The 2022 federal election has highlighted Australia’s role in the Pacific and a clear focus from new Foreign Secretary Senator Penny Wong. In her first message to the Pacific, the Foreign Secretary spoke of the importance of remittances, a key element of the relationship between Australia and our Pacific partners.
According to data from SaverPacific, sending money from Australia and New Zealand to the Pacific Rim has some of the highest remittance transfer costs in the world.
Remittances are an important part of island economies, and reducing their cost has been a focus of Australian governments of both political stripes for more than a decade, but practical action on the key issues of keeping costs high have fallen behind.
The costs of sending remittances to the Pacific have fallen over the past decade as new digital services have been launched in the region. Despite these gains, the costs remain worrisome and consistently high. At nearly 10.1%, remittances from Australia to the Pacific (particularly Fiji, Samoa, Tonga, Tuvalu and Vanuatu) are significantly above the global average for remittances ( 6.04%), and triple the target amount of the United Nations program for sustainable development. Development goals.
Good work has already been done to reduce the cost of sending remittances to this region. ANZ and Commonwealth Banks appear to have eliminated their flat fees for interbank transfers to the Pacific.
These initiatives are commendable but do not solve the problem. Only 40% of Pacific Islanders have access to formal banking services. Eliminating fees for interbank transfers is therefore not a one-size-fits-all solution. These banks also continue to charge a markup on their retail exchange rate – insidious hidden fees they can use to defraud their customers.
The promise of remittance companies and other fintechs is that they offer more agile and customer-centric solutions to traditional banking problems. While companies like Wise aren’t always the cheapest option, their transparent pricing model shows the true costs of sending money overseas, encouraging consumers to find the best deal possible.
More transparency in foreign currency pricing
The easiest and fastest thing you can do to reduce expensive Pacific remittances is to empower consumers. Give them the tools to search for the best deal. This means the Australian Competition and Consumer Commission needs to revise its foreign exchange best practice guidelines to improve price transparency.
As argued by Australian MP Andrew Leigh and the UK Behavioral Insights team, international exchange service providers should indicate both the upfront fee and any hidden markup in the retail exchange rate they offer their customers.
Equally important from the standpoint of enabling consumers to find the best deal is the expansion of Australia’s open banking regime – the Consumer Data Right (CDR). This would involve expanding commodity benchmarks to include exchange rates. This product data can then be used by authorized data holders to create meaningful, up-to-date comparison charts showing the cheapest way to send money from one country to another.
An example of how open banking could improve consumer outcomes is the SaverPacific remittance and financial literacy platform, which provides a comprehensive comparison of remittance services across ten remittance corridors across the world. Peaceful.
The website contains real-time data from money transfer operators, but an expansion of CDR’s product reference data to include bank exchange rates via an open API (application programming interface) would mean that all cross-border exchange providers are required to provide up-to-date data to authorized data holders. This would reduce the manual entries needed in the website and make the data more up-to-date.
Improve financial architecture
The Reserve Banks of Australia and New Zealand are engaged in the development of a regional electronic KYC (“know your customer”) facility, which is intended to cover the entire Pacific. Allowing digital verification would be a game-changer, as it would allow many more customers to access banking services in countries where access to personal documents might be limited or non-existent.
This project was announced in late 2019, with the tender process starting in September 2021 with a request for information. It’s good that it’s continuing, but given the impact the lack of certainty on this issue has had on money transfer operators, it can’t happen soon enough.
A comprehensive, collaborative and risk-based approach to KYC regulation and compliance is needed to better facilitate access to financial services, as required by the Financial Action Task Force standards. A tiered risk-based KYC system can work – as it does in African and Central American markets – with lower levels of KYC required for low-cost mobile money accounts and transfers. value, and higher levels of KYC for high-risk sectors and for traditional bank accounts, providing a full range of features.
Common regional KYC standards should be developed to support cross-border remittances and money flows. Given the complete lack of identity documents in some parts of the Pacific, reference letters from employers or local authorities should be considered the lowest common denominator required for KYC identity verification. While it’s not a perfect solution, it beats the alternative: that the unbanked go to informal remittance channels that aren’t regulated or monitored.
The Australian government – given that it is helping Telstra buy telecoms provider Digicel – should leverage this investment to facilitate the rollout of more feature phones with brand-independent mobile wallets, as well as to take advantage of smartphones less expensive and no longer available. Mobile phones, which have some internet capability but are less functional than a smartphone, can provide a form of wireless account and enable mobile banking, spending and receiving money from abroad.
Governments should seek to address the issue of debanking, an uncompetitive practice where established banks stop working with innovative start-ups, often for the wrong reasons. This issue has already been brought before the Board of Financial Regulators, but any policy response should ensure that Australian banks’ risk assessments are in line with global standards, i.e. real risk is assessed on the basis of evidence and not merely assumption, and that supervisors assess the quality of institutional risk assessments, particularly when they inform debanking decisions.
Wise sought correspondent banking relationships in the Pacific, unfortunately without success. When correspondence was entered into with a particular bank operating in the South Pacific, Wise was told explicitly that the bank was “not currently considering partnering in a low-cost service model”. In other correspondence, where it was asked whether it was a matter of compliance or commercial considerations, the answer was “both”.
If the Australian government improves transparency and comparison of remittance prices, facilitates eKYC, and eliminates inappropriate debanking, it would go a long way to reducing remittance sending costs.
Jack Pinczewski is the Asia-Pacific government relations manager for Wise and holds stock options in Wise PLC.
Jonathan Capal is the Head of Global Programs for Saver.Global, the company that operates and develops www.saverpacific.com.