May 11, 2006
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Remarks by Deputy Assistant Secretary for International Monetary and Financial Policy Mark Sobel on the Committee on Payment and Settlement Systems of the Bank for International Settlements –World Bank

I am delighted to be here with such a distinguished group of experts in payments and settlement system and remittance issues.  Unfortunately, I am an expert in neither topic.  But the U.S. Treasury and the Administration have played an active part for many years in supporting international initiatives to promote the efficient and secure flow of remittances to developing countries and the role these flows can play in economic development.  So perhaps I can offer some broader commentary against this background, before making more specific observations on the narrower topic before this conference.

Five years ago, remittance issues were hardly on any policy-maker's radar screen.  Given the large remittance flows between the United States and Mexico, however, they had begun to appear on ours.  In 2004, when the U.S. hosted the Sea Island Summit, the Treasury made remittance issues a key component of the finance cone of the Summit process.  When we first broached this topic with our colleagues, we received blank stares.  But they quickly learned that their economies had close connections to the global remittance business, and I am pleased to say that by the time the Summit rolled around, not only were there no longer blank stares, but there was enthusiasm around the table for pursuing remittance initiatives.

And well there should have been!  Our work on remittances complements many key U.S. international economic objectives.

·  First, promoting growth around the world, especially in developing countries, is a critical driver of our work.  Growth in turn is the key contributor to  poverty reduction, and growth is best led by the private sector.
 
·  Second, and closely related, the U.S. is keenly interested in seeing stronger financial systems emerge around the world. 

·  Third, we of course want the international financial system to be safe and sound, and to bring flows into the formal financial system and have it comply  with anti-money laundering and counter terrorist financing standards. 

Remittances are extremely relevant to all of these policy objectives and they are a large and growing source of capital and income for development.

·  Reported remittance flows totaled $167 billion in 2005.  Unreported remittance flows undoubtedly raise this figure substantially.  Only a few years ago,  reported flows were under $100 billion.

· That is 1-1/2 times official development assistance.

· These are private sector flows.  They are nearly equal to net private debt flows, three times net portfolio flows and two-thirds of net foreign direct  investment flows.

· For many countries, remittances often can exceed 10% of GDP.  In Central America, they can reach nearly 30% of GDP.

· Remittances are a stable source of income for developing countries and this factor is crucial given volatility in developing country financing and  economies. 

Let me expand on a few aspects of the importance of remittance flows from our vantage point.  First, financial access and literacy.  Inadequate financial access and financial literacy are issues for many countries, including the United States.  An estimated 10 million Americans do not have accounts at mainstream financial institutions.  Bringing un-banked residents into the financial mainstream and raising financial literacy of U.S. residents are priorities for the U.S. government.  In 2003, President Bush signed into law legislation that created the Financial Literacy and Education Commission.  Last month, the Commission, headed by Treasury Secretary Snow, launched a national strategy to improve financial education and financial literacy of all U.S. residents.  A federal financial education website (mymoney.gov) and hotline were launched in English and Spanish in October 2004.  The Commission is now working on developing a multimedia campaign to address financial education needs in the United States.  

Treasury has also promoted financial literacy work as a key component of our bilateral and multilateral remittance initiatives.  We have encouraged exchanges between the U.S. FDIC and their counterparts on the development of financial education programs and the potential adaptation of the FDIC's MoneySmart financial literacy training program.  In recognition of the significant immigrant population in the United States, MoneySmart is available in six languages (English, Spanish, Chinese, Korean, Vietnamese, and Russian).

Second, development impact.  Remittances are undoubtedly vital for basic survival for the receivers.  But studies have shown that remittance recipients are more likely to send their children to school, have more access to health care, and more likely to start small businesses. 

Third, financial deepening.  Often, households receiving remittances previously never had sufficient liquidity to open a bank account.  By banking the un-banked and spurring greater private financial sector involvement in serving the underserved, a country's banking system can deepen.  A focus on remittances can also provide governments with a compelling reason to review and change those financial sector policies that have facilitated uncompetitive practices, impeded competition, and inhibited innovation.   Further, remittances can afford households an opportunity to accumulate savings, access other financial products such as loans and insurance and establish a credit history.

Fourth, financial soundness.   Remittances can flow through many channels – banking systems, money brokers, and cash couriers.  Needless to say, personal cash transfers can expose the senders and receivers to physical attack and theft, and like all financial products can be vulnerable to abuse.  As you know, the U.S. has worked for years to make sure remittance channels are not abused by criminals or terrorists, in particular through its work with the IMF, World Bank and FATF to enhance compliance with international standards.  It is in all of our interests to make formal channels more efficient and attractive for users so that legitimate flows need not go outside of these formal channels.

But striking the right balance between facilitating access to remittance services and ensuring the integrity of the financial system is extremely difficult.  Consistent with our risk-based approach to AML/CFT regulation, we have adopted a relatively light touch in the federal regulation of money service businesses (MSBs).  Nevertheless, in recent years, these businesses have faced significant difficulties opening and maintaining banking accounts in the U.S.  The banks, uncertain of the extent of their responsibility for ensuring the compliance of their customers, have shied away from this business.  FinCEN, in concert with our federal banking regulators, has responded by: producing clearer guidance for both the MSBs and the banks; conducting training sessions for the bank examiners; and it is currently assessing stakeholders' responses to a request for input to their assessment of the need for further action. 

