Enhancing the Efficiency of the Remittance Market in the Czech Republic: an overview of the situation and future programs

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Enhancing the Efficiency of the Remittance Market
in the Czech Republic an overview of the
situation and future programs
Ministry of Finance Remittance Seminar Prague,
Czech Republic February 24, 2008 Donald F.
Terry Special Advisor Payment Systems Development
Group The World Bank
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Presentation structure

• A. The growing attention to International
  Remittances the CPSS-World Bank General
  Principles
• B. The remittance market in the Czech Republic
  Overview
• C. Enhancing the efficiency of the remittance
  market in the Czech Republic

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Development and Implementation of the General
Principles for International Remittance Services
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• The General Principles are a multilateral effort
  to address a global challenge

Request from G-8
In 2004, The World Bank was asked by the G-8 to
take the lead in an international effort to
improve remittance services. The Payment Systems
Development Group worked with the Bank for
International Settlements to address the request
for better remittance services.
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• The General Principles are a multilateral effort
  to address a global challenge

Chairs World Bank PSDG and CPSS Members AMF,
ADB, Central Banks of Brazil, Europe, Germany,
Italy, Mexico, Philippines, Sri Lanka, Turkey,
EBRD, HKMA, IADB, IMF, Fed Board of Governors,
Fed of New York, World Bank Secretariat World
Bank PSDG, CPSS, DFID
The World Bank PSDG and the Bank for
International Settlements CPSS chaired the Task
Force that developed the Principles. The
Principles have been endorsed by the G-8, G-20
and the Financial Stability Forum
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An international remittance is a cross-border,
person-to-person payment of relatively low value

• Typically by migrant workers to their families.
  Especially from developed to developing countries
• Person-to person, low value - ie not commercial
  or wholesale payments
• Domestic remittances also exist
• Recurrent - but typically made by individual
  transfers (eg not by standing order)
• Typically credit transfers
• For remittance service providers (RSPs), often
  indistinguishable from any other retail
  cross-border transfers

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• Premise is that best way to reduce cost is to
  have competition as far as possible
• The principles are not a call for remittances to
  be regulated. Sometimes it may be more important
  to remove existing regulation
• They do not aim to set specific service levels.
  Low price may often be more important than high
  level of service

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• Purpose is to tackle weaknesses in the market
  that inhibit competition (including poor
  regulation)
• Remittances are part of an individuals access to
  financial services
• A good remittance product improves value to the
  user in the short term and access to other
  financial products in the long term
• There are no standard solutions

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Issues with remittances

• Usually expensive
• Sometimes slow
• Sometimes inconvenient
• Occasionally unreliable

Focus here is on payment system aspects (not
developmental, immigration, balance-of-payments
or other aspects)
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GP1 The market for remittances should be
transparent and have adequate consumer protection

• Transparency means information about the service
  (price, speed, fx charge etc). Transparency
  promotes competition and should drive down prices
• Especially important for remittances
• Access problems for users
• Complex to work out price
• What is appropriate consumer protection? Most
  important are probably error resolution
  procedures (RSPs own or national schemes).
  Beware of the cost of some possibilities!

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GP2 Improvements to payment system
infrastructure that have the potential to
increase the efficiency of remittance services
should be encouraged

• Domestic payment infrastructure.
• Remittance services usually depend to some extent
  on this. But the infrastructure may not always be
  very efficient, especially in receiving
  countries.
• Cross-border payment infrastructure.
• Greater standardisation to help STP in
  correspondent banking?
• Direct links between domestic systems as an
  alternative to correspondent banking?
• Linkages of different networks?

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GP3 Remittance services should be supported by
a sound, predictable, non-discriminatory and
proportionate legal and regulatory framework

• Does not mean special laws/regulations for
  remittances
• Sound, predictable, non-discriminatory
• and proportionate! Avoid danger of
  over-regulation. What is the problem regulation
  is meant to cure? Is regulation the best way to
  cure it?
• For key corridors, sending and receiving
  countries may want to cooperate if there seem to
  be legal obstacles

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GP4 Competitive market conditions, including
appropriate access to domestic payments
infrastructures, should be fostered in the
remittance service industry

• Importance of contestability and removing
  barriers to entry
• Avoid exclusivity conditions (as opposed to an
  agent choosing to offer only one remittance
  service)
• Are there problems with direct or indirect access
  to domestic payment systems?

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GP5 Remittance services should be supported by
appropriate governance and risk management
practices

• RSPs face financial risk (eg if liquidity is
  supplied to disbursing agents), legal risk,
  operational risk, risk of fraud, reputational
  risk
• Good governance and risk management practices by
  RSPs make remittance services safer and help
  protect consumers
• but there is unlikely to be any systemic risk
  so protection measures should be proportionate to
  the risks

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Who should take action?
Many people may need to take action. But
Remittance Service Providers and the authorities
have particularly important roles
Remittance Service Providers
should participate actively in the application of
the general principles
should evaluate what action to take to achieve
the public policy objectives through
implementation of the general principles
Public Authorities

• Form of action by authorities?

