Michael Grover - Assistant Vice President, Community Development
Jimmy Nguyen - Community Affairs Intern
Published November 1, 2008 | November 2008 issue
In 2007, workers of Mexican descent who live in the U.S. sent roughly $24 billion to Mexico through remittances, or transfers of money. These transfers are an important source of income for Mexico's communities and families and amount to an estimated 2.7 percent of Mexico's gross domestic product.1/ Remittances to Mexico have grown by 170 percent from $8.9 billion in 2001, but have begun to level off recently.2/
According to a 2003 Pew Hispanic Center report on Latino remittances, most immigrants send money home once a month in transactions that average less than $300. Mexican-American workers in the U.S. have typically sent their remittances to Mexico through money transfer operators (MTOs) such as Western Union and MoneyGram. According to the Pew Hispanic Center report, remittance senders used these two MTOs for 70 percent of their transfers. Senders used informal, less secure means of transferring money, such as through the mail or by hand, 17 percent of the time and remitted money through banks just 11 percent of the time.3/
The fees and costs associated with multiple, small-dollar remittances can be significant and can reduce the overall amount of money sent home. Citing data from the World Bank, the University of Iowa's Center for International Finance and Development noted in a 2007 report that MTOs channeling money from the U.S. to Mexico generally charged higher fees for lower dollar amounts. For example, MTOs charged more than 10 percent for transfers of $100, as compared to less than 3 percent for $500.4/
Recently, financial service providers have developed alternative strategies for lowering the cost of remittances for Mexican workers in the U.S. One alternative is the Directo a México® initiative sponsored by the Federal Reserve Banks and Banco de México, Mexico's central bank. The principal aim of the initiative is to help financial institutions in the U.S. compete more effectively in the remittance market. Financial institutions in the U.S. that offer Directo a México generally charge lower transaction fees than the big MTOs charge. As the initiative gains ground and market share, its fee structure has the potential benefit of increasing the amount of money families in Mexico receive from their relatives in the U.S. Given how the Directo a México program operates, it could have an added benefit, too: increasing the number of Mexicans and Mexican-Americans who use the formal banking system.
In 2001, Banco de México and the Federal Reserve Banks agreed to study the possibility of linking the two countries' payment systems by creating an efficient, interbank mechanism that would be available to all financial institutions in both countries. The service was proposed to improve access to the payments system network for financial institutions on both sides of the border. It also aligned with the Federal Reserve Banks' mission to ensure an efficient, effective, and accessible retail payments system. From this partnership, the FedACH (Federal Reserve Automated Clearinghouse) International® Mexico Service, now known as Directo a México, was created in 2003. Marketing of the new service to financial institutions in the U.S. began in the summer of 2005.
The main selling points of Directo a México to U.S. financial institutions and the Mexican-American customers they serve are the service's security, speed, and low cost. Directo a México lowers the cost of sending a remittance in two important ways. First, financial institutions can make money transfers through the service with a very low, per-item surcharge of $0.67. Second, the service offers a competitive exchange rate for converting dollars into pesos, regardless of the amount transferred, that is generally lower than the exchange rate charged by MTOs. For example, the Federal Reserve Banks estimated that the service would save 55 pesos (approximately $5) on a $350 remittance transfer, in comparison to the fee charged by a typical MTO.5/ While financial institutions charge an add-on fee to their customers for using Directo a México, the overall per-transaction cost of the service is generally at or below $5, or roughly half the total fee charged by most MTOs.6/
One of the key requirements of the program is that both the sender and receiver of the remittance need to have a bank account. Bank-to-bank transfer services are a more secure method of transferring money across the border than informal means such as the mail. Additional advantages of using the service include the ability to automate recurring transfer payments and the fact that money is available to recipients in Mexico on the next banking day. In addition, the Directo a México program helps financial institutions overcome the English-Spanish language barrier. The service provides Spanish-language promotional templates for brochures, pamphlets, and other marketing materials that enrolled U.S. financial institutions can use.
One challenge for Directo a México is that the market for bank-to-bank transfers may be limited by the relatively small proportion of households in Mexico with bank accounts. Several studies suggest that roughly 30 percent of Mexican households have bank accounts, compared to roughly 64 percent7/ in the U.S. To help overcome this hurdle, the Federal Reserve Banks and Banco de México collaborated with BANSEFI, a bank owned by the Mexican government, to create the Beneficiary Account Registration (BAR) web site. The site allows financial institutions in the U.S. to generate an 18-digit bank account number, also known as a CLABE, at a BANSEFI branch. The financial institution can use Directo a México and the CLABE to transfer funds from the U.S. to Mexico. The web site enables originating financial institutions in the U.S. to initiate a Mexican bank account at any of BANSEFI's branches, which are typically located in rural and low-income areas throughout Mexico. The beneficiary must then go to the BANSEFI branch, or its affiliated financial institutions, with proper identification to formalize the account. The BAR web site promotes financial inclusion by encouraging the otherwise "unbanked" Mexican citizen to open a bank account and participate in the country's financial system.
