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Transfer Fees Sting Immigrants

November 14, 2000

NEW YORK (AP) _ Every other month, Gregorio Lazaro and his two brothers strain $600 from modest wages and send the money home to relatives they left behind in central Mexico.

But for years, a sizable portion of those savings never made it from the Lazaros in Los Angeles to their family in Tepatlaxco, south of Mexico City. Instead, it was claimed as fees _ most in the form of punishing exchange rates _ that remittance services levy on immigrants who wire money.

Such fees, often totaling 10 percent or more of the dollars being sent, have become especially lucrative in recent years as immigration into the United States has increased. Last year, immigrant workers sent $17.4 billion to their home countries, nearly double the level in 1991, according to the U.S. Department of Commerce.

``I felt...like I was being taken advantage of,″ says Lazaro, a housepainter.

Western Union and MoneyGram, the largest wire-transfer companies, make no apologies for their fees, which have been targeted by a number of lawsuits alleging fraud. But now there are signs of a shifting dynamic in the remittance business _ notably, new competition _ that could give industry giants a run for consumers’ money.

``There are more companies and people can make better choices,″ said Esperanza Morales of Asociacion Tepeyac de Nueva York, a social-services group that works with recently arrived Mexican immigrants.

Those choices include independent wire transfer firms, the U.S. Postal Service and credit unions that offer cut-rate transfers _ Gregorio Lazaro recently joined such an institution in Los Angeles.

Activists ``have tried to create some noise, but it’s been very, very timid,″ said Manuel Orozco, a specialist in remittances at Inter-American Dialogue, a Washington-based think tank. ``The problem is that Latin Americans don’t have consumer protection in their culture. We are used to accepting things, no questions asked.″

Anger at wire transfer fees sparked the lawsuits by Mexican immigrants in the late 1990s and stirred calls for reform by lawmakers. Change, however, comes slowly _ wire transfer legislation died in Congress and California, and a pending settlement of a federal suit leaves the fees intact.

Mexico, which receives more than a third of the remittances from the United States, and many other developing countries rely on wire transfers from abroad as a key source of domestic income.

``It is money that goes for medical needs, for education,″ said Juan Hernandez, a professor at the University of Texas-Dallas and an advisor to Mexico’s president-elect, Vicente Fox. ``It goes to the areas of Mexico that need it most.″

Moving money also brings in big money for wire-transfer firms and banks. A report commissioned by the U.S. Treasury Department found the business generated more than $1.1 billion in revenues in 1996, and transfers have grown considerably since then.

Most remittance companies advertise low service fees for international transfers _ typically $8 to $12 to wire $300 to Mexico. But that cost can double because of what critics call ``hidden fees,″ charged when dollars are converted to foreign currency at poor exchange rates.

For instance, it costs about 10.4 cents to buy a Mexican peso at current exchange rates. The wire-transfer companies, however, charge their customers as much as a penny more for that same peso. The difference, called the foreign exchange spread, is pocketed by the companies. With enough transactions, the money starts adding up.

Advocates charge that wire-transfer businesses have kept quiet about this income stream, and in doing so, take financial advantage of consumers who can least afford it.

``It’s a major revenue producer for these companies,″ said Matthew Piers, lead attorney in the federal class-action suit. ``In fact, I think it’s safe to say that it’s a bigger revenue producer than the service fees.″

Transfer companies ``stole a lot of money because you’d send dollars here and they would receive pesos there, and (the remittance firms) would charge for the difference,″ said Arnulfo Chino Rojas, a New York restaurant worker from the Mexican state of Puebla.

Money-transfer companies acknowledge that the foreign exchange spread is a major profit center, and defend their practices by saying that the exchange rate is disclosed on the receipt given to consumers.

``Were these hidden fees? Absolutely not,″ said Peter Ziverts, a spokesman for Western Union, a subsidiary of Atlanta-based First Data Corp. ``The foreign exchange component is disclosed to the consumer at the time of the transaction.″

Even so, the allegations of shady practices have affected the companies’ business.

``One of the things that we’re very concerned with is our relationship with our customers, and I think, clearly, negative publicity has hurt some of those relationships,″ said Brad Parker, a spokesman for Phoenix-based Viad Corp., MoneyGram’s parent company.

Seeking to rebuild those relationships, the companies last year agreed to a class-action settlement that offers coupons good for discounts on future wire transfers. They have also agreed to pay $4.6 million to community groups assisting Mexican immigrants, and more than $10 million in plaintiffs’ legal fees. The settlement, pending before a federal judge, would also require the companies to disclose their foreign-exchange fees in any price-related advertising.

But Fred Kumetz, a Los Angeles lawyer who initiated the battle over fees, criticizes the pact as a ``sweetheart settlement″ that would buy the support of community groups while doing little to protect consumers. Kumetz represents a group of California consumers who are pursuing a separate case in state court that seeks direct payments from wire-transfer companies.

While the settlement won’t cut fees, Western Union and MoneyGram are now facing more price-driven competition from smaller remittance companies, said Gustavo Mohar, an official with the Mexican embassy in Washington, which three years ago began tracking wire-transfer rates after fielding many complaints.

Operations like Raza Express in Los Angeles now undercut the big transfer firms on price. In New York, Delgado Travel, a chain of 19 travel agencies in neighborhoods with large immigrant populations, now advertises flat fees of 4 percent to wire money to Mexico, El Salvador, Nicaragua and other Latin American countries.

The big companies have recently pared their own fees _ in New York, Western Union is now cheaper than the low-cost competitors. But the big companies’ prices remain higher than competitors in many other markets.

In Los Angeles, for example, Western Union was recently charging a $12 fee to send $300 to Mexico at an exchange rate of 8.85 pesos per dollar _ counting the foreign exchange spread, the transaction cost $28. Meanwhile, competitor Raza Express was charging a $10 fee with an exchange rate of 9.25 pesos, for an overall cost of about $13.

The U.S. Postal Service has gotten into the act with Dinero Seguro _ Spanish for ``secure money″ _ which allows people to wire money from Texas, California and Illinois to Mexico. That program is scheduled to be expanded next year to offices in every state and service to other countries.

Meanwhile, the World Council of Credit Unions has launched its own fledgling effort as a way to attract new members.

In July, the council’s IRNet program began offering discount wire transfers to Mexico, Guatemala and El Salvador from Southern California Edison Federal Credit Union in Los Angeles, where Gregorio Lazaro is a member. Plans call for the service to expand to other credit unions in California, Texas, North Carolina and Illinois.

``The fact of the matter is that Latinos in the U.S. are underserved with financial services,″ said Dave Grace, an executive with the credit union group.

The new ventures in the U.S. are supplemented by efforts outside the country. Mexican president-elect Fox has asked his advisors to study the remittances issue to find ways to cut costs for expatriates.

And a project launched by the Banque Haitienne de Developpement aims to open wire-transfer counters inside community cooperatives in rural Haiti. The service, funded partly with a $175,000 grant by the U.S. government, aims to cut transfer fees and plow profits into housing and business loans for Haitians.

But for Gregorio Lazaro, the bottom line is getting the maximum amount home. ``I feel very good because I feel my family is receiving more money now,″ he says. ``It’s very important that they receive this money.″

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