how does cross-border remittances / money transfer work

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Explanation of Cross-Border Money Transfer!!

Traditional Model & Pre-Pay (Pre-fund) Model

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Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The traditional (i.e. simplest) money-transfer model.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

In the traditional model, a User walks into an Agent Network premises and user either Cash or some other payment instrument to pay for a Remittance.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Through out the day, various customers come to the various agent locations and put up their money for the remittances to be sent across.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

At the end of the day, the MTO (Money Transfer Operator) takes all the money, from all the Agents (who essentially have a deposit with the MTO) and pools everything into a singular transaction.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Along with all the money that needs to be remitted across, the MTO also prepares a file that has the instruction set on how to break down the remittances to the individual orders that came in for distribution. !This file is prepared for the Settlement Bank in the Beneficiary Territory.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

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Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Remitting MTO emails (or FTPs) the File across to the Beneficiary MTO.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The money is then shipped off by the MTO to the Settlement Bank that the MTO has (on the Remitting Side the Settlement Bank is essentially the Bank that the MTO is working with). !As not all Banks handle remittances clients, this is why the nomenclature assigned to the banks that do work with MTOs.

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Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Settlement Bank then initiates a SWIFT Wire transfer to be sent across to the Beneficiarys Settlement Bank, usually through an intermediary, known as a Correspondent Bank (which will have two elements: !The Send Side Bank (known as Remitting Bank) the Receive Side Bank (known as the Receiving Bank).

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Via the SWIFT (or other network) the money is sent across the border and the accounts of both the Remitting Bank and Receiving Banks are adjusted for the money transfer. !By this time a day or two has elapsed

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Receiving Bank then informs the Settlement Bank (which is the final destination) that your Money in US Dollars has arrived and as per todays rate, I am now giving you the local currency equivalent in say Pakistan Rupees. !The US Dollars are surrendered to the Central Bank, improving the economy, whilst the local currency is provided to the Settlement Bank.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

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Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Settlement Bank on the Beneficiarys Side then informs its client, the MTO, that they have received the money and it is now available for use in the local denomination (in this example, it is in PKR - Pakistan Rupee).

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The MTO then starts to distribute this money out, via either direct bank deposits or Agent COC (Cash Over Counter) payments thereby completing the Remittance cycle.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The MTO then starts to distribute this money out, via either direct bank deposits or Agent COC (Cash Over Counter) payments thereby completing the Remittance cycle.

Hey did you get the money I sent?

Yup! I just got it. Thanks!

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

This example was that of a batch-process, where the two MTOs are basing their transactions on trust. The two MTOs do not interface or integrate with each other in any manner. The only common denominator is the file-sharing they do to break down the remittance and disburse them.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The second element of trust here was the money. Until and unless the Beneficiary MTO did not receive the money from the Remitting MTO, they did not distribute any remittances. This example can best be summed up as upon realization of funds on the receiving end

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money TransferRemitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

What happens when both the parties can trust each other with money in advance? How will that change the game?

!The Pre-Pay (or Pre-Fund) Model.

?Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Now, lets look at the same scenario where a Remitter wants to send out a Remittance, and how it differs using the Pre-Pay (or Pre-Fund) model.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Sending MTO places an advance deposit with the Receiving MTO. Under this arrangement, they agree to a floor price, lets assume US$ 100,000. This way, US$ 100,000 would always be available to the Receiving MTO. The currency is held in US Dollar by the receiving MTO and is not converted to the local currency component (yet).

US$100,000

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

A User walks into an Agent Network premises and user either Cash or some other payment instrument to pay for a Remittance. Lets say the amount they want to transfer is US$ 1,000

US$ 1,000 to !send to Pakistan

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Conversion Rate as provided by the Receiving Banks Treasure Department for the day is 1US$ = 100 Pakistan Rupees

US$ 1,000 to !send to Pakistan

1US$ = 100 PKR

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Let us also assume the MTO/Agent will split this transaction cost 50/50 and the cost to transfer is US$ 15.00

US$ 1,000 to !send to Pakistan

1US$ = 100 PKRUS$ 15.00

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

So the accounting would look like this

US$ 1,000 to !send to Pakistan

1US$ = 100 PKRUS$ 15.00

Funds to transfer: US$ 1,000!Cost to Transfer Funds: US$ 15.00!Total Amount Paid: US$ 1,015.00!Exchange Rate: 1US$ = 100 PKR!Amount To Be Received by the Recipient: US$ 1000 x 100 = PKR 100,000!The Fees for the transfer (US$ 15.00) is not converted.!As per US Law, the complete breakdown of the transaction, including the exchange rate and what the beneficiary would receive has to be provided at the time of the transaction to the person sending the funds.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Remitting MTO sends instructions via a real-time system (if integrated) or off-line message (if not integrated) to Beneficiary MTO to Pay US$ 1,000 to the Beneficiary from the Pre-Pay account and use the conversion rate of US$ 1 = PKR 100 and credit the amount immediately.

US$ 1,000 to !send to Pakistan

US$100,000

Deducted US$ 1000 from PrePay Account and!do a direct account credit for Beneficiary.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

MTOs Receiving Bank then forwards the money in Pakistan Rupee after conversion to the Settlement Bank for direct account credit to the Beneficiarys account

US$ 1,000 to !send to Pakistan

Pre Fund Account: US$100,000!Deduct Payout: US$ 1,000!Balance: US$ 99,000!Exchange Rate: US$ 1 = 100 PKR!Transfer to MTO Account for further!credit to Beneficiary account:!PKR 100,000

Pakistan Rupees: 100,000 deposited!into Beneficiarys Account.

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

With the transfers completed, this is what the status looks like right nowthere are two elements missing???

Paid US$ 1,015

Commission: US$ 7.50

Commission: US$ 7.50

PrePay Account Balance:!US$ 99,000

Received: PKR 100,000

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The US$ 1,000 that was received by the MTO in the Remitting country. That needs to be sent across to the PrePay Account to level (or top-up) the balance.

Paid US$ 1,015

Commission: US$ 7.50

Commission: US$ 7.50

PrePay Account Balance:!US$ 99,000

Received: PKR 100,000

US$ 1000.00 ???

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The Receiving MTO makes money on the Exchange Rate. The Actual exchange rate may be 1 USD = 102 PKR - so the MTOs Receiving Bank will quote Rs. 100 as the exchange rate and pocket Rs. 2 x (transfer amount) as its income, which in this case would be Rs. 2 x 1000 = Rs. 2,000 as income.

Paid US$ 1,015

Commission: US$ 7.50

Commission: US$ 7.50

PrePay Account Balance:!US$ 99,000

Received: PKR 100,000

How does the Receiving!MTO make Money?

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

The last open item left is to ensure the US$ 1,000 that is residing with the Sending MTO to be sent to the Receiving MTOs Bank via SWIFT Transfer.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)

US$ 1,000 Sent across via SWIFT

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.

Cross-Border Money Transfer: Pre-Pay (Pre-Fund Model)Remitting Territory Beneficiary Territory

Agent!Network

Remitting!Bank

Agent!Network

Receiving!Bank

Settlement!Bank

Settlement!Bank

MTOMTO

Once all funds have been settled and all payments sent across, this is how the eco-system would look like.

Paid US$ 1,015

Commission: US$ 7.50

Commission: US$ 7.50

PrePay Account Balance:!US$ 100,000

Received: PKR 100,000

Final Position

Commission: Rs. 2,000

Faisal Khan (Payments Consultant) http://about.me/faisal.khan (c) Copyright 2013-2014. Faisal Khan & Company. All Rights Reserved.