Accord Seeks to Curb Fees for U.S.-Mexican Money Transfers

SAN FRANCISCO -- An international banking accord, designed to reduce the exorbitant commissions Mexican workers pay on the billions of dollars in remittances that they send home each year, was announced here Tuesday.

But the success of the new program will depend on Mexicans overcoming their long-standing distrust of their native country’s banking system.

On Tuesday, the U.S. Federal Reserve Bank and the Bank of Mexico announced that a new automated clearinghouse for cross-border financial transactions will begin operating by the end of this year. Similar to one regulating U.S. and Canadian banking activities, the system will automatically credit accounts in Mexico with remittances sent from U.S. banks, and vice versa.

The plan was announced at the Partnership for Prosperity economic development conference.

The loose-knit group was formed by President Bush and his Mexican counterpart, Vicente Fox, in September 2001 to seek ways to extend the economic benefits of expanded binational trade to regions of Mexico that have so far been left behind.

The agreement is an outgrowth of a concerted effort by the two countries to streamline the flow of $10 billion in cash that Mexicans living in the United States send home annually, mainly to their families. Both countries perceive remittances as potential fuel for economic development and, by extension, a means of reducing illegal immigration.

Both governments are concerned that the economic benefits of remittances are undercut by high commissions.

Average commissions have dropped considerably in the last two years, but they still range from 6% to 10%.

“People were being abused, paying 20% to 30% to send $200 or $300,” said U.S. Treasurer Rosario Marin, who spoke at the meeting Tuesday. “None of us here would pay that.”

Another concern has been that as much as 90% of the cash sent southward is used by family members for immediate consumption instead of being left in savings or investment accounts where the money can have a longer lasting and more positive effect on a local economy.

The new arrangement may also help American employees and retirees living in Mexico receive their salaries, Social Security and annuity payments in a more timely fashion, said Elizabeth McQuerry of the Federal Reserve System’s Atlanta office. She said the new banking clearance system should make it easier for immigrants to open savings accounts from the U.S. side of the border because funds can be put directly into such instruments.

The wholesale cost of each electronic transfer will be about 60 cents for money going from the United States to Mexico and 30 cents from Mexico to the U.S. To use the system, Mexicans must have bank accounts on both sides of the border. The final retail transaction cost will vary from bank to bank, McQuerry said.

After being largely ignored for years, remittances are now recognized as a crucial source of capital and, to use one economist’s phrase, as the “new foreign aid” for Mexico and other developing countries. For Mexico they represent the second largest source of foreign exchange after oil sales.

Don Terry, a remittance expert at the Inter-American Development Bank in Washington, told the gathering that the $100 billion in annual remittances sent around the world now helps support 10% of the global population.

High commissions for the U.S.-Mexico transfers stem from the lack of competition among financial institutions for the business and from the insufficient financial infrastructure to smooth the path. The United States and Canada have long had a bank clearinghouse arrangement.

But there are signs now that competition among banks for remittances-transfer business is heating up. In the last several weeks, Citibank and U.S. Bank have each announced new flat-fee programs for senders of remittances.

The World Council of Credit Unions, a U.S. trade association., will soon launch a cooperative service in which credit union members in the United States can transfer funds of $1,500 or less for a flat fee of $10 to a corresponding credit union account in Mexico. People on the receiving ends of such transfers are 10 times more likely to keep money in savings or investment accounts, said David Grace, the credit union association’s regulatory affairs manager.

“The purpose is to bring people into the formal financial system and give them access to credit, mortgages and other products that will improve their lives,” Grace said.

But two bank system failures since the early 1980s have engendered a deep distrust of banks among Mexican families, only one-third of whom have bank accounts. Many undocumented workers are also reluctant to open U.S. bank accounts because it requires identification.