US Axes Low-Cost Cross-Border Service Due To Low Adoption

February 27, 2023
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The US Federal Reserve has announced the end of its little-known international ACH service called FedGlobal to Europe and Canada in the coming months.

The US Federal Reserve (the Fed) has announced the end of its little-known international ACH service called FedGlobal to Europe and Canada in the coming months.

As per the announcement, US banks will be able to send money to Europe until April 27 and receive transfers from there until July 31.

The Canadian service will end roughly two months after that, accepting payment orders from the US until June 30 and processing money originating from Canada until September 29.

The Fed said it made the choice after “thorough consideration and evaluation” without giving a particular reason, but VIXIO PaymentsCompliance understands that the decision was made due to low adoption and the cost of maintaining the service.

FedGlobal enables low-cost efficient cross-border payments to 33 countries, including the UK, 29 other European countries, Canada, Mexico and Panama.

Only last May, Cheryl Venable, chief of payments operations at the Atlanta Fed, spoke of the potential expansion of FedGlobal to new geographic areas, such as Asia-Pacific, South America and the Indian region.

Now the Fed has announced that it will end FedGlobal in Europe and Canada, although it will continue to offer the service in Panama and Mexico.

FedGlobal, a low-cost cross-border A2A solution

FedGlobal is an international ACH transfer directly between a US bank and another bank in one of those 33 countries without the need for an intermediary.

It claims to be a lower-cost solution that cuts beneficiary deductions, improves transparency for customers, provides consistent delivery times and is available for institutions of all sizes.

It is typically described as an ideal solution for lower-value transfers (those below $10,000).

Compared with wire transfers, where the average fee for participant banks stands at $40 and payment processing typically takes two to five business days, FedGlobal payments have a $5 fee and go through within one to three business days.

In a 2015 report, the regulator cited a bank user calling FedGlobal “a game changer for the industry”, while another user said the transparency the Fed provides “has made it easy for us to meet our compliance obligations”.

The service allows for various small recurring cross-border payments, such as social security and other benefit payments. It also allows business transactions, such as vendor payments, and consumer transactions, such as bill payments and remittance transfers.

It offers participating institutions three different options for currency exchange. Banks may choose to convert US dollars to the destination currency based on a competitive exchange rate, or they may opt to make same-currency transfers either in US dollars or a foreign currency.

In the same 2015 report, the Atlanta Fed, which is the gateway operator of FedGlobal in the US, estimated that financial institutions could earn nearly $54,000 in revenue on the hypothetical processing of 1,000 transactions, each worth $5,000, compared with a much slimmer $8,400 gain in case those were processed via a wire transfer.

This does not mean that consumers need to pay more in fees. In fact, the report estimates an average $55-$90 cost to the sender on a $5,000 transfer in the case of using FedGlobal, compared with the average $125-$255 fee in the case of a wire transfer.

Despite stated benefits, FedGlobal did not take off

Since launch, the Fed has continuously monitored the level of adoption of the service and worked to create tools to encourage uptake.

In 2013, when concerns arose about the impact of new post-financial crisis consumer protection rules for remittance services, the Fed took the initiative and created a white-label solution to facilitate compliance with the disclosure and reporting obligations.

To make the service more attractive in other jurisdictions, particularly in Latin America, the central bank set up a service called account-to-receiver (A2R), which allowed people without a bank account to cash out at specific non-bank locations.

However, A2R processed only a few hundred payments in its first couple of years. By 2015, the Fed decided to shut down the service, acknowledging that the lack of consumer demand limited the overall benefit of the service.

Similarly, and despite strong growth, FedGlobal has failed to attract significant adoption over the last decade, representing only a small part of the total international ACH volume in the US.

According to the latest available numbers, the total number of transactions in 2018 reached 172,000, a 293 percent increase compared with 2010, while total value jumped to $6.1bn in the same period, up 1,097 percent.

The Fed explained that much of that uptake could be attributed to the Canadian and European services. Combined, the two regions accounted for 90 percent of total transactions and 99 percent of total value.

Despite its growth, transfers through FedGlobal represent only 0.21 percent of the total international ACH transactions processed in the country, a factor likely to have contributed to the regulator’s decision to end the service.

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