Fintech comes in many shapes and sizes. One particularly hot area of focus, however, is money transmission and currency exchange.

There are three reasons why fintech businesses are greatly attracted to this area. One, the barriers to entry are extremely low. Two, it’s easy to look technologically innovative (by offering seriously reduced prices) when really all you’re doing is undercutting competition and/or spending a lot more on marketing than the competition. Three, there’s a general perception customers are being ripped off in the sector, which makes for a compelling marketing narrative.

But there’s more to it than that. As we’ve long argued, a security/access paradox applies to fintech. This is especially the case for “fintech” catering to the money services sector. If the sector is easily accessible (highly competitive) it’s not secure, and if it’s secure it’s not easily accessible. The more entrants there are, consequently, the easier it is for criminal enterprises to exploit the sector for their own ends.

RUSI’s latest report on how financial crime is being facilitated through Money Service Businesses (MSBs) in the UK is worth noting in that context.

Two key issues are highlighted.

First, because KYC and AML rules freeze so many entities out of the formal transmission system, many new entrants are especially attracted to providing services to these demographics, since the financial reward in doing so is very large. Crime groups themselves thus have an interest in launching their own money transmission services and popularising them as legitimate “fintech” alternatives, even if in reality they operate in the shadows of the regulated sector for the sake of enabling criminal enterprise.

Second, the scale of competition in the industry creates a structural vulnerability which ensures even legitimate entrants can be easily taken advantage of by groups seeking to launder funds. The more money service companies there are, the easier it is for criminal networks to spread and disguise their illicit business and/or move hot potato style from one service provider to the next as they get frozen out. Since many of their strategies involve the employment of money mules, the presence of more providers makes it easier to extend the life cycle of the money mules in the system before they get detected and frozen out.

To wit, this is an important observation from RUSI (our emphasis):

The size of the MSB sector makes it highly competitive. In order to attract customers, money remitters and bureaux de change have lowered commissions, meaning that their profitability relies more on the aggregate volume of transactions than on high margins.

A review of publicly available accounts of MSBs confirms that a significant proportion have registered losses for several consecutive years.

While competition is generally considered to keep prices for consumers down, it may also have unintended consequences.

The World Bank noted, for example, that

…it is possible that the potential benefits of permitting retail businesses and individuals to act as principal [money transfer businesses] in a specific country may not outweigh the potential costs of oversight and of the risk factors, or of effective risk mitigation techniques with respect to money laundering and terrorist financing risks and other risks.

Along similar lines, in the context of discussions on the regulation of the banking sector, a member of the European Central Bank’s executive board noted that an ‘oversized financial sector can reflect increased risk-taking’. Regarding the MSB sector in the UK, several stakeholders interviewed while researching this paper pointed out that the negligible margins resulting from the high number of actors might encourage certain MSBs to accept funds from organised crime groups that are generally willing to pay higher commissions in the course of the money laundering process.

What this suggests is that the high fees charged by incumbent firms are more the result of regulatory compliance costs (filtering out money laundering and regulatory risk) and desires to run break-even businesses than exploitative models designed to gouge customers just because they can. Accordingly, there is a competitive disadvantage in operating honest and profit-oriented businesses in the sector because competing businesses can subsidise the low prices they offer to customers by charging criminal networks much higher commissions for the risk of taking their business.

A truly “virtuous” circle is created when criminally-subsidised low prices allow for network effects to be accelerated, since the bigger the network the more useful the money transmission enterprise for the criminal organisation at hand, both from an obscuration perspective and a functionality one.*

The public, however, has no perception of these constraints. In a world where price is the only differentiating factor, consumers are happy to transfer business to the lowest price provider irrespective of how dubiously those low prices are achieved. (The same oversights apply to the success of tech models employing regulatory arbitrage for competitive advantage, among them Uber.)

Unfortunately, without stricter enforcement and penalty application, it’s unlikely anything can be done to reassert a floor on the true cost of doing honest business in this sector.

What’s more, since so many of the undercutting entities operate quite effectively without the need for formal registration, it becomes even more difficult to track and penalise wrongdoing. Consumers, it appears, are so price sensitive these days they’ve become entirely ambivalent to whether a venture is regulated or certified as above board (see Crypto). In the style of collapsing communist systems or failed states, we have all become corrupt enablers of illicit activity, sparking the sort of race to the bottom which could soon threaten the stability of civilised society.

Otherwise put as: every man for himself, and to hell with the ethical or social consequences until they apply to me — something that makes it almost impossible to solve the problem without a broad-based ethical revival across society.

Relatedly, Santander said this week it had conducted a ‘fake job advert’ experiment to discover how many Brits would apply for a job as a money mule, helping criminals to launder money.

The ad they posted looked like this, drawing, as you’ll note, heavily on “fintech” buzz to appear alluring:

Out of 2,000 people presented with the ad, one third said they would apply for the job while only 15 per cent rightly identified the role as that of a money mule. Of those who fell for the ad, seven per cent said they would still apply for the job even after they were informed it was for a role as a money mule.

The most likely to be scammed, meanwhile, were those aged 18-24 and regionally those based in Northern Ireland.

Last of all:

71 per cent of people are unaware of the term ‘money mule’ but even when given an explanation of what it is over a quarter thought it may carry no criminal punishment.


*Bitcoin’s attraction is closely linked to its potential to reduce the cost of money transmission for illicit entities. For it to do so, however, a large merchant network must adopt the currency directly or else illicit entities will still be dependent on MSB channels for cashing them out of crypto and linking them back into the real economy on much more expensive terms. A large honest user network is also necessary if illicit transactions are to be effectively co-mingled with honest ones and hence obscured from authorities. Merchants and users, however, are unlikely to adopt such a system if it proves more expensive than official rivals. To that end, the spiraling cost of bitcoin transaction demonstrates quite elegantly that there is no free lunch.

Related links:
Why transaction laundering is turning into a huge financial blindspot – FT Alphaville
Transaction laundering should be a top priority for regulators in 2018 – FT Alphaville
Innovative criminals embrace online opportunities – FT
When financial inclusion stands for financial intrusion – FT Alphaville
The security/access paradox and digital lenders – FT Alphaville
Fintech paradoxes, blacklist edition – FT Alphaville
On the economic power of ransom – FT Alphaville
The Paradox of Civilization: Pre-Institutional Sources of Security and Prosperity – NBER

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