The Australian government has attempted to address the problem of high remittance costs to the Pacific for some years, but solutions have not been quick, easy, or comprehensive. Compounding the issue, it is likely that the Pacific market is too thin, risky, and expensive to ever facilitate the UN’s target remittance transaction rate organically. Policies must therefore address market conditions for all Pacific Island workers in Australia through increased financial services competition, better functioning banks, and more accessible technology, but also through temporary market interventions for Australia’s PALM workers, at minimal cost.
The most practical way forward will be to use a combination of methods leveraging existing infrastructure and practice in the short term while pursuing more effective solutions over the long term. Against that background, in addition to initiatives already activated, the following should be considered.
Short term: Use or adapt existing financial infrastructure and regulation
Recognising that remittances will continue to flow to Pacific Islands as the PALM scheme grows, measures to bring down costs in the near term should be prioritised by using or modifying existing financial architecture.
Improving transparency
The government must legislate on price transparency for all forms of international money transfer.
MTOs would need to demonstrate the difference between the retail and the mid-market rate, and the Australian government would need to provide support on how to calculate mid-market rates in real time. Accurate and real-time comparisons motivate consumers to change remittance providers and therefore boost competition. Policing and enforcement alongside digital literacy training will be necessary for the measure to be effective.
Failing effective regulation on price transparency, a “good practice” stamp regulated by the Australian Prudential Regulation Authority (APRA) can incentivise MTOs to adopt best practice and encourage consumers to use them.
A review of exclusive contracts for remittance providers at Australia Post (a Commonwealth-owned enterprise) must be conducted to ensure best practice.
Expanding the ‘Ave Pa’anga Pau program
‘Ave Pa’anga Pau should be expanded into other Pacific Island countries. Supported by development partners, this would be guided by the lessons from Tonga’s pilot initiative. The requirement that participating banks have a social mandate committing to low-cost service provision may have to be adjusted so that more banks can participate. Policies such as subsidising commercial banks to provide a similar initiative and supporting visa applicants to set up bank accounts at home prior to departure could complement the program.
Using existing financial architecture as a temporary measure
DFAT can subsidise business services to send regular remittances home through the regular wages system, as is already operating in New Zealand. There, the Seasonal Worker Superannuation Administration Service (SWSAS) is an opt-in initiative supported by New Zealand’s Ministry for Foreign Affairs and Trade.
Under this program, employers of seasonal workers send home retirement savings and remittances, with fees set at interbank rates.
Public intervention could provide a temporary measure to bring down costs. Australia’s central bank, the Reserve Bank of Australia (RBA), already sends regular payments (such as pensions) to overseas recipients. The RBA, on behalf of the Commonwealth of Australia, provides transactional banking services to more than 100 Australian government agencies. In the 2022 financial year, the RBA distributed 1.1 million international payments totalling A$17.6 billion.
Under direction from the government, Australia’s central bank could administer regular remittances for PALM workers to nominated bank accounts in the Pacific until the market is ready.
The price could be determined by competitive systems. One option is a reverse auction, where MTOs bid for an exclusive contract to provide the remittance service instead of the RBA. If the MTO offers a lower cost service than the RBA, then that MTO provides the service for PALM workers. If the RBA’s service is cheaper than the lowest bid, it would provide the service instead, keeping the public option open. However, if the RBA cost is not low enough, another option is a subsidy, whereby private MTOs and the RBA bid to deliver remittance transactions at prices specified by the Australian government/DFAT and then compete via reverse auction over the subsidy they require, thereby minimising the subsidy. The Australian government could also contract out multiple fixed-rate services to Pacific market providers, for example in country-specific corridors. The bid for the lowest rates would win the contract, thereby creating competition for the market, rather than in the market. Under all public options, the exclusive contract would be up for periodic auction, to keep pace with changes in the market and technology. And to promote further competition, Pacific Islanders working in Australia would not be bound to using them, thereby encouraging competitors to lower costs or offer better services or other benefits.
Intervening in the remittance market given structural inefficiencies and national interest considerations is arguably within the remit of the RBA.
The structural lack of competition born from the small-sized Pacific market points to inefficiency. There is therefore a prima facie economic case for public intervention, of which public provision (i.e., by the RBA) is an option. Doing so is also in the interest of the welfare of the Australian people, given the benefits of lower cost remittances for both Pacific development and the sustainability of the labour mobility scheme. Regardless, this policy remains substantial in nature and would require significant political and institutional ambition to be implemented.
Longer term: Prepare for a digital future
While leveraging the existing financial infrastructure will help to temporarily cut costs, going digital is the future. Digital transfers can provide longer-term and cheaper options than cash transfers. They can also improve productivity by reducing travel and time burdens of remitting through cash-to-cash services and can broaden inclusive Pacific economies.
There is no underestimating the benefits of digitalising the Pacific, but costs and complications must also be considered, including needs for cybersecurity and supervision to protect Pacific citizens.
