In the ordinary course of offering remittance services, a remittance service provider (RSP) assumes risks inherent to the remittance business. While some are from the internal environment, others are from external environment. Assuming risk is necessary for the realization of returns on their investments. If not properly calculated and mitigated, the consequences of risks include negative impacts on the RSPs’ goals, reputation, liquidity, and maybe even financial losses. These consequences may potentially reduce the customer base of RSPs and deplete their capital, hinder their operations, causing bankruptcy or cessation of business.
In offering remittance services, the risks could be either expected or unexpected. Expected risks are those that an RSP knows with reasonable certainty will occur, for example, the expected adverse movement of foreign exchange rates and inadequate liquidity in various currencies. Unexpected risks are those associated with unforeseen events, for example, losses due to a sudden economic downturn, natural disasters, or human actions such as terrorism.
Due to the risks facing the remittance business and their consequences, the need for effective risk management guidelines for RSPs cannot be over-emphasized. Through effective risk management, an RSP can implement robust policies to mitigate the risks and optimize their risk-return trade-off.
These guidelines aim to guide RSPs in identifying, evaluating, monitoring, and controlling key risks from the remittance services. A key component is risk management guidelines or rules that can guide RSPs in making decisions that would enhance risk identification and management practices. Moreover, the risk management guidelines can help to strengthen RSPs’ capacities in developing, applying, and monitoring risk-based remittance policies and regulations to enhance market competition and innovation while safeguarding against risks to financial stability.