Monitoring and outreach?
Direct provision?
Catalyst/ facilitator?
Monitoring?
Dialogue?
Regulation?
More interventionist
Less interventionist
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• The General Principles have been formally
  endorsed by the G-8, G-20 and the Financial
  Stability Forum
• Both Sending and Receiving Countries have been
  urged to adopt them!!!

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• The General Principles are a multilateral effort
  to address a global challenge

Membership ADB, AMF, CEMLA, CGAP, DFID, EBRD,
IADB, IMF, UNDP, US Treasury, USAID, World Bank
The World Bank PSDG is chairing a Coordination
Group that developed Guidelines for the
application of the General Principles and
stocktaking methodology
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• The General Principles are a multilateral effort
  to address a global challenge

Examples WHF (with MIF-IADB/CEMLA), CISPI, API,
SADC, and other available tools, as FSAPs
This group has drafted a guidance note for
practitioners to use in performing assessments
based on the General Principles. It includes a
number of questionnaires and other assessment
tools.
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• The General Principles are a multilateral effort
  to address a global challenge

Assessments El Salvador (September 2006)Morocco
(November 2006) Honduras (April 2007) Haiti
(September 2007) Sri Lanka (Q1 2008) Nigeria
(February, 2008) Uganda (April 2008) Czech
Republic (May 2008) Next Brasil (March
2009) UAE (April 2009)
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• Improvements in the remittance market are
  achievable, when international and national
  authorities work with the private sector to
  achieve the goals of the Principles.
• The pilots undertaken so far have led to
  remittance market improvements, and the
  assessments developed are a good tool to provide
  recommendations and promote cooperation between
  authorities.
• The World Bank will continue to lead teams in
  implementing the principles (with an increased
  focus on Africa and South Asia within regional
  initiatives going forward)

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World Bank Remittance Price Database

• To design a refined methodology to gather
  comparable remittance price data and measure the
  economic gains from lower costs to consumers
• Increase transparency
• Increase competition
• The project will assist with the delivery of
  General Principle 1
• 120 corridors analyzed
• Next data release March/April 2009
• Available in English, French, Spanish and
  Italian. Soon in Russian and Arabic at
  http//remittanceprices.worldbank.org

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The Country Pairs (The corridors)
The Country Pairs
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Some information about the remittance market
structure and scenario in the Czech Republic
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The steps made and the future path

• The Ministry of Finance (MOF) of the Czech
  Republic requested the World Bank to support its
  efforts to enhance the efficiency of the
  remittance market in the country.
• A World Bank Team of experts visited Prague in
  May 2008 and worked very closely with the MOF
  with important contributions from Marc Hollanders
  (Special Advisor for Market Infrastructure and
  Financial Stability, Bank for International
  Settlements, and Co-Chairman of the Task Force
  that produced the GPs).
• The team had the opportunity to hold open
  discussions with several institutions of the
  public and private sector, and it has gathered
  representative opinions from different players in
  the remittance market on the current status of
  the remittance market and ongoing reforms.
• A final report was produced and was presented to
  the authorities for their consideration and
  deliberations.
• In December 2008 the MOF and the WB signed an
  agreement for the implementation of two of the
  recommendations included in the final report
• Preliminary work has begun and starting from
  summer 2009 activities will enter in the
  operative phase

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Main Features of the Market for Remittances in
the Czech Republic

• FIRST
• QUESTION

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Volume of remittances sent from the Czech
Republic in 2007
54.966.000.000 MLN CZECH CROWNS or 3.427.532.890
US DOLLARS
or 2/2.4 of the national GDP (possibly more, if
we consider the illegal market!)
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Number of migrants who are potentially sending
money
400.000! (regular migrants) ??? (200.000???)
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• Countries of Origin
• EU (in particular the Slovak Republic and Poland)
• Ukraine
• Vietnam
• Commonwealth of Independent States (Russia,
  Moldova, others)
• China
• Mongolia

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Main Remittances Service Providers (RSPs)

• Money Transfer Operators (MTOs)
• Banks
• Ceská Pošta
• Irregular/llegal channels

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Average Cost
To remit the average sum of 200 Euros, the cost
can go from 8 to 14, depending on several factors
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Enhancing the Efficiency of the Remittance
Market Applying the General Principles for
International Remittances Services in the Czech
Republic
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• General Principle 1
• Transparency and consumer protection
• The market for remittance services should be
  transparent and have adequate consumer protection.

