News out of El Paso del Norte, Texas:

Officials of the Federal Reserve Bank of Atlanta were in El Paso on Tuesday to lead a seminar for local banks and credit unions about Directo a Mexico, a program that allows electronic transfers of funds to any Mexican bank, through Banco de Mexico, for only 67 cents a transaction. …

The consulate also had a presentation to encourage bankers to accept the matricula consular, a card issued to Mexican nationals by the consulate, as a valid ID to open a bank account in lieu of a Social Security card, consulate officials said.

The Fed began the “Directo a Mexico” program two years ago, pursuant to the George Bush – Vincente Fox agreement on a package of cooperative measures. It’s a wholesale service to banks, enabling smaller banks to compete against Western Union and against larger banks for a share of the $20 billion (and growing) annual market in transmitting money to Mexico. The money sender has to open an account at a participating bank in the US (which typically charges a retail price of $5 per transfer); the receiver goes to a branch of the Mexican government-owned “development” bank Bansefi to collect the pesos.

The business about the ID card? Under “know your customer” rules, US banks normally can’t open an account for a customer without seeing official US identification (passport, driver’s license, social security card). Many of the folks remitting money to Mexico are, come se dice, undocumented. The idea that “The Federal Reserve Bank is attempting to aid lawbreakers in moving their cash around” naturally has the John Birch Society and other anti-illegal-immigrant groups in a tizzy. Since I'm in favor of financial privacy for everyone, that part doesn't bother me.

What bothers me is the question: Why should the US government's Federal Reserve System be in the international money remittance business, competing with private providers, at all? The Fed might say, hey, why not, if we’re an efficient provider because of our economies of scale? But it isn’t that easy to judge whether the Fed really is an efficient provider, because it isn’t that easy for the Fed itself to figure out its average and marginal costs. Presumbly there exists some internal Fed study estimating that 67 cents a transfer is the Fed’s average or marginal cost for the service, but I can’t find any such study online to examine its assumptions and methods. If the Fed's service turns out not to cover its costs, will we know?

We do know that ordinary commercial banks have a large enough scale to provide the service more cheaply than Western Union. Again from the El Paso Times:

In the increasingly competitive remittance market, some banks have come up with an unbeatable offer: money transfers to Mexico for free. This week, Chase Bank launched Rapid Cash, a program offering up to three free money transfers a month to its customers in El Paso only. … Bank of America is also offering free money transfers to its customers in a 2-year-old program called SafeSend. Rapid Cash is a partnership with Banorte in Mexico. SafeSend is a partnership with Santander, Bansefi, La Red de la Gente, Telecomm Telegrafos and soon Banorte. … Inter National Bank, which sold 70 percent of its shares to Banorte in January, has cross-border banking and … allows customers to transfer funds between banks for free, bank officials said.

The Federal Reserve Bank launched two years ago a program called Directo a Mexico … But few banks have signed up with Directo a Mexico, instead preferring to make their own deals with Mexican banks.

So again: what’s the rationale for the Fed getting involved in this market?