First appeared in the Australian Financial Review 

By Dr. Manjula Luthria, Senior Regional Economist for the Pacific Islands, World Bank

10 November 2009—After the devastating tsunami that hit Samoa and Tonga on September 30, Australian and New Zealand banks stepped in to assist, waiving the substantial fees on sending money back to these countries throughout the month of October.

Samoans and Tongans living abroad were first to help their families cope with the tragedy. It is good news that all of the money intended for the needy actually made it there instead of a chunk being lost to money transfer operators in fees.  But what happens when Samoa and Tonga are no longer in the media spotlight?

While the reprieve on transaction fees was useful in time of emergency, a more permanent solution is needed to lower the costs of money transfers. Currently, at least $100 million annually that is intended to go to the poor is lost in transfer fees. Fees on money transfers out of Australia to the Pacific are the highest in the world, ranging from 15-40 percent of the amount sent.

Pacific islanders rely on remittances as much as they do on tourism or aid, with remittances comprising over 25 percent of total GDP in countries like Samoa or Tonga. In poor countries without a Centrelink, these funds are a household’s social safety net.

Recent evidence from New Zealand has shown how an amendment to domestic financial regulations lowered money transfer fees significantly for our South Pacific neighbours.

Australia, through the leadership of the Australian Transaction Reports and Analysis Centre (AUSTRAC), should consider a similar amendment now. Australia is one of three major remittance source countries for the Pacific, and Australian banks have the most extensive financial infrastructure across the Islands.

Through a number of public-private roundtables, the World Bank found the introduction of enabling financial regulation coupled with greater competition from the ATM/EFTPOS networks utilised by banks, could significantly bring down money transfer costs.

The majority of Pacific islanders don’t have access to the level of identification demanded by global financial regulators. Without this it is impossible to open a bank account. New Zealand regulators overcame this exclusion by relaxing the identification requirements necessary to open a bank account overseas.

Early signals from the Financial Action Task Force indicate no adverse commentary on New Zealand’s amended financial regulations. That’s because regulation that helps enlarge the legitimate financial sector is a desirable objective for oversight agencies.

The amended regulation provided the impetus for Westpac New Zealand to launch a remittance product targeting Pacific communities. This innovative product has reduced the cost of transfer to under five percent and put pressure on the competition to revise their fee structures downwards.

Long after the fee waiver ends, Pacific Island communities in Australia will continue to send money home to support their loved ones. High fees on transfers take away hard-earned income that supports food, housing, health and education in the Islands. Why not empower them to provide additional assistance to those most in need? 

Now is the time for AUSTRAC to seize an opportunity that complements Australia’s development objectives in the region.