The New Zealand Pacific Remittance Corridor: Lowering Remittance Costs

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1 Chapter 26 The New Zealand Pacific Remittance Corridor: Lowering Remittance Costs Don Abel and Kim Hailwood Remittances are a key factor in Pacific island countries, representing 12 percent of gross domestic product (GDP) on average, yet the Pacific region has some of the highest remittance fees in the world. To address this issue of remittance fees, in June 2007 the World Bank s Pacific office convened a high-level public-private stakeholder meeting in Sydney, attended by the Central Banks of Australia, Fiji, New Zealand, Tonga, and Samoa as well as executives from the primary remittance service providers in the region. The meeting recorded that although remittance fees were trending downward in other parts of the world, rates being charged in the Pacific were unreasonably high. At that time, remittance providers were routinely charging percent of the value of the transaction and sometimes even more. This meeting marked the beginning of the New Zealand Pacific Remittance Project, a project that over the next three years would be responsible for reducing the cost of sending money between New Zealand and Pacific island countries. The purpose of this case study is to record how this was achieved what worked and what did not. Background Although individual remittances from New Zealand to Pacific island countries are often relatively small sums a few hundred dollars sent home each month the market as a whole is far from low value. Remittances to the Pacific region (principally from 325

2 326 l DON ABEL AND KIM HAILWOOD Australia, New Zealand, and the United States) are estimated by the World Bank to be worth over $470 million annually (World Bank 2010b). This estimate does not capture payments made through informal, unrecorded channels. The World Bank (2006b) notes this could add at least another 50 percent to the official estimate. Most Pacific island economies are dependent on remittances as an important source of household income and foreign exchange. Samoa and Tonga are among the top 10 global recipients of migrant remittances as a share of GDP (World Bank 2010c). As well as providing income directly to households to improve living standards, remittances are an important source of current account financing, enabling higher levels of imports, which contribute to macroeconomic stability (Browne and Mineshima 2007). In Samoa and Tonga remittances far surpass official development assistance receipts. In these countries, remittances exceed a fifth of GDP (World Bank 2010b). New Zealand is a key source of remittances for both countries. The simple model of sending money home has enabled a whole industry to grow and prosper on the back of transacting remittances. According to Gibson, McKenzie, and Rohorua (2006) the high transactional costs of Pacific remittances cannot be justified in terms of scale. They analyzed two non-pacific countries (Ghana and Mozambique) with scales of remittances similar to the New Zealand Tonga corridor. Both African countries had substantially lower money transfer fees, and the transaction could be completed at one-third of the cost. The impact of the fees charged on remittances can be dramatic, particularly in relation to the small amounts sent, the purchasing power in the receiving country, and the typically lower incomes of New Zealand family members sending the money. Any decrease in remittance costs would result in more money remaining in the pockets of Pacific peoples. It is estimated that remitters to the Pacific may face additional charges of up to $90 million in remittance fees each year equaling 20 percent of the total amount formally remitted in 2008 (Luthria 2009). 1 The World Bank s 2006 Global Economic Prospects highlighted three strategies for lowering the cost of remittances: promoting competition, improving migrants access to the financial system, and disseminating information. In 2007 the Reserve Bank of New Zealand established the cross-government New Zealand Pacific Remittance Project, which included representatives from the New Zealand Ministry of Pacific Island Affairs and the Ministry of Foreign Affairs and Trade (which manages the New Zealand Aid Programme), in cooperation with the World Bank. The project s goals were to reduce the total transaction cost of remittances to between 5 and 7 percent by encouraging competition (including access to banking products and services), by promoting transparency and fee disclosure, and by building financial awareness. Initially the project was hampered by the lack of remittance data needed to assist policy makers and to inform potential market entrants. By working with the Samoan and Tongan Central Banks, however, and using the seminal paper of Gibson, McKenzie, and Rohorua (2006), sufficient information was gathered to make a start.

