The remittance industry provides international money transfer services for migrant workers and others looking to send relatively small amounts of money overseas, but is under threat of "unintended consequences" from too-stringent regulation and stingy Australian banks, a new research paper suggests.
The paper, written by Ken Ooi and Ross Buckley for the Centre for International Finance and Regulation, notes that the fees banks charge for transfer services tend to make the cost of small international payments prohibitive.
In addition, both senders and receivers of funds need to hold a bank account. "This represents a particular problem for the many small transfers that are made to the lesser developed countries in our region," the paper points out.
These factors have combined to produce what the authors call "an alarming trend" in Australia, where banks are closing the accounts of MTOs, rather than face up to the costs of compliance and the risks of failing to meet anti-money laundering and counter-terrorist financing regulations.
At last count, three of the Big Four banks had terminated the accounts of MTOs, and Westpac is facing a class action in the Federal Court next week by more than 100 MTOs to prevent it from following suit and effectively ending an industry estimated to facilitate transfers of A$30 billion a year.
The researchers argue that action needs to be taken to prevent this from continuing, as money transfer operators facilitate international payments and offer services to a segment of the market that is often unserved by banks.
"Across the Pacific Islands, this fosters financial inclusion, which may be defined as the delivery of financial services at an affordable cost to all sections of society," the paper states.
The researchers warn that closing down the industry would threaten the financial stability of the Pacific region.
The banks' regulatory obligations require them to finely balance opposing interests. On the one hand, an overly stringent application of risk controls can detract from the ability to do business. On the other hand, several large global banks have found out to their cost that an insufficient regard for risk can result in heavy fines and severe reputational damage.
The paper suggests Australia's banks, having seen their overseas counterparts come to grief, have decided to take the simpler path of closing the accounts, thereby reducing access to financial services for people in the Pacific Islands.
Governments and regulators in Australia and New Zealand have responded by taking steps to encourage banks in the two countries to explore service options that promote financial inclusion, according to the researchers.
Two examples provided are from 2008 and 2012 respectively, where Westpac and ANZ introduced remittance card services facilities that allowed funds paid in by remitters in Australia and New Zealand to be withdrawn via automated teller machines or point-of-sale technology by a linked-card holders in the Pacific Islands.
But these services enjoyed limited success, as recipients were generally required to visit a bank branch. Accordingly, people who could not access a branch were unable to use the services.
The authors further argue that Australian banks have an obligation to promote financial inclusion, and to pursue broader corporate social responsibility goals, based on:
- the pivotal role that the banks play in the Australian financial system; and
- the action by the Federal Government to guarantee the liabilities of the banks during the worst of the financial crisis in 2008, recognising their importance to a stable financial system.
"Therefore, as the banks have previously benefited from public sector support, they should incur a regulatory obligation to make tangible CSR contributions," they say.
Among suggested courses of action, individual MTO operators would benefit from having a collective industry body that represents their interests with a unified voice. And for their part, government and regulatory bodies could contribute by devising a legislative and regulatory framework that encourages banks to promote financial inclusion, the authors conclude.