Partnerships and the MTO Ecosystem
The hardest problem a new money transmitter faces is not technology, not compliance, not capital. The hardest problem is building a network of partners who will deliver money to beneficiaries.
A money transmitter founder calls me after he has been licensed for six months. He has customers who want to send money to Southeast Asia, but he has not been able to find a payout partner who will deliver money to those countries. He has asked ten correspondent banks, and all have declined. He is losing business.
This is the reality of the money transmitter business: the business is fundamentally about relationships. You build relationships with payout partners, with banking partners, with technology partners, with compliance partners. Without these relationships, you cannot operate.
Types of Partnerships in the MTO World
A payout partner is an entity that agrees to deliver money to beneficiaries on your behalf. Payout partners take several forms: a bank, a money transmitter in the destination country, an independent agent or agent network, a fintech platform.
Banking partners are the institutions that you maintain customer deposits with and that facilitate settlement with payout partners. Banking partners take several forms: traditional banks, fintech banks, payment processors.
Technology partners provide the software systems, payment processing infrastructure, compliance tools, and APIs that enable your operation.
Compliance partners are consultants, compliance service providers, and external auditors who help you maintain a functioning compliance program.
Payout Partners and Correspondent Networks
Payout partners are the most critical partnership in a money transmitter business. Without payout partners, you cannot deliver money to beneficiaries.
A correspondent banking relationship is when a bank in the United States maintains a relationship with a bank in another country (the correspondent bank). Money intended for beneficiaries in the destination country flows through the correspondent bank to the local beneficiary bank. The correspondent bank charges fees for this service.
For money transmitters, correspondent banking relationships are becoming difficult to establish. Large banks have reduced the number of money transmitter relationships they maintain. They perceive money transmitters as high-risk because of the potential for money laundering and because money transmitter volumes are volatile. Some banks have simply exited the money transmitter business, forcing money transmitters to find alternative payout partners.
For money transmitters that can maintain correspondent banking relationships, the relationships are valuable because they provide reliable payout infrastructure. But correspondent banking relationships require significant due diligence, require ongoing monitoring of the correspondent bank's AML compliance, and require compliance with banking rules regarding funds transfers.
Alternatively, many money transmitters work with local money transmitters in the destination country. You send money to a partner money transmitter in the destination country, and the partner money transmitter delivers the money to the beneficiary. This approach is simpler than correspondent banking—you do not need to maintain a banking relationship—but you are dependent on the reliability and compliance of your partner.
An emerging approach is to work with fintech platforms that have built payout infrastructure. These platforms—Wise (formerly TransferWise), MoneyGram, and others—have built networks of payout partners and can deliver money efficiently. The platforms charge fees, and you share revenue with the platform, but the infrastructure is reliable.
A final approach is to work with independent agents in the destination country. An independent agent agrees to receive money from you and to pay beneficiaries. You pay the agent a commission on each transaction. This approach is used primarily in corridors where banking is weak or where formal money transmitter infrastructure does not exist.
Banking Partners
A banking partner is the bank that you maintain customer deposits with and that facilitates settlement. Banking partners are critical because without a bank, you cannot hold customer money and cannot conduct settlement.
Finding a banking partner is increasingly difficult. Traditional banks have reduced the number of money transmitter relationships they maintain. Many banks have exited the money transmitter business. A money transmitter looking for a banking partner today faces limited options and high fees.
Banks that serve money transmitters require extensive due diligence. The bank will conduct a Know Your Customer investigation of the money transmitter's principals, will review the money transmitter's AML program, will review the money transmitter's business model and customer profile. The bank's due diligence can take months.
Banks also require an independent audit of the money transmitter's AML program. The bank will hire an external auditor to review the money transmitter's AML controls and to report on whether the controls are adequate. This audit can cost five thousand to twenty thousand dollars.
Once a bank agrees to serve you, the relationship is ongoing. The bank will monitor your transactions to ensure that you are not conducting suspicious activity and will reserve the right to terminate the relationship if the bank is not comfortable with your risk profile.
A recent development is fintech banks that serve money transmitters more actively. Fintech banks such as Silvergate (before its closure), Signature Bank, and others have built relationships with money transmitters and have been more accommodating of the regulatory complexity. However, fintech banks have also faced their own regulatory challenges, and some have closed or reduced their money transmitter relationships.
Technology Partners
Technology partners provide the software systems and integrations that enable your operation. These partnerships can include transaction processing vendors, payment processors, compliance vendors, and others.
When selecting a technology partner, you should understand the partner's experience with money transmitters, should understand whether the partner's systems integrate with other systems you use, and should understand the partner's roadmap and whether the partner plans to continue serving the money transmitter market.
