personal finance forum

In 2001, the U.S. Federal Reserve and Banco de México embarked on a study of how to link the neighboring countries' payment systems by creating an inter-bank mechanism available to all financial institutions in the United States and Mexico. The resulting platform was introduced in 2003 as FedACH International Mexico Service. In 2005, the Fed began marketing the service known as Directo a México to U.S. financial institutions.

Directo a México allows U.S. financial institutions to provide a fast, cheap and secure account-to-account or account-to-cash money transfer service from the U.S. to Mexico. The individual sending money must hold an account at a participating bank or credit union in the United States. The recipient in Mexico may receive payment either in a bank account or as cash at any TELECOMM-TELÉGRAFOS branch. When the program was initiated, the beneficiary in Mexico was also required to hold a bank account.

Directo a México's website outlines the advantages of using its service to send money from the U.S. to Mexico. The average cost to send $350 via a traditional money transfer company is $10 plus a $6.50 foreign exchange fee. To transfer the same amount via Directo a México, the sender pays an average cost of $3 plus a foreign exchange fee of $0.70, an average total savings of $12.80. A transfer of more than $2000 will carry the same transfer costs at one of the best foreign exchange rates. Directo a México estimates savings of $82 in fees for a transfer greater than $2000. In addition to cost advantage, the service provides next business day delivery of funds, fee certainty, transparency and security.

One of the Fed's chief objectives when developing a cross-border payments system was to enable banks and credit unions to market Directo a México as an entry product to unbanked Mexicans in the U.S. In other words, traditional financial institutions could target potential customers by offering them a cost-effective remittance product, then convert them to banking customers.

This approach has seen limited success. Although many U.S. banks and credit unions now offer Directo a México, the program has not been able to wrestle market share from the leading money transfer companies. Similarly, Bank of America introduced a remittance service, SafeSend, with the intention of attracting underserved Latinos and converting them to retail customers. This too was not very successful.

The inability of Directo a México to significantly penetrate the U.S.-to-Mexico remittances market underscores the difficulty of bringing unbanked Hispanics into the conventional banking system. Yes, remittances are driven by convenience and the traditional money transfer companies continue to offer the most convenient service. But most unbanked and underbanked Hispanics distrust banks and fear giving up anonymity for the limited benefits of being a low-income banking customer.

Directo a México is a great service. It's a shame that more senders of money to Mexico do not use the central banks' system. The program's inability to impact the unbanked problem in our country indicates that a more comprehensive approach is needed. In addition to leading with services like cash checking and remittance service, banks must align with relevant community organizations and teach financial literacy. Community-based, culturally-sensitive education is the most effective way to bring the unbanked into the banking system.