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

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

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 Presentation structure

Development and Implementation of the General Principles for International Remittance Services

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.

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

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

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

Purpose is to tackle weaknesses in the market that inhibit competition (including poor regulation) • Remittances are part of an individual’s 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

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)

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!

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?

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

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?

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

Many people may need to take action. But Remittance Service Providers and the authorities have particularly important roles: Who should take action? 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

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!!!

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

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.

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)

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)

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

The Country Pairs The Country Pairs (“The corridors”)

Some information about the remittance market structure and scenario in the Czech Republic

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

Main Features of the Market for Remittances in the Czech Republic • FIRST • QUESTION:

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!)

Number of migrants who are potentially sending money: 400.000! (regular migrants) + ??? (200.000???)

Countries of Origin: • EU (in particular the Slovak Republic and Poland) • Ukraine • Vietnam • Commonwealth of Independent States (Russia, Moldova, others) • China • Mongolia

Main Remittances Service Providers (RSPs) Money Transfer Operators (MTOs) Banks Česká Pošta Irregular/llegal channels

Average Cost To remit the average sum of 200 Euros, the cost can go from 8 to 14%, depending on several factors

Enhancing the Efficiency of the Remittance Market: Applying the General Principles for International Remittances Services in the Czech Republic

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 Arbiter’s role in the remittance field is limited by the present restriction of its jurisdiction to the payments among EU countries. • General Principle 1 • Transparency and consumer protection • The market for remittance services should be transparent and have adequate consumer protection.

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. • Česká 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.

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.

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.

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.

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

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.

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.

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.

NEXTSTEPS • 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

NEXTSTEPS • 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

Thank you Donald F. Terry Special Advisor Payment Systems Development Group • Donaldfterry@gmail.com

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