Technology partnerships often involve long-term contracts with fixed fees or per-transaction fees. You should negotiate terms carefully, should understand termination provisions, and should understand whether you will have access to your data if the partnership ends.
Compliance Partners
Compliance partners are external consultants and firms that help you build and maintain a compliant operation. These partners include compliance consultants who help you design your AML program, external auditors who test your controls, and expert witnesses who can testify about industry standards if you face enforcement.
Compliance partners are valuable because they bring expertise and objectivity. A compliance consultant can identify gaps in your program that you might miss. An external auditor can provide credible assurance to regulators that your controls are working.
However, compliance partners can also be expensive. An external audit might cost ten thousand to fifty thousand dollars annually. Compliance consulting can cost ten thousand to one hundred thousand dollars per year or more.
How to Evaluate and Select Partners
When evaluating a partnership opportunity, you should ask several questions: what is the partner's experience in the money transmitter industry, what is the partner's financial stability, what is the partner's track record for service quality, what are the terms of the partnership agreement, what will the partnership cost.
For payout partners, you should conduct due diligence on the partner's AML compliance program. You should understand whether the partner is licensed if required, should understand the partner's approach to AML compliance, should understand the partner's ownership and beneficial owners.
You should check references. Ask the potential partner to provide references from other money transmitters that the partner works with. Call those references and ask about their experience.
You should understand the partner's pricing. For payout partners, you should understand what percentage of the transaction value the partner will retain. For technology partners, you should understand the setup fees, the monthly fees, and the per-transaction fees.
Partnership Agreements: Key Terms
A partnership agreement should specify: the services the partner will provide, the fees the partner will charge, the timeline for service provision, termination rights and procedures, confidentiality provisions, and dispute resolution mechanisms.
For payout partnerships, the agreement should specify: which countries the partner will deliver to, what the maximum transaction size is, what documentation the partner will require, how long the partner will retain records, what the partner's AML procedures are, what the partner will do if the partner identifies suspicious activity.
For banking partnerships, the agreement should specify: which types of accounts the bank will provide, what the bank's fee structure is, under what circumstances the bank can terminate the relationship, what due diligence the bank will conduct, what the bank will monitor.
You should have an attorney review any partnership agreement before you sign it. Do not assume that you understand the terms.
Managing Partner Risk
Once you have established partnerships, you must manage the risk associated with the partnerships. Partner risk includes several dimensions: performance risk (will the partner deliver the service), compliance risk (will the partner comply with AML regulations), financial risk (will the partner remain solvent), reputation risk (will the partner's compliance or legal problems reflect poorly on you).
Performance risk is managed through SLAs. The partnership agreement should specify the service level that the partner will provide: turnaround time for payouts, uptime for systems, support responsiveness. You should monitor the partner's performance against the SLA and should escalate failures.
Compliance risk is managed through due diligence. You should conduct initial due diligence when you establish the partnership, should conduct ongoing monitoring of the partner's compliance program, and should be prepared to terminate the partnership if the partner's compliance program degrades.
For payout partners, you should understand whether the partner has been subject to regulatory enforcement or to enforcement action by FinCEN. A payout partner with enforcement history indicates higher compliance risk.
Financial risk is managed through diversification. You should work with multiple partners so that if one partner fails, you can redirect business to other partners. You should avoid concentrating too much business with a single partner.
Reputation risk is managed through ongoing monitoring of news and regulatory announcements about your partners. If a partner is subject to enforcement action, you should understand the nature of the action and should evaluate whether the partner's compliance issues present a risk to your business.
Building a Partner Network from Scratch
A new money transmitter faces a bootstrapping problem: you have no track record and potential partners do not know you. How do you establish relationships with partners?
For payout partners, you should start with relationships you have. If you have family or business connections in a destination country, those connections can become payout partners. You can establish an agent agreement with them, can provide training on your compliance procedures, and can build a payout network.
If you do not have existing relationships, you should search for payout partners. This might involve networking in trade associations, meeting potential partners at industry conferences, using brokers who connect money transmitters and payout partners.
For banking partners, you should work with a bank that specializes in serving money transmitters. These banks understand the regulatory requirements and are more likely to accept a new money transmitter as a customer. Alternatively, you can work with a fintech bank that serves high-risk customers.
For technology partners, you should evaluate the major vendors and should determine which vendor's platform best aligns with your business model. You should negotiate trial periods so that you can test the platform before committing to a long-term contract.
Practitioner's Bottom Line
Building a network of payout and banking partners is the most critical operational challenge in starting a money transmitter business, more difficult than technology or compliance because the supply of payout partners, especially to emerging markets, is limited. Evaluate partners based on their regulatory history, financial stability, and compliance program. Establish partnership agreements that clearly specify services, fees, and termination rights, and manage ongoing partner risk through monitoring and diversification across multiple partners.