• CURRENT STATUS
• Critical information on the market of remittances
  and the behavior/preferences of migrant
  communities is not fully available, calling for
  further investigation and research.
• Transparency on the real cost is not full, as the
  exchange rate, a relevant component influencing
  the cost of the remittances, is not yet disclosed
  in a comprehensible way for the average consumer
  under all circumstances.
• The Consumer Protection Strategy of the MoF aims
  at increasing the customers understanding of the
  main financial instruments, but is not
  specifically targeted toward the migrants and, so
  far, might have a limited impact on the issues
  related to remittances.
• The Financial Arbiters role in the remittance
  field is limited by the present restriction of
  its jurisdiction to the payments among EU
  countries.

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General Principle 2Payment system
infrastructure Improvements to payment system
infrastructure that have the potential to
increase the efficiency of remittance services
should be encouraged.

• CURRENT STATUS
• The CR is implementing the SEPA Project and it is
  now facing the task of adapting its system to the
  EU environment.
• The domestic infrastructure is well distributed
  across the country and access points and payment
  instruments are widely available. New
  technologies are in place and ready to be used
  more extensively.
• Besides a single agreement with Slovakia aimed at
  settling separately and with a special procedure
  cross border payments, there are no major links
  between the national payment infrastructure and
  those of the major receiving countries.
• The connection of commercial banks to SWIFT is
  widely available, but no direct correspondent
  relations among national and foreign banks in the
  countries of origin of migrants have been created
  so far.
• Ceská Pošta has 3,387 agencies on the territory
  and it is active on the market of remittances,
  but so far there has not been any project about
  the connection of its infrastructure with that of
  the national postal services of the major
  receiving countries.

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General Principle 3Legal and regulatory
environmentRemittance services should be
supported by a sound, predictable,
non-discriminatory and proportionate legal and
regulatory framework in relevant jurisdictions.

• CURRENT STATUS
• The CR is adapting its legal system to the acquis
  communautaire, adopting all the different
  directives the EU has produced in the field of
  the payment systems. Particular relevance in this
  moment has the adoption of the Payment Service
  Directive.
• In accordance with Act No.6/1993 Coll., the CNB
  administers payments and clearing between
  financial institutions, promotes the smooth and
  efficient operation thereof, and contributes to
  the safety, soundness and efficiency of payment
  systems and to its development.
• For the time being and until the forthcoming
  reforms will not be fully adopted and
  implemented, the CNB might not have complete
  oversight powers over the remittance segment of
  the payment system (i.e. the RSPs and the
  circuits supportig their business). Its mandate
  derives from the The Foreign Exchange Act and its
  later modifications (Act No. 219/1995 Coll. of 26
  September 1995) and not from specific payment
  system law and regulation.
• The only law specifically applicable to
  remittances is the new law on the AML regime
  recently adopted by the President of the CR.

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General Principle 4Market structure and
competitionCompetitive market conditions,
including appropriate access to domestic payments
infrastructures, should be fostered in the
remittance industry.

• CURRENT STATUS
• The presence in the country of the Office for the
  Protection of Competition, and a precise
  legislation on this issue, can be seen as a
  reassuring fact about the general level of
  competition in the country. Furthermore, the CR
  is one of the few countries where exclusivity
  agreements are not applied by the major MTOs,
  possibly as they are discouraged by the action of
  competition authorities.
• At the same time, the average cost of sending
  remittances, higher than in other European
  countries, can be an indicator of the fact that
  competition forces in the market do not play at
  their full potential.
• The high number of potential RSPs, might be
  reduced by the skeptical approach that many
  commercial banks have towards the profitability
  of this specific market.
• The national postal system, thanks to its wide
  distribution, plays a role in the market, but it
  has inadequate technological infrastructures and
  procedures to be a real competitor in the market.
  This is more evident taking into consideration
  the fact that in the last year the volume of
  transactions operated by WU using the Post office
  logistic distribution, has registered an increase
  of 50.
• The access to the domestic payment infrastructure
  is proportionally regulated and non banks
  institutions have either direct access, if they
  can meet predetermined requirements, or indirect
  access through banks.

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General Principle 5Governance and risk
managementRemittance services should be
supported by appropriate governance and risk
management practices.

• CURRENT STATUS
• In general, the adoption of manuals, codes, and
  good governance procedures and the specific
  training of the employees are required by the
  Anti-Money Laundering Law and by the Foreign
  Exchange Law and the RSPs interviewed have
  confirmed their compliance with the laws.
• Nowadays, in the Czech Republic some RSPs still
  assume credit and liquidity risks as they
  disburse the funds to the beneficiary before they
  themselves receive the necessary funds from the
  paying institution. At present these exposures
  are not deemed of systemic proportion.
  Notwithstanding the possible reputational risk
  must not be underestimated.
• In case of frauds or insolvencies the legal
  framework in the CR presents some gaps that could
  lead to the scarce protection of the consumers of
  those RSPs which are not under the supervision of
  the CNB.
• There is no structured coordination among RSPs
  and no industry code of conduct or guidelines for
  governance and risk management.

