Nacha payments 2013 -Transparency in Cross-Border Payments & Impact of Dodd-Frank Section 1073
Dodd-Frank Section 1073 is arguably one of the biggest changes to cross-border payments globally in recent years. It requires banks providing cross-border payments services to U.S. based consumers to commit to all fees, funds delivery date and more before initiating the transaction. This session describes the pros and cons of open loop, closed loop and hybrid approaches. Speakers also discuss whether the new requirement is likely to be adopted by corporates and internationally.
Published on: Mar 3, 2016
Transcripts - Nacha payments 2013 -Transparency in Cross-Border Payments & Impact of Dodd-Frank Section 1073
Transparency in cross-border payments & theimpact of Dodd-Frank Section 1073Paul TrozzoSenior Vice PresidentPNC BankJonathan LearHead of BusinessEarthport North America
2Session SynopsisDodd-Frank Section 1073 is arguably one of the biggestchanges to cross-border payments globally in recent years.It requires banks providing cross-border payments services toUS consumers to commit to all fees, funds delivery date andmore, upfront.This session will describe the pros and cons of open loop, closedloop and hybrid approaches; and discuss whether the newrequirement is likely to be adopted by corporates, and in othercountries
3Agenda1. Overview of Dodd-Frank Section 10732. Key requirements3. Range of approaches4. Questions
4Regulations0 200 400 600 800 1000Dodd-Frank (2010)Other Acts, CombinedGramm-Leach-Bliley (1999)Sarbanes-Oxley (2002)Interstate Banking Efficiency (1994)Glass-Steagall (1993)Federal Reserve (1913)Major U.S. Financial Legislation: Pages in theFederal Register
5Dodd Frank 1073 - Background– Dodd Frank 1073 (DFS1073) seeks to protect consumers sending ElectronicFund Transfer (EFT) payments across borders– Imposed by Congress Summer 2010; statute finalized by CFPB and enteredinto the Federal Register 7 Feb 2012– The Final Rule originally scheduled to take effect February 7, 2013.Proposed rule changes from December 2012 delayed implementation.– Echoes many of the transparency requirements imposed by the EC PaymentServices Directive (PSD) in 2009; however– Unlike the PSD, DFS1073 is unique in shifting liability to the remitting bankregarding the accuracy of the payment; and in doing so removes primacy of theaccount number for settlement of disputes.
6Dodd Frank 1073 - Requirements– Full fee disclosure at the time of origination – including taxes imposed atbeneficiary– Guarantee of amount of final funds delivered– Guarantee on when funds will be received– Right to cancel a transaction up to 30 minutes after submission– 180 days of rolling liability for disputed transactions– estimates initially acceptable; certainty required by Jul 2015
7Dodd Frank Section 1073 – issues and changes– As a result of market feedback, CFPB has• excluded organisations which transact fewer than 100 cross-borderconsumer payments p.a., up from the initial 25• published ‘safe harbour’ list of countries for which estimates are acceptable:– Aruba– Brazil– China– Ethiopia– Libya– Establishment of tax deductions on payout remains a major challenge:• Only a few countries publish reliable data• Industry bodies have carried out feasibility studies for other countries– May lead to development of a universal tax utility for all banks to tap into
8Different approachesDifferent options for approaching DFS1073:1. Exit consumer originated cross-border payments business2. Adapt ‘open loop’ wire (correspondent banking) modelRationalize entry channels, currencies, countries3. Adopt a closed loop solution4. Outsource via Agent Agreement5. Adopt Hybrid/‘Global ACH’ service
9SWIFT is working with the industry to identify and shapepotential solution(s)• Enables the unambiguous identification oftransactions requiring compliance• A CR for SR 2013 was submitted to PMWGproposing an update to the User Handbook toinclude the use of a codeword “CCT” (‘ConsumerCredit Transfer’)• in field 26T of the relevant MT messages• Market Practice Guidelines around usageare being discussed by the PMPGSWIFTRemitCodeword‘CCT’in 26T• SWIFTRemit provides full transparency onamounts, fees, charges; delivery timeline,supports cancellation and return process;allows account validation and transaction statusIndustry Liaison• Cash & TradeSubcommittee of theSWIFT U.S. NMG• Federal ReserveBoard• The Clearing House• BAFT-IFSA• Payments MarketPractice Group(PMPG)• PaymentsMaintenance WorkingGroup (PMWG)Source: SWIFT
10How Hybrid/’Global ACH’ worksSegregated AccountsPayment InstructionsFunding in USDFI:EUR UK:GBPSG:SGDUS:USDPH:PHPAU:AUDJP:JPYZA:ZARUS:USDUS:SGDNO:NOKPL:PLNFXprocessBranchPhoneOnlineFunding in SGDNo FXprocessChannels
11Hybrid/Global ACHDFS1073 Requirement Hybrid/Global ACH CommentFull fee disclosure at the point oforigination.• Fixed end-to-end fee per transaction• FX rate ‘fixed on send’All fees are known upfrontDomestic payments schemes do notsupport per transaction benededuct/lifting feesGuarantee on final principal settled. 100% predictability for all fees other thantaxes:• No beneficiary landing fee.• No ‘incoming credit’ posting fee.FX rates are set upfrontAny fees imposed by local serviceproviders are known upfront and henceabsorbed by global service providerGuarantee on when funds will bedelivered.100% predictability of value date Domestic payments schemes haveknown and predictable clearing cycles;hence time/date of payment is knownupfront30 min cancellation right fromoriginationService enhancement ; generic warehousingrequirement which can be achieved either viaODFI or global ACH partner.180 days rolling liability ODFI responsibility
12Impact on non-US FIs• Ability to deliver transparent services to US FIs• Though DFS1073 applies only to consumer-initiated transactions, the feeand FX rate transparency and transaction predictability is expected toimpact other segments, especially SME.• Regulators in several other countries are observing the effects of the PSDand DFS1073. Greater transparency seems inevitable.
© 2012 All Rights Reserved.Questions?– Will regulation be relaxed?– Will repudiation liabilities force prices higher?– Will major players exit?– Will estimates result in better service levels?