Common Risks Associated With Running A Money Transfer Business

Common Risks Associated With Running A Money Transfer Business

Money transfer is a reliable business to operate in that people’s need to send money across borders will forever be evergreen. It’s also a line of work that doesn’t involve the messiness of mom-and-pop store businesses like stocking perishable or fashionable products. It’s a business one can start anywhere in the world, run on the go and entire online if they want. 

There are usually favourable aspects to starting up this kind of business as well. For one thing, in a place where remittances to other countries are commonplace, your money transfer operation can become almost an essential arm of the community. For another, modern technology allows for more automation of services, which helps you to operate efficiently.

However, it doesn’t mean there aren’t risks associated with money transfer business.  It’s those risks, however, that are crucial to consider before you make the leap to starting up your own money transfer business. Let’s see some of the ones you need to be keenly aware of, below.


Incorrect Details

Human error is one of the most common risks associated with money transfer business. In this industry, it’s particularly crucial to make sure all details are thoroughly checked. If anything incorrect is not picked up during documentation either by the remitter or the beneficiary, the ensuing havoc can be a headache at best.

Double-checking should therefore be standard practice for any money transfer business. The key details at hand will generally be the names, account numbers, amounts of money, and Swift/BIC codes. Although computer software can help validate codes that adhere to standard formats such as Swift/BIC, there’s little else it can do here to ensure that the details are correct.


Fraud and Money Laundering

It’s a well-known fact that money transfer is a regular target of fraud and money laundering schemes. Indeed, even large established money service business (or MSB) firms are found on occasion to be engaging in a variety of illicit activities. Notably, FT points out that Wirecard saw a dramatic fall from grace in recent years.

Typically, however, it’s customers that will try to commit these crimes through techniques like surfing and structuring, which we covered in more detail in the post “The Difference Between Smurfing & Structuring”.


Maintaining Bank Compliance

Without a bank account, a money transfer business will struggle to perform its basic functions. Unfortunately, and in no small part due to some of the issues already noted, money transfer business accounts tend to be classified as higher risk regardless of size (together with other high-risk bank clients like payday lenders and payment processors).

The best thing a money transfer business can do with respect to this problem is to maintain as much compliance with regulations as possible. In the UK, registering with the Financial Conduct Authority is a legally necessary step, for example. However, it’s not unheard of for even totally compliant businesses to be dropped by banks due to the sheer amount of due diligence required on the part of the bank.


Unfavourable Exchange Rates

For all sorts of reasons, certain currencies can be subject to greater volatility. And while currency values don’t typically swing in large amounts over short periods of time, there is enough day-to-day volatility that the leading forex platform FXCM goes as far as to support artificial demo trading for people just getting started in the market. This is designed to help newcomers to currency exchange get used to fluctuations and market movements, and the same can be necessary for those getting involved with the money transfer business.

Problems can materialise especially when the profit model of the business is more reliant upon the difference between purchase and sale rates rather than commission. If dealing with a high-volume transaction during a big price swing for the currency in question, for instance, your business could take a significant hit – and this isn’t necessarily all that unusual if your customers need to make transfers to or from territories where the currency is subject to volatility at a given time. It’s thus important to budget for price swings, and try to optimise the timing of transactions where possible.


Less Convertible Currencies

Not only can certain currencies be more volatile, but capital controls applied by the government in question can also make them difficult to trade. Sometimes this is done as a means of mitigating volatility, especially where it can seriously affect the value of exports. Investopedia provides a primer on this issue, whereby the legal framework of certain countries may not be regulated in favour of international trading, as is the case with currencies like the U.S. dollar or the Japanese yen.

One case in which this has changed substantially in recent years is with regard to the currency of the world’s second-largest economy, the Chinese renminbi. The currency’s move toward internationalisation has not yet seen it become as popular on international markets as the dollar or euro, though it has certainly become more feasible for the money transfer industry. It’s important to keep an eye on any currency that suddenly changes status, however, as was the case recently with the Russian ruble.

Unfortunately, this list is not exhaustive regarding all the risks one can face in this business. For more information on the best remittance software to help you start up or automate your money transfer business, contact us right away! We’re experts at it and can help.


Leave a Reply

Your email address will not be published. Required fields are marked *