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• TO SUM UP The role of the Remittance Service
  Providers to enhance the efficiency in the
  remittance market in the Czech Republic
• CURRENT STATUS
• RSPs in the Czech Republic are generally
  transparent about the services offered, even
  though, as already mentioned, further efforts
  should be done in order to make as clear as
  possible the real impact of the exchange rate
  applied on the final cost of the transactions.
• The level of cooperation among banks or between
  banks and other RSPs in Czech Republic is not
  particularly solid. However, it is necessary to
  mention the coordination effort among 5 major
  RSPs and the Cash and Payment Systems Department
  of the Czech National Bank, aimed at discussing
  the reform of the legislation on remittance
  services.
• No Code of conduct has been produced by the
  market on all the aspects of the remittance
  business

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• TO SUM UP The role of the Remittance Service
  Providers to enhance the efficiency in the
  remittance market in the Czech Republic
• CURRENT STATUS
• Most of the RSPs are not yet organized to deal
  specifically with remittance issues, and no new
  products, marketing campaigns, and interactions
  with other business lines have been planned.
• Interviewed commercial banks, except one single
  case, seem not to be particularly aware of the
  CPSS-World Bank General Principles for Remittance
  Services and in general of the potentialities of
  the market of remittances.
• In the Czech Republic, remittance recipients are
  not generally considered to be attractive
  customers of banking and financial services.

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• TO SUM UP The role of public authorities to
  enhance the efficiency in the remittance market
  in the Czech Republic
• CURRENT STATUS
• The MoF and the CNB are at the center of the
  debate on improving remittance services and in
  the country, as regulators of the market and
  payment system overseer, respectively. Great
  interest has been shown in improving market
  efficiency and in increasing awareness about the
  GPs.
• The CNB and the Czech Statistical Office have
  innovated the methodologies applied to the
  estimation of the migrants and remittances flows.
  In doing so they have involved the Ministries of
  Labor, Commerce and Trade, Foreign Affairs,
  Education and Interior.
• The Ministry of Interior has increased its
  cooperation with foreign counterparts in the
  analysis of the migration processes and in the
  reduction of the criminal activities linked to
  it. Same work has been done by the Financial
  Analytical Unit of Ministry of Finance in the
  field of AML and CFT international cooperation.

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• TO SUM UP The role of public authorities to
  enhance the efficiency in the remittance market
  in the Czech Republic
• CURRENT STATUS
• The CBN has oversight powers on the payments
  system of the country. The central bank might not
  have all the tools at the moment to oversee fully
  this segment of the National Payments System
• An unstructured and sporadic cooperation has been
  noticed among national authorities and
  international organizations, NGOs and foreign
  counterparts (e.g. foreign Embassies and
  Consulates in Czech Republic) to carry out
  systematic educational and awareness campaigns
  with migrants and with their families abroad on
  the opportunities offered by the market of
  remittances.
• The dialogue with the private sector does not
  seem sufficiently active. For example, there are
  no cooperative bodies for this segment of the
  payments system.

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NEXT STEPS

• SURVEY ON THE FEATURES OF THE MARKET FOR
  REMITTANCES
• Starting next spring the WB will begin collecting
  data among the most important communities of
  migrants in the country, about the ways in which
  the money is sent abroad
• The project will involve foreign embassies and
  consulates in the country and will be undertaken
  through a specific training of Czech residents,
  creating an opportunity for transfer of technical
  and theoretical background on the issue
• The results of the survey will be analyzed and a
  detailed report with specific statistical
  information and figures will be published in
  autumn 2009

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NEXT STEPS

• NATIONAL REMITTANCES PRICE DATABASE
• The Ministry of Finance of the Czech Republic has
  agreed on creating a national database on the
  cost of sending money abroad, in line with the
  decision already taken by other national
  governments and under the unifying methodology of
  the World Bank
• The WB, during the next summer of 2009, will
  oversee the process to select the company in
  charge of the data gathering, paying particular
  attention to the frequency of the updates
• By the end of the following autumn, the WB will
  oversee the collection of new data to populate
  the database according to a specific methodology,
  already applied to the Remittances Price
  Worldwide database, launched in September, 2008,
  making possible the full integration of the Czech
  Database with those already existing and in
  process of being created
• The WB will also give support in the online
  publication, by selecting and overseeing the
  companies to be appointed to this specific task
• The database will be online not later than the
  spring of 2010. Specific workshops will be
  organized at the end of the activities in order
  to raise awareness by targeting migrants and
  their families

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• Thank you
• Donald F. Terry
• Special Advisor
• Payment Systems Development Group
• Donaldfterry_at_gmail.com