1 payments in the americas comparing experiences

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Payments in the Americas

Comparing Experiences

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I. Background

• In early 2002, the Federal Reserve and Banco de México got together to talk about a possible link between Fed ACH and TEF, the Mexican ACH.

• The objective was to develop a reliable, low cost infrastructure for cross border transactions between financial institutions.

• The “Partnership for Prosperity” program, sponsored by presidents Bush and Fox included this link as one of its goals.

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II. Initial agreements• As recommended by the Cross Border Council, the

service will abide by the rules, procedures and formats of each country.- Central bank regulations. - NACHA.- Cecoban TEF.

• Both Central Banks have to recover their total costs, plus an internal rate return.

• The Total cost of transactions are paid by the originator bank.

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III. The service

• The Federal Reserve offers the service under the name FedACH InternationalSM Mexico Service.

• The Federal Reserve of Minneapolis (USGO) and Banco de México (MGO) are Gateway Operators.

• We have a link only in one direction: for payments from the US to Mexico.

• There is only one modality: the US bank sends USD and the beneficiary receives MXP (Fix to Variable).

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III. The service

• The service is tailored to recurring payments and other payments that are not time critical, such as:- Government payments,- Family remittances (only for account holders),- Payrolls from companies with employees in Mexico,- Small and medium-sized businesses with cross-border

interests,- Insurance; loan & lease payments; pensions; annuities- Etc.

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IV. Operation

• The USGO sends an ACH payment file to the MGO in NACHA format.

• The same day, the USGO transfers the total amount of the payments to a MGO account in a correspondent bank.

• The MGO buys pesos from an FX operator. The rate is a standard wholesale rate published daily by Banco de Mexico minus 0.21%.

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IV. Operation

• The MGO translates the NACHA format into TEF format, with the same rate it gets from the FX operator, and sends it to TEF.

• Payments are credited to the beneficiaries at the opening of the following day.

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V. Implementation

• It takes time and much attention to detail to start a reliable and secure service.

• There was an incident with the distribution of Social Security checks.

• The Federal Reserve Bank of New York (International Direct Deposit) asked for a link for Government payments, with the FRB of New York as USGO.

• This link started operating in October 2003.

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V. Implementation

• Some of the processes in the new link were not as automatic as we would have liked.

• The link with the FRB of Minneapolis started operations on February, 2004 for commercial payments.

• The FRB of New York started sending payments as Originating Depositary Financial Institution through the FRB of Minneapolis link on August, 2004, and there is now only one channel to send payments.

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VI. FX rate

• Banco de México would rather not participate directly in the FX operation. Banco de Mexico sells the USD to a foreign exchange operator.

• The rate is a function of an interbank wholesale rate published daily by Banco de Mexico.

• We started at a 1% spread over the base rate, and now we've reduced it to 0.21%.

• With more payments, we can get a better rate.

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VII. Legal Specifications

• The USGO and the MGO developed agreements and contracts for cross border transactions:- FedACH InternationalSM Mexico Service Guide Book.

- Technical specifications

- Cross Border Gateway Operator Agreement- Price list

- Jurisdiction Agreement

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VII. Legal Specifications

• All this agreements and contracts are supported for the following regulations:- Operating Circular Number 1- Operating Circular Number 4- Operating Circular Number 5- NACHA format specifications- Cecoban TEF Rules- Circular 2019/95 of Banco de México.

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VIII. Operational Specifications

• Process for exceptions: - Rejections- Cancellations

• Notifications • Balance Reports• Advices• Tracing of operations demanded for the FRB.

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IX. Settlement

• Settlement between Gateway Operators is in USD, one banking day before the domestic settlement in Mexico, through a procedure of the Integrated Accounting System (IAS) of the FRB of Minneapolis.

• Banco de México has a US Commercial Bank as correspondent.

• There are now very few family remittances.

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X. Remittances

• There is a huge number of family remittances from the US to Mexico.• 48 million operations.• USD 16 billion a year.

• There is a program to get more Mexicans banked, with identity papers issued by consulates.

• Bansefi is trying to connect savings cooperatives with presence in rural areas, and it has a program to open accounts to recipients of remittances.

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X. Remittances

• Mexican consulates are promoting the service among potential users and are encouraging banks to offer it.

• The cost of the service is much lower than that of other options.

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XI. Pending Issues

• The Federal Reserve and Banco de México will promote USA-MX Payments.

• Payments credited in USD (Fix to Fix).• Format changes mandated by The Office of

Foreign Assets Control (OFAC).• Payments from Mexico to the US.

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