Dan Caputo, VP of Global Treasury Solutions at AscendantFX

Providing your customers with a complete range of international services is critical to success in today’s competitive environment. International services may be the smallest piece of business you have with many of your customers, but without it, you risk losing them to your competitors.

Ascendant Global Payments partners with Independent Community Bankers Bank to offer a full suite of international services, including Wires, Global ACH, Check Clearing and Foreign Banknotes. In this post, we will focus on the benefits and risks of foreign check clearing. It is important to understand the risks when performing foreign exchange transactions.

Background

For years,the banking industry has discussed the “death of the check.” While that prediction has not yet come true, check volume has decreased 3% annually from 2012-2015 to 18 billion checks, and 8% annually from 2016-2019 to 14 billion checks*.This trend has accelerated with the introduction of debit cards, ACH, Same Day ACH, increased credit and card acceptance, and will likely continue with the introduction of faster payments.

There is still one type of check volume that has not decreased:checks drawn on banks fromforeign countries. Possible reasons for this include the following:

• Foreign banks charge high fees for international wires. Check issuers choose the lowest cost option for them to pay for international purchases.
• US companies are expanding their global footprint and increasing their business dealings in foreign countries.
• Foreign banks are not able to send ACH payments.

Financial institutions accept foreign checks for a variety of reasons,including:

• Increased ease with which their business clientscanbuy and sell productsglobally.
• Customers that have family in other countries.
• Customers depositing foreign checks are oftena financial institution’s most profitable segment with extensive banking needs that mayinclude lines of credit, credit cards, mortgages, loans, and wealth management, all of which may be at risk by not offering a full menu of services.

There are somerisks to consider when processing foreign checks, including timing risk and exchange rate risk.

Timing Risk

Return rules in other countries do not mimic US rules. We are accustomed to receiving returns in a timely manner. Foreign banks may return items for the same reasons US banks,such as non-sufficient funds, stop payments, and fraud, but these items may come back to you several months after your original deposit. You should consider your customer and the amount of the transaction. The “Know Your Customer” rules should always apply.

Exchange Rate Risk

When you process a check payable in a foreign currency, such as Canadian dollars, you are essentially selling that check for US Dollars to credit your client. At the time of that transaction, an exchange rate is committed. You receive credit for the amount quoted once your check is received for processing.

Consider that if the check is returned, a new transaction is occurring. At that time, the paying bank is refusing payment of the check, and you must buy the check back. Unfortunately, the exchange rate may be less favorable than your original sell rate, and your financial institutioncould take an exchange rate loss if the check is returned. The larger the check, the larger your institution’s potential loss.

Risk Mitigation

The increased risk associated with these transactions requires greater scrutiny than simple, domestic transactions. While such risk is present, there are ways to mitigate them for your institutionand your customer.

• Check Image Clearing
  The Canadian Banks now accept images of most Canadian checks. Items drawn on Canada are now returned in 2-3 days instead of 2-3 weeks. This decreased lead time is greatly reduces the risk of the exchange rate changing significantly.
• Send for Collection
  Sending a check for collection is different than processing a check as a provisional item. A collection check is expensive and takes approximately 4-6 weeks to receive credit. The process includes:
  • Sending the check by courier to the paying bank requesting payment.
  • Paying bank will verify funds and no stop payments on the check.

There is no guarantee that the funds will be paid, but if they are paid, they are considered good funds. Foreign checks should be sent on collection based on the financial institution’s risk tolerance. Suspicious checks should always be sent for collection or refused outright.

Deposits Through a Foreign Exchange Partner

Independent Community Bankers Bank can provide a streamlined process for international services. For example, checks drawn on Canadian banks can now be cleared by scanned image. This new option addressesmany of the pain points many customers have with old manual methods. Here are a few benefits of the ICBB process:

• Items are scanned for processing, with same or next day credit.
• Courier fees and item loss in the mail are eliminated.
• Enhanced compliance monitoring. Illegal online gambling companies establish themselves in Canadato facilitate payment of winnings to clients with USD checks. Scanning technology allowsthe ability to block these items immediately.

Things to Consider:

No matter what choices you make with regards to processing foreign checks, you should always have the security of the financial institution and the customer in mind.The following measures can protect you both from significant risk:

• Know Your Customer
  As we previously mentioned, the “know your customer” rule should always apply. Understand why they are receiving foreign checks. If you credit your customer immediately, you are in essence providing an unsecured loan until you receive credit for those funds. Ask questions to protect your customer from scams and the financial institution from losses. Consider the following:
  • Is it unusual for your customer to receive a foreign check?
  • Have they potentially fallen victim to fraud?
  • If the check is returned, will your customer have funds to cover the return?
  • Will they still have an account with you?
• Establish Limits
  You should have policies regarding dollar limits you will process. Treat each transaction as a credit risk on a per-customer basis.
• Hold Funds
  Checks payable in other currencies are not subject to the same return times as our daily US cash letter.
• Suggest a Wire Transfer
  As an alternative to foreign check collection, suggest to your customer that they request a wire transfer from the payor. Wire transfers are the only payment where you can be assured the settlement is “final”. Foreign currencyaccount details can be provided so the check issuer can send a local currency wire transfer. This is much faster than collection items, and more cost effective then check clearing.
• Report Suspicious Activity
  As part of your regular BSA requirements, you should consider filing a SAR when you see suspicious activity. Unusual transactions for your customers and returns of fraudulent items should trigger investigations.

For more information about International Services contact Independent Community Bankers’ Bank solutions@icbb.bank or your local Acount Executive.

*Federal Reserve Payments Study 2019