3 26. THE NEW ZEALAND PACIFIC REMITTANCE CORRIDOR l 327 Competing Financial Services Australian banks dominate the financial markets in Pacific island countries. Although these Pacific island domiciled banks have sustained high levels of profitability over the past decade percent return on equity they have not been significant competitors in the provision of household remittance services. A key objective of the New Zealand Pacific Remittance Project was to encourage a New Zealand based Australian bank to compete effectively in the New Zealand Pacific remittance corridor through using inexpensive electronic means. In reviewing the electronic card market it was clear that cross-border transactions could be and were being made using these means without any oversight by authorities. Although the potential money launderer could use this method with impunity, the genuine, hardworking family member was forced to send small amounts of money home through traditional banking channels at considerable cost. The apparent barriers to banks developing electronic cards to remit funds across borders were the regulations for anti money laundering (AML) and countering the financing of terrorism (CFT). The product identified by New Zealand based banks as most easily deployed to achieve low-cost remittances was a card facility using the banking system s international ATM and EFTPOS networks. To encourage such product development required a change to AML/CFT legislation in New Zealand, and, consequently, the Financial Transactions Reporting (Interpretations) Regulation was implemented in A New Zealand domiciled Australian bank was the first financial institution to take advantage of the regulatory change with the launch of a new card facility in This facility allowed funds to be loaded onto a special remittance card account by a New Zealand based remitter, while a second card was issued remotely to an overseas resident, which allowed money to be withdrawn in the overseas country through the ATM and EFTPOS networks. The facility had to operate within tightly specified parameters, including monitoring on a daily basis. This meant that the opportunity for abuse was mitigated effectively. The remittance card was judged by a New Zealand weekly newspaper as the best new banking product of the year in a 2009 business feature article. Simultaneously a Web site ( was developed, cofunded by Australian and New Zealand governmental aid agencies, to allow remitters to compare the costs of sending money through various providers from Australia and New Zealand to Pacific island countries. The Web site was accredited as meeting the World Bank s standards for remittances databases in In part, high fees are the result of a lack of competitive pressure, with operators in the marketplace able to hide the real costs of remitting money home in complex fee structures. And, in part, high fees have been driven by regulatory costs imposed by customer identification and verification requirements. With the introduction of the Financial Transactions Reporting (Interpretations) Regulation, increased competition from a new remittance product, and transparency in the market from information provided via the SendMoneyPacific Web site, costs began to fall.

4 328 l DON ABEL AND KIM HAILWOOD On average, for every country surveyed by the SendMoneyPacific Web site (table 26.1), it is significantly cheaper to remit money to the Pacific from New Zealand than from Australia. 2 Table 26.1 Cost of Sending $NZ 200/$A 200 from New Zealand/Australia to a Pacific Island Country as Percentage of Total Amount Sent Papua New Guinea Solomon Islands Banks Banks MTOs MTOs Tuvalu Kiribati Banks Banks MTOs MTOs Vanuatu Fiji Banks Banks MTOs MTOs Samoa Tonga Banks Banks MTOs MTOs Source: SendMoneyPacific.org as of June Note: MTO = money transfer operator. Financial Education Over the course of a year, the fees paid by one New Zealand based remitter can equal more than one week s salary. Since remitters do not, as a rule, increase the amount they transmit to take account of these fees, the net result of higher charges is that the recipient simply receives less money. The problem is often compounded by the low level of financial capability among both remitters and beneficiaries. New low-cost remittance products can be fully successful only when consumers are empowered with the skills, the knowledge, and the motivation to engage effectively with financial services and make informed choices. To effect real change, an understanding of the components of the transfer cost (the fee and the currency exchange rate commission), knowledge about competing products, and how the low-cost products might be used is required. Studies highlight limited take-up internationally of new remittance products if there is not a direct link to financial education (Orozco 2004).