Moreover, corresponding banking relationships may still be needed by MTOs to provide this service, so ongoing regulatory support for MTOs’ inclusion in the banking industry will be important. Ultimately, investing in digital connectivity as part of a development program goes further than improving people’s bank accounts — it impacts health, education, economic development, and social connectivity.
Enabling digital identity systems
The Australian government can fund and develop an eKYC system (digital identity verification system) for PALM workers and families using their visa documents. As an opt-in system, PALM workers could nominate two people to participate in the eKYC system during the visa application process. The eKYC would help workers efficiently switch providers using portable KYC data on a central database, reduce operational costs, and encourage regional standards.
Data would be decentralised, encrypted, and stored on the user’s mobile phone wallet rather than a digital cloud, giving full control to users and de-risking against cyberattacks.
Pacific governments could settle agreements with the Australian government to use the digital identities to build up domestic digital identification systems, which would be communicated to PALM workers at the time of opt-in.
Reflecting the challenges of access to identity papers in the Pacific, a Pacific eKYC system should require identity documents according to perceived risk. Global standards groups have called for a tiered risk-based KYC system like those in Nigeria, Russia, Eswatini, Peru, and Egypt that accommodate less due diligence for lower-value remittances.
AUSTRAC recognises the value in risk-based approaches — they improve effectiveness and efficiency of verification. Although tiered risk systems are not “a perfect solution, it beats the alternative: that the unbanked move towards informal remittance channels which are not regulated or monitored”.
Learning from these case studies by adopting a tiered system can help Pacific nations transition to a simplified digital future.
Leveraging technology and communications infrastructure
In July 2022, Telstra completed the purchase of Digicel Pacific, a telecommunications and network services provider in the Pacific. Digicel Pacific was acquired with the support of a US$1.33 billion financing package provided by Export Finance Australia. Communities in Papua New Guinea, Vanuatu, Fiji, Samoa, Tonga, and Nauru are now serviced by Telstra, which, as Australian Foreign Minister Penny Wong said,
…reflects [the Australian government’s] commitment to help build a stronger Pacific family through investment in high-quality infrastructure. Telecommunications and digital access are critical to sustainable economic growth and development outcomes…
This purchase presents an opportunity for the Australian government. DFAT should collaborate with Digicel Pacific and “recommerce” providers to offer free mobile wallet facilitation and cheap refurbished mobile phones to the market, including smart phones and feature phones — available for purchase from major Pacific retailers and not attached to contracts with telecom providers to mitigate the risk of profit maximising and bad contracts. Feature phones can access the internet but not perform the advanced functions of a smartphone, making them cheaper but still able to facilitate mobile wallet transfers. Private companies across the Pacific — supported by the Australian government — can refurbish end-of-life electronic devices including phones to re-sell cheaply or donate to unconnected communities.
Such partnerships would not only bring critical digital technologies and financial inclusion to Pacific communities, but address sustainability in the Pacific market.
However, the lack of digital infrastructure in the Pacific — including cellular towers, communications cables, and cybersecurity and resilience — is a structural challenge that will also need to be met, primarily by more investment from development partners including Australia, Japan, and the United States.
Ongoing: Coordination by development partners
Traditional development partners in the Pacific want to collaborate. The newly created Partners in the Blue Pacific initiative is testament to growing interest in these efforts.
Three of the Blue Pacific partners — Australia, New Zealand, and the United States — provide significant sources of remittances to the Pacific. It stands to reason that collaboration between these three countries be part of any solution to the problem of high remittance costs.
Partnership efforts should focus on three objectives. The first is combining funding for more iterations of the successful Pacific Financial Inclusion Programme. Initiatives could include country-specific forex calculators, preferential forex rates for nations in the PALM scheme, and the roll-out of mobile wallets and digital infrastructure. Collaborative funding for the expansion of ‘Ave Pa’anga Pau would be another option.
Second, Australia, New Zealand, and the United States can collaborate on technical and data support for Pacific countries. Pacific nations expressed a need for technical capacity support for reporting and monitoring on remittances, and for the improvement of IT infrastructure. According to a recent report, Kiribati, Tonga, and Solomon Islands also welcome the opportunity to improve remittance data reporting in line with international standards, including having more accurate data on the actual value of remittances, remittance behaviours, costs, and current pricing data.
Alongside support for reporting, Australia, New Zealand, and the United States should establish a central interactive database for remittance flows into Pacific Island countries so governments and policymakers can precisely track remittance flows and average costs of remitting for different methods. As it stands, Pacific countries are likely underreporting remittance receipts due to data and capacity constraints, resulting in data mismatches such as that noted between the World Bank’s global remittance database and National Reserve Bank of Tonga’s reports.
Third, partners could collaboratively reform regional banking standards to seek to rectify the problem of debanking — a problem largely driven by US banks. Donors could encourage more evidence-based risk assessments of corresponding banking relationships with Pacific banks that can then be advocated for among global banks. Simultaneously, partners can support compliance of Pacific banks with global standards.
Other measures outlined in the G20 Roadmap could be driven forward collaboratively to ensure a full response by Australia, New Zealand, and the United States.
