How Banks Profit from Delaying Foreign Payments

If you get monthly remittances from a non-resident Pakistani, you are doing well. Obviously, you have it better than Pakistanis who earn money in the Pakistani rupee, but you also have it better than Pakistanis who get foreign payments for their services.

When someone from overseas gives money to their relatives, the funds arrive in your account with ease. But if you are an independent contractor working for a foreign organization such as the World Bank, and they send you an international payment for a report you have produced for them, it will take at least a few days and maybe even weeks for the money to reach you.

During a few days or weeks, your money is stored in a secure bank account. However, the bank is not just holding your funds until they are ready to give them to you; they are also making interest on them. Due to the abundance of this income, people wind up earning a considerable amount of money essentially for doing nothing.

While this may seem like a scam, there are legitimate reasons why this occurs. Because banking channels involve bureaucratic checks and balances, international payments for services are not as simple and stress-free as money transfers. Occasionally, they may even need you to produce supporting documentation for the money transfer.

The first question may be, how much may banks potentially profit from this? Let’s assume, for the sake of simplicity, that on a given day $10 million in incoming funds are held by banks for an unnecessary average of 5 days.

If the yield on a $1 loan is 1.5%, banks make $0.75 million by just keeping the money for 5 days. This equates to $54.75 million for the whole year. It is essential to note that the yield assumption of 1.5% is much lower than the norm.

This is not the end. Typically, the rate at which you receive your incoming transfer is lower than the interbank buying and selling rate. Suppose the bank is able to charge you an additional Rs 1 in spread on buying and selling. This affords the bank the chance to make $10 million per day, or Rs 3,650 million per year.

A bank earns $54.75 million plus Rs. 3,650 million by keeping your funds and by providing you with a lower interest rate. Again, this is only an illustration. We are not calculating this based on total remittances since RDA transfers are instantaneous and other means are likewise almost instant. This problem mostly pertains to those receiving payment for services rendered overseas.

As previously indicated, this may seem to be a hoax. And in all honesty, it is not a fraud. If the bank did not give you all of your money, it would constitute a fraud. Bancassurance would be another example of a bank participating in fraud, but that topic is better left for another day.

What it is is an inconvenience and a standard banking practice. Occasionally, banks detain this cash because of severe compliance checks. Banks often request SWIFT instructions to track money.

The deal is not always straightforward. Due to the worldwide financial network, a single transfer may include up to four institutions on occasion. With fast technology and digital payments, this does raise some problems.

A source at the FX desk of a bank adds, “Occasionally this is done to track money, and sometimes it is done to earn a fast profit by holding onto the transaction for two to three days.”

A person with a similar dilemma said, “I am a lawyer who receives payment for legal services from overseas customers. Occasionally, my payments are delayed unreasonably. Sometimes I reply with a legal notice threat. As a consequence, the monies are transferred the next day. It is all about leverage and pressure.”

His leverage is not a single occurrence.

“My branch staff is aware that I am acquainted with the bank’s CEO. I have never threatened to speak with him personally, yet they continue to be terrified. It works for me since I get the payments instantly. In the event of a delay, I get a phone call from the branch manager or operations manager apologizing and continuously asking whether I’m upset or furious. I was unaware that the service depended on it.”

It is also vital to understand that banks may only keep cash for a maximum of two weeks. A prominent bank’s treasury source says, “Banks are banks. You cannot expect them to be altruistic. They want to profit from every possible source.” That does make sense. Expecting a bank not to be greedy is like to expecting a great white shark to be vegetarian.

However, this raises a dilemma for the State Bank of Pakistan, the governing body (SBP). The SBP is responsible for ensuring that the banking experience for clients is secure and hassle-free. Of course, they cannot penalize banks for doing their due diligence, particularly in light of the FATF’s surveillance, but they may remark when these “checks” are just an annoyance that drives profits.

The insider elaborates, “Because the SBP is pressuring banks to suffer FX losses in order to lower the exchange rate at the government’s desire, we may see banks attempting to offset these losses by profiting from the FX spread by keeping your money.” The insider adds, “The SBP may continue to turn a blind eye to it, given its current predicament.”

Original Story: Published in Pakistan Today