for Prosperity between Presidents Bush and Fox stated: o The Banco de México and the U. S. Federal Reserve agreed to study the possibility of setting up an automated clearinghouse system (ACH). Once established, there will be an efficient interbank mechanism to carry out payments between both countries that will be available to all financial institutions 4

Development o. Payments System o o o Have an efficient and low cost interbank mechanism to transact payments (corporate, individual, government) between both countries that will be available to all financial institutions, and promote the use of low-cost banking services. Optional service for every bank and credit union in U. S. Connection reaches ALL banks in Mexico’s SPEI system 5

Development o Legal o The operating rules of each central bank/payments system rules govern their respective payments system. Provides sound, predictable, nondiscriminatory, and proportionate legal and regulatory framework. 6

Development o Agreements o The central banks signed a service contract that includes technical specifications, operating rules, and warranties for the payments. o Contract outlines the operating rules, formats, timeframes, and treatment for exceptions (rejects, cancellations, complaints, etc. ) o Contract periodically updated as service is enhanced. 7

Development o Technology o The teams designed a payments converter to convert payments from the NACHA to SPEI format and vice-versa. o Converter built and maintained by Banco de Mexico. o Periodic updates as service enhancements are implemented. 8

Phase 1 o Fed. ACH International® Mexico Service o October 2003 – government payments o o Receivers of Social Security benefits voluntarily converted from receiving paper checks to electronic delivery. February 2004 – commercial payments o Service opened for U. S. financial institutions to send credits to Mexico. 9

Phase 2 o Directo a México. SM o September 2005 re-branding of service o Provides financial institutions with customizable, Spanish language materials oriented to consumer needs Color poster and brochure, lobby/tent cards, text of radio spot, FX Information Sheet o Customer Guide (market and promotional ideas for financial institutions) o 10

Payment Characteristics Phase 1 Phase 2 Type Account to Account Funds Availability 2 business days Next business day FX FIX – 1. 00% FIX – 0. 21% Currency USD-MXN MXN-MXN (in development) Flow US to Mexico to US (in development) Fee to U. S. Financial Institution $0. 67 11

FX Comparison “Banked Bonus” – Directo a México FX rate results in beneficiary receiving peso equivalent of US$5 more per transfer (on a US$350 payment) Directo a Mexico FX rates compared to data in Appleseed study on FX rates of other transfers for 2 week period in 2005. 12

Market Experience - Fees Average fee in market still around US$10. 13

Market Experience –Volume & Value 14

Challenges o Potential customers may not have traditional documentation and may be unbanked o Customers may need special marketing and customer service needs o Money transfer businesses dominate remittance market 15

Challenges o Lack of person-to person payment model in U. S. o Growing concern over regulatory environment for financial institutions o This is new. 16

Milestones o Beneficiary Account Registration (BAR) website o o o Developed by Bansefi to pre-open lowcost accounts in Mexico Remittance transfer provides incentive to formalize account and become banked Collaboration with the Federal Reserve to facilitate ease of use by USFIs and link with Directo a México payment channel 17

Milestones o BAR provides: o Ability for U. S. financial institution to preopen account at any L@Red de la Gente (Bansefi + affiliated cajas) branch across Mexico o Affiliated cajas now beginning to come onto Bansefi technology platform CLABE for receiver generated on website Registration takes only 3 -4 minutes 18

Milestones On February 23 in Jalpa, Zacatecas, Mexican President Felipe Calderón Hinojosa endorsed Directo a México as the solution to help reduce the cost of transfers to Mexico. President Calderón also recognized efforts by the government-owned bank Bansefi to incorporate Directo a México into its program to further lower the cost of remittances and to encourage use of the financial system by Mexicans. 19

Lessons Learned o o Connectivity and technology are the easy part. Central banks can only encourage savings and better options in the market. Establishment of new ideas requires financial institution and consumer and behavior to change. o o Banks and credit unions can now offer low-cost cross-border transfers to their customers but they are not yet used to doing this. Customers originating and receiving transfers must learn to use financial institutions to attain a range of benefits. 20

Lessons Learned o Branding to Directo a México important step in facilitating offer by financial institutions and commercial acceptance by consumers. o More financial education needed. o Account to account payments are transparent and carried out between highly and routinely regulated financial institutions. 21

Contact Elizabeth Mc. Querry Assistant Vice President Federal Reserve Retail Payments Office 404/498 -7888 elizabeth. mcquerry@atl. frb. org 22