Providing a zero-cost payments system using virtual gift cards

Date: 16 Mar 2014 Comments: 0

RTgiftIn designing a global system to ensure instant, cost effective and fully auditable individual transfers of funds across national borders, RTpay – a non-profit transaction processing and tax advisory company – is proposing an innovative new approach to low denomination global transfers, particularly for the unbanked and under-banked.

In the ‘RTgift’ model, actual transfers of funds are minimized by using an offsetting process based on the transfer of ‘virtual gift card’ value. Under this model, transactions become purely domestic for the purposes of regulation.

Background

It has become apparent that banks are not prepared to support most Money Transfer Businesses (MSBs) in facilitating international remittances due to the manner in which Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulations are applied to every transaction, no matter how small.  This situation has resulted in many banks withdrawing support from the market altogether or imposing unrealistic conditions, driving many international transactions into unlicensed or black market channels which encourage illegal activity and are impossible to monitor or control.

The remaining services typically impose very high fees – as much as 20% on some transactions when FX markups are also considered – and these costs are disproportionately felt by those least able to afford them.

While it is not desirable to ease the AML and CFT regulations on large-scale or very frequent transactions, there is a need for a simple and cost-effective service for those wishing to send money home, in particular for the unbanked who may not have sufficient formal identification to satisfy a bank’s KYC requirements.

Banks require clear guidance before they will commit to re-enter a market that has cost them dearly. To that end, we are looking for regulators to provide a clear ruling to approve the RTgift system processes outlined below, which are designed to enable low cost, auditable small value transfers using an electronic gift format, with tight controls against misuse.

RTgift system outline

The RTgift system is designed in such a way that the financial flows are domestic transactions in both the sender’s country and the recipient’s. Funds collected as gifts from the sender’s country are offset against purchases of goods and services from that country.

Higher net worth individuals in other countries who wish to purchase goods from the sender’s country can do so by purchasing an electronic gift. Funding from these buyers is used to settle to gift recipients in the same country in local currency. In this way the less wealthy pay no fees, while the buyers receive good value from the provision of convenient guaranteed-price transactions.

RTgift

By moving to domestic transactions, the RTgift system operates in a manner which lies outside the scope of existing remittance regulations – while nevertheless offering an even greater level of security, checks and auditable information. Using the RTgift system, every transaction would be checked and verifiable in real-time, with credit-card style fraud alerts flagging potential problems and instantly blocking questionable transactions where necessary.

We recognize however that regulations are constantly updated and redefined, and there is a danger that new regulations or interpretations could easily be introduced at any time that would prevent the effective operation of such a system. Banks will be understandably reluctant to be involved in the system unless they receive positive confirmation on the regulatory treatment of electronic gift cards, from which they can positively identify a clear approval for such business.

Our view, based on meetings and communications with a number of stakeholders, is that aid agencies and NGOs in particular are keen to have available a process which is approved by regulators and which can open up financial corridors to the neediest in many countries.

The intention is not to bypass regulations which have been established to protect against criminal activity; on the contrary we are extremely supportive of this aim and will work to ensure that all possible precautions are in place to support this. However we do believe there is a need to facilitate the cost-effective sending of family gifts of small, regular amounts where there is only limited information on the participants.

The RTgift system will closely monitor and report on multiple low value transactions, with a fixed maximum of number of counter-parties and limits on the size and frequency of transactions where there may be little formal identification of the gift giver and recipient.

Business model

By managing the environment and minimizing risk, we are able to offset transfers from family members against purchases by high net worth individuals; this means that gift transfers of relatively small value and frequency can be made at zero cost for both sender and recipient; no commissions, fees of FX markup on either side of the transfer.

As a non-profit group, we believe that this offsetting will help to produce a genuine narrowing of the rich/poor divide. At the same time, by working with local commercial partners in each country, there is also the opportunity for substantial income generation.

Given the current size of the world market for remittances, estimated as over $500 billion, a reduction in costs to the user from an average of 10% down to zero can be seen to be a significant factor if applied successfully throughout the world.

The target of many international organizations, including the World Bank, G20, United Nations and many charities, is to reduce costs to less than 5%. We regard this target as fully obtainable, even when the recipients wish to convert funds to cash. However our aim, in concert with groups such as the Better Than Cash Alliance (BTCA), is to incentivize the continued use of an electronic payment flow throughout the entire economic process, minimizing the use of cash wherever possible. To this end, incentives are provided to make the transaction flow electronic from end to end – from initial loading to final purchase.

The RTgift system provides an opportunity for governments to be able to use a single clearing structure for all domestic payments to and from unbanked and under-banked citizens, at a zero cost to all. The system provides a vehicle for government benefits, aid agency support, payroll and gifts all linked into a single electronic account, from which the account holder can make direct electronic payments for rent, utilities etc., as well as make cashless purchases of goods or services from any supported merchant..

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