To date, more than 380 financial institutions in 42 states have enrolled in Directo a México, compared to just six institutions when the service was launched in 2004. In the Ninth Federal Reserve District, 29 institutions have signed on. The earliest adopters include St. Paul Federal Credit Union, Franklin National Bank, Bank Cherokee, Arcadia Credit Union, and Royal Credit Union.
According to Elizabeth McQuerry, assistant vice president of the Retail Payments Office at the Federal Reserve Bank of Atlanta, the prevalence of credit unions on that list is no surprise.
"Directo a México is a natural fit for credit unions, because they are community-focused institutions that work to build and maintain strong relationships with their members. They also tend to be physically located in the neighborhoods of their member base."
Of the 29 Ninth District institutions that have adopted Directo a México, St. Paul Federal Credit Union (FCU) in St. Paul, Minn., is the market leader in terms of the number of members using the service and the average dollar amount of their transactions. At present, approximately 70 customers use the St. Paul FCU Directo a México service, making a total of 30 to 40 remittance transfers a month and averaging about $600 per transaction.
St. Paul FCU officially kicked off its Directo a México service in July 2007 at a ceremony attended by 200 community members and officials, including representatives from the The Consulate of Mexico in St. Paul, the Mexican government, Banco de México, the Federal Deposit Insurance Corporation, the Federal Reserve Banks of Atlanta and Minneapolis, Caja Morelia Valladolid (a Mexican credit union), and Minnesota elected officials.
According to St. Paul FCU Branch Manager David De Santiago, encouragement from the consulate played an important role in his institution's involvement in the program.
"The Mexican consulate helped identify that most of our money transfers in the St. Paul area are to one particular city in Mexico, the city of Tarímbaro. It also identified the credit union branch that most of the beneficiaries use in Tarímbaro, which is Caja Morelia Valladolid. St. Paul Federal Credit Union shared this information with BANSEFI, and BANSEFI in turn added Caja Morelia Valladolid to the BAR web site and initiated a networking relationship between the two institutions."
Thanks to the Directo a México promotional templates, St. Paul FCU is able to market the service using monthly newsletters, colorful brochures, and press releases. The credit union charges a flat fee of $3 per remittance, regardless of the amount transferred. Since it began offering the service, St. Paul FCU has seen Directo a México serve as an entry product that enables customers to move into a fuller, traditional banking relationship. According to De Santiago, "Directo a México is a useful tool to pull in customers, but it is up to us to keep them as customers and introduce them to all the other traditional products the credit union has to offer."
Since the inception of Directo a México, participation in the service has steadily climbed. Now, more and more financial institutions are expressing an interest in entering the remittance market. According to McQuerry, "We've seen significant increases in payments volume since the creation of Directo a México, and new depository financial institutions sign up to participate in the service every month. Including government items, Directo a México has processed more than 1.3 million items to date, with zero payments lost."
Still, the true test of the service lies ahead. One of the key challenges for Directo a México will be to gain market share against the more established remittance providers, like Western Union and MoneyGram. It also remains to be seen whether the new service will increase the number of Mexicans and Mexican-Americans who leave the ranks of the unbanked. Early evidence suggests that as word of the new service spreads and more financial institutions sign on, the potential benefits of Directo a México may indeed be realized.
For more information on Directo a México, visit www.directoamexico.com.
Jimmy Nguyen served as a Community Affairs intern at the Federal Reserve Bank of Minneapolis in the summer of 2008. He is currently pursuing a bachelor's degree in finance and economics at the University of St. Thomas.
1/ Mexican remittance estimates for 2007 are from the Multilateral Investment Fund. Gross domestic product estimates for the same year are from the International Monetary Fund.
2/ Multilateral Investment Fund.
4/ Enrique Carrasco and Jane Ro, Remittances and Development, Center for International Finance and Development, University of Iowa, June 2007, http://www.uiowa.edu/ifdebook/ebook2/contents/part4-II.shtml.
5/ Federal Reserve estimates based on exchange rate fees from an Appleseed report, Creating a Fair Playing Field for Consumers: The Need for Transparency in the U.S.-Mexico Remittance Market, December 2005. Available at http://appleseeds.net/Portals/0/Documents/Publications/USMexicoRemittance.pdf.
6/ Federal Reserve estimate, 2006.
7/ Authors' calculation using household estimates from the Center for Financial Services Innovation's Underbanked Consumer Study Fact Sheet, June 2008, and the U.S. Census Bureau's 2006 American Community Survey.