Dodd-Frank requires banks to disclose cross-border payment costs in advance

Dodd-Frank requires banks to disclose cross-border payment costs in advance

Bank of America Merrill Lynch has launched a service aimed at helping smaller banks to cope with Dodd-Frank rules for US cross-border trades.

Under Dodd-Frank Remittance Regulation 1073, payment service providers are required to disclose all the fees that would apply to a cross-border transaction, including fees at the beneficiary bank and any relevant taxes, to the customer in advance.

The rules are problematic for financial institutions, partly because of the difficulty of working out some of the components in advance. For example, the rate of currency exchange can be virtually impossible to pin down in advance. The exchange could take place in the US, but if the currency denomination of the recipient account is unknown the transaction will be carried out in US dollars and therefore may still need to be converted. In addition, taxes may differ even between different provinces in the recipient country.

“For example, if a German customer is charged credit fees by their bank, that’s done in euros – but the payment service provider has to estimate the cost, and it may differ depending on the recipient bank and a whole host of other factors,” said Greg Murray, head of US dollar wire and clearing products, global transaction services at BAML. “Smaller banks may struggle to find the resources to deal with these requirements – and that’s where we can help.”

In response, BAML has created a database of fee and tax information, which it then extends to client banks through an API web service, BAML Information Exchange for Payments. BAML also operates a white label web application FXtransact White Label, which banks can use to enter the data relating to a cross-border transaction, and BAML will fill in the fee and tax details for them, and provide the disclosure form required by the Dodd-Frank regulation.

The service is currently being implemented by clients. BAML will not charge a separate fee for the service; instead it will be included depending on which package its customers have chosen.

“By adopting our solutions, our clients have the ability to make payments within the new regulatory framework in more than 140 currencies, including the U.S. dollar, across 200 countries and territories,” said Murray.

Other challenges posed by the new rules include the provision that if a consumer makes a mistake and submits the wrong details for a transfer to their bank, and the bank carries out the instruction as requested, the customer is not liable for the mistake – instead the bank is required to rectify the situation. The measure has met with strong opposition from financial market participants, who argue that it is fundamentally unsound.

“We believe this could be costly for the industry and potentially open the door to fraud,” said Murray.

However, market participants believe that regulators may modify this provision in the final rule.

The revised final rule on Dodd-Frank 1073 is due to be released in the next few months.