5 26. THE NEW ZEALAND PACIFIC REMITTANCE CORRIDOR l 329 Programs that promote financial capability within the Pacific remain on a passive footing. There is a gap in the provision of relevant, easy-to-access financial information and advice to help Pacific peoples, which is impartial, jargon free, not geared to sell products, and tailored to their personal circumstances. The second phase of the project, MoneyPACIFIC, began in 2009 with the goal of providing targeted financial education to Pacific peoples in New Zealand and the Pacific region, contributing to a long-term vision of better-informed and more confident citizens, able to take advantage of increased competition and choice in the financial sector. MoneyPACIFIC is directed at building awareness, engagement, and confidence. The MoneyPACIFIC brand consists of a simple logo and a tag line Financial care is being aware. It has a clear terminology link to the SendMoneyPacific Web site. The first MoneyPACIFIC initiative was to produce 35,000 bilingual wall calendars for Pacific households in New Zealand, Samoa, and Tonga, incorporating financial tips and information relating to the cost of remitting money. The 2010 calendars were made available through schools, churches, and community groups. Following the success of the first calendar, the print run for the 2011 calendar was doubled to 70,000. The Central Banks in Samoa and Tonga were key partners in this work. The original proposal was to distribute an A4-sized information sheet on remittances and other financial issues. However, once a piece of paper has been read, it is easily discarded. It was agreed that with monthly Pacific photo shots, a calendar would be a permanent fixture in the homes of Pacific families. The benefit was that the calendar would be in the household for a year and referenced mainly by mothers, who largely manage the household and family finances. The financial tips in the calendar are being expanded through a public awareness campaign that focuses on remittances and the teaching of good money skills to children. To date these messages have been transmitted on Pacific radio stations in New Zealand. Initial outreach work conducted within the New Zealand Tongan community points to this population becoming more aware of different remittance options and the benefits of shopping around since the introduction of the two-card remittance facility, the SendMoneyPacific Web site, and the MoneyPACIFIC calendar (Developing Markets Associates 2010, as cited in Australia and New Zealand 2010). What Has Been Achieved, What Did Work, and What Did Not The introduction of the remittance card increased competition in the New Zealand Pacific corridor, placing pressure on other operators to protect their market share by reducing costs below the 7 percent targeted by the New Zealand Pacific Remittance Project. Surprisingly, though, and against expectations, the two-card remittance product was not adopted in Australia nor was it widely publicized in Pacific island countries. Consequently, the costs of remitting funds from Australia and New Zealand have

6 330 l DON ABEL AND KIM HAILWOOD diverged widely with, for example, the average cost for a person remitting from Australia to Samoa currently almost twice that from New Zealand. This points to the importance of political engagement on the issue of the cost of remittances. Both the Australian and New Zealand governments have a keen wish to see these costs reduced for Pacific island communities, and there is a strong trans-tasman initiative to meet this objective. In addition, South Pacific economic ministers and Central Bank governors have agreed that they need to play a leading role in advocating the importance of financial education and to drive collective national actions to achieve a strong focus on financial capability within the Pacific region. A set of MoneyPACIFIC goals were agreed on in 2009 by the Pacific Islands Forum economic ministers to strengthen financial capability in the Pacific region over the coming decade. They include goals on financial education, access to basic financial services, and consumer protection. Despite a relatively limited budget, the New Zealand Pacific Remittance Project worked because it brought together a range of public sector institutions (including the World Bank) and private sector interests that jointly believed the cost of remitting funds to the Pacific island countries was unnecessarily high. Their combined effort meant that change became inevitable. Notes 1. A further impetus to look at remittance costs in New Zealand arose from the temporary worker migration program: the Recognised Seasonal Employer Scheme. This program, which began in 2007, each year draws up to 8,000 workers to New Zealand, predominantly from Pacific island nations, to work in the horticulture and viticulture sectors. Their earnings are often sent home as remittances or repatriated savings. 2. A comparable trans-tasman cost disparity can also be seen in the World Bank s Remittance Prices Worldwide database.