To promote remittances, the United States has been involved in many initiatives.

· Under the U.S.-Mexico Partnership for Prosperity initiative, launched in fall 2001, Mexico and the U.S. have worked together to promote competition among private providers, expand financial literacy, and improve payment systems.  In many respects, it was through this process that we learned about the remittance market and its true importance.  The cost of transmitting remittances in the U.S.-Mexico corridor has plummeted by some 60%.  Many attribute the cost reduction to a sharp increase in competition.  A centerpiece of this effort has been the development of the Automated Clearing House (ACH) system by the Atlanta Fed and the Bank of Mexico, which connected the retail inter-bank payment systems of the two countries.  This helped teach us at Treasury about the importance of payments systems to remittances.

· Under the APEC Remittance Initiative launched in fall 2002, the APEC economies have undertaken a regional effort to examine factors that contribute to the use of informal remittance channels.  APEC brought together the public and private sector to work toward creating a more competitive environment for remittances.  The World Bank and the Asian Development Bank were significant contributors to this effort.

· Under Summit of the Americas Initiative, launched in January 2004, our aim is to create conditions to stimulate a drop in half in the cost of sending remittances by 2008 from 12% to 6% of a transaction. To this end, bilateral and multilateral efforts are being launched.  On the bilateral front, Treasury and other U.S. agencies are working to identify pilot countries.  Pilot projects in turn will focus upon strengthening financial institutions, identifying and addressing impediments to remittance flows, working with the international financial institutions (IFIs) to target assistance to promote financial sector development, and conducting civil society outreach. 

· The 2004 Sea Island Remittance Initiative was a U.S.-led Summit effort.  In the finance channel of the Summit process, the Treasury asked each G-8 country to study the role remittances play in their economies, identify regulatory and other barriers to efficient delivery of remittances, and select a remittance partner country with which it would work.  This effort put remittances on the map of the G-8 countries and quite quickly, the other G-8 countries recognized that while remittances would never dominate the headlines, they represented an important public policy issue in which finance officials could make a difference.  Treasury also conducted outreach with private sector participants on remittances with the other G-8 finance ministries.
Since finance officials are custodians of the IFIs, we thought about what gaps existed and where the IFIs could play a role.  One area was in balance of payments data.  The collection and reporting of this data varied widely across countries.  A G-8 working group with the International Monetary Fund and World Bank was set up, and it is producing good results.  The definition of personal remittances has been revised and clarified.  Guidance for countries on how to collect and compile remittance statistics will be developed by a statistical "city group" effort that is being launched next month.

We also thought about the Fund and the Bank's outstanding work on standards and codes.  As I said earlier, the more we focused on remittance issues, the more we realized payments issues were involved.  For me, this question was well encapsulated by a simple question – why could I send money virtually cost free to New Mexico, but it would cost many dollars to send that same amount of money to Mexico?
Payments systems across borders do not interface well, especially for small payments.   Furthermore, the payment systems of many recipient countries are not automated and have limited reach beyond the urban centers.  Technology can play a key role in overcoming these problems.  Some financial institutions have extended the reach of their internal electronic proprietary payment systems to overseas branches and coupled that with an account-to-account collection and delivery system.  Existing proprietary cross-border payment system operators have developed remittance specific products and services – debit cards, for example – which member financial institutions can use to offer services.  Other bodies have developed new initiatives involving proprietary cross-border payments systems.  Here, I will mention again the U.S.-Mexico ACH. 

In the U.S., we have large computer systems and can move small and large amounts of money quickly and virtually – Fedwire, CHIPs, or the retail ACH.  But the cost of transmitting funds internationally can be $30 for a $150 transmission.  Obviously that cost is a function of much more than payments systems – the sender has to go to a place to move funds and the receiver to another spot to collect funds.  Sometimes these funds are being moved to remote areas.  This can involve going through a range of correspondent accounts and hand-entering transactions.   

Given this payments dimension, we began to speak to the IFIs, the Fed, and the CPSS about developing principles for international remittance services.  As the March 2006 CPSS/World Bank consultative paper and today's conference show, outstanding progress is being made.  The paper's general principles, focusing on transparency, payments system infrastructure, the legal environment, market competition, and risk management, strike the right themes.  The paper is easily readable and digestible.  Our expectations have been exceeded.  We would like to urge all stakeholders to seriously consider these general principles and assess the need to make adjustments in their own systems.

So let me conclude by thanking Cesare Calari of the World Bank and his team, Tommaso Padoa-Schioppa, my former softball team member Tim Geithner, Marc Hollanders and others of the CPSS for their excellent work, and all of those contributors from national capitals who are here and not here today for their fine work.  In the final analysis, the focus on remittance issues by officials, such as yourselves, is important because by drawing attention to the complexities of the remittance market, putting in place the structures to reduce costs, and creating conditions for sounder banking systems, policy-makers are making a tangible difference in promoting global growth, improving the lives of poor people around the world and making a good contribution to better public policy.   

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