Money Transfer Mechanics

Overview

This Document is a basic summary of International Money Transfer or Cross Border Remittances. The topics dealt with are very generic in nature and would change as per the send or receive country. A country which is both send and receive would also need a dual license from the regulators or one single license could be sufficient if the regulations thus state.

Licenses

A non banking company which wants to do cross border Remittances, has to first be a licensed entity of the country where they want to send the money from the country regulators. At times a contract with licensed entities in a country can serve the purpose. Some countries issue service based licenses. In many countries the regulators approve of any new agents.

Examples of Licenses are the State licenses in the USA and the FINCERN MSB license. Another example of a service based license is India, where cash remittance pay-outs needs an MTSS license from the regulator, but for bank deposits no separate license is required by the MSB company.

Type of Agents

There are two broad types of Agents, one is a banking Agent & the other is a non-banking Agent.

• Banking Agent

A Banking Agent is one which is a bank in the pay-out country.

Banking Agent, will ask us to open two accounts in their bank, one is their local currency for pay-out and the other is the USD or as is negotiated and most beneficial to the Remittance company. This will depend on a 1:1 coordination with the Nostro accounts held by them. Sometimes they agree to open more than one such account, basis their Nostro account availability & central bank approvals. We can also deal multiple times in each currency or split the whole transfer in different currencies basis our sales. Example, when we have multiple send countries, and we collect in CAD & USD & GBP, we can do a 1:1 with each currency and the sales to the particular Agent. The bank account that is opened will be owned by the remittance company.

Example: Bangladesh – The only allowed entities to do remittance pay-outs are banks. The banks open two accounts for the remittance company. One is the Non Resident Taka Account & second is the Non Resident Dollar Account, hereinafter referred to as NRT & NRD account. The bank needs to get approval from the Bangladesh Central Bank to open the foreign currency account for the remittance company.

• Non-Bank Agent

A Non-Bank Agent is a company which is not a bank in the pay-out foreign country. Non-Bank Agent will have its bank accounts in designated currencies and we have to fund those accounts to keep the pay-outs ongoing. The currency of the bank account is generally their local currency. They will not generally have a Nostro account. But some big non bank Agents have Nortro Account, but it is rare. We will have to fund the Agent account. The account ownership will be in the name of the Agent. Most sending Agents are of this category. But there are many Agents of MSB companies, which are Banks.

Funding Arrangements

Pre Funding & Security Deposits

Pre funding

The Agents in the pay-out countries are bound by their central bank regulations. The general trend is that of a pre funded account, for the remittance business. Few central banks have also prescribed minimum balances to be always kept in the account for their companies, be it banks or non-banks. The Agents stop cash or bank deposit pay-outs if the balance falls below the regulatory balance.

Example: Bangladesh: The regulation says that the minimum balance in the Non Resident Taka (NRT) Account (The bank will open the NRT account) should be always be 500000 BDT. If the balance falls below BDT 500000, the bank will stop pay-outs.

Security Deposit

The Agents in the pay-out countries are bound by their local regulations to have a collateral security by means of cash security deposit or bank guarantee, over and above the pre funding amount. This SD or BG is taken in terms of USD or as per the negotiations and our capability to fulfil the same. For example if we go for a USD bank guarantee we will have to furnish that from our banks.

Settlements & Foreign Exchange

Money Flow Cycle

The Merchant Top-Up the Bank Account in the local currency, there after he does the transaction using the system. Many such transactions are done by the Merchant with the top up deposit. This local currency sits in the Bank Account of the send country till we do a Telegraphic Transfer of the same to the Agent, for the value the Agent has to make pay-out before hitting the pay-out stoppage limit, for example BDT 500000 for Bangladesh, in India it is one million INR but can be negotiated to be less.

Movement of Money

As described in the money flow cycle the local currency that is available in the send country bank account has to be sent to the Agent in the pay-out country. This has to be done in the methods as applies to the type of Agent i.e. banking Agent and non-banking Agent.

• Banking Agent – This Agent will give us two accounts in our ownership. Plus they will also give us a Nostro Account where we will have to send the foreign currency. The Nostro account of the Agent bank is a bank account owned by the Agent bank in a foreign currency, it can be domiciled anywhere in the world, but is generally in the same country as they are domiciled or near about. For example the Bangladesh Agent bank may have a bank account in USA in USD denomination, which they extend to us as the Nostro account. Thus we will do a Chips or Fed wire or ACH transfer from our bank Account to the Agent bank’s account. Also considering that our foreign currency account is in local currency, they will give us a 1:1 mirror credit to our local currency account held with the Agent bank in the pay out country.
• Non-Bank Agent – This Agent will give us their bank account in their local currency. Our bank will send a TT or MT103 SWIFT Message to the Bank of the Agent the local currency. During this conversion our bank will convert the local currency into the foreign currency at fx rate agreed during the transfer.

Foreign Exchange Rates

For every Agent we have to do a trade of the forex currency and if we have multiple Agents in the same country, we have to do that many number of trades. When we have to have one Fx Rate for a country with multiple Agents, the way to have one single rate for all Agents is to do a weighted average rate taking into account the volumes of currency and rates for individual Agents.

For example if we deal with one Agent deals 100000 USD for BDT for 77.15 & another Agent deals 75000 USD for BDT for 77.50 , our Bangladesh rate will be 77.30 for each USD sent to Bangladesh. This will be our cost rate or buy rate.

1. Banking Agent – Every time we transfer the Forex currency into our bank account with the bank, our traders will negotiate a rate for the currency pair as is relevant, example USDBDT as is applicable for that Agent and country. These rates negotiated will be based on Inter Bank Rate (IBR) at SPOT less SPOTCASH Margins. The SPOTCASH or SPOTTOM or TOMCASH are based on money markets and keep on changing every day and the sole determinant is the bank whom we deal with.
2. Non-Bank Agent – Every time we transfer from our account to the Agent’s account in their country, we will have to negotiate a rate with our bank. These rates will be based on the IBR at SPOT less SPOTCASH Margins.

Cross Currency Rates

Cross Currency rates are applicable when dealing in multiple currencies, for send and pay-out. In the above example the BDT rate for USD is 77.30. Now if we start sending from Singapore & we only send a consolidated local currency to Bangladesh, the cross currency rate will be determined basis the SGDBDT rate in the market.

• Margins on Cost or Buy Rate

The margin is the difference between the sell or customer rate and the cost or buy rate. The general trend is to have a specific percentage on a currency pair. For example currency we set a margin of 1% then our sell rate going by the same example above will be 76.53 BDT for every USD sent. And the margins can be set corridor by corridor and based on the market conditions.

So for every USD sent to Bangladesh there will be forex gain of a certain amount and similarly for every SGD sent to Bangladesh the forex gain will be there on each transaction.

This can be translated to the transaction Fx Gain based on how much of what currency of money has been sent.

• Frequency of Transfers

The frequency of transfers to Agents are determined by factors of cost & the amount of coverage required at the Agent.

Every time a TT or SWIFT is done has a cost attached to the same. Also the banks be it our own bank in case of non-bank Agent or the sending of money into the Nostro of the banking Agent, will have minimum thresholds for better rates. The more amount of money we send the rate will be closer to the IBR rates. This is because the banks deal in huge volumes and small amounts are to be put in odd lots & these odd lots do not give them the IBR rates, so they pass on the same to smaller fx transactions.

The ideal method of sending is to send daily at the start of the market opening for a certain currency to get the latest rate for the currency.