Pacific payments part 1: background
Payments from Pacific workers living in New Zealand are a key source of income for families in many Pacific Islands. The transaction cost of these payments is amongst the highest in the world. This is part 1 of our exploration into this important issue.
Every year it costs Pacific people living abroad over $100 million to update some numbers in a database. These are important numbers — they represent money being sent to the Pacific Islands, money that allows children to go to school, families to buy food, and relatives to get medical treatment.
The transaction cost of these payments (also called remittances) are amongst the highest in the world. It is more important than ever that Pacific people get a fair deal given the fact that the World Bank expects these payments to decline in the wake of COVID–19 due to a fall in wages and employment of migrant workers. At Springload we know technology designed with a human centred approach improves lives. We’re exploring technology that can make sending money across the southern seas a simpler and cheaper experience.
Causes of high costs
Small size of payments
Although many payments are made, the average size of each transfer is small, with 75% being under $500 NZD. Given that most providers charge a fixed minimum fee, the average cost as a proportion of each payment is high.
Geographical isolation
The Pacific Islands are the home to 2.3 million people scattered over an area equivalent to 15% of the earth’s surface. This massive area makes it unattractive for new financial institutions to set up shop and in some cases many people are left without a bank (known in the industry as unbanked). For example, in the Solomon Islands, the unbanked live on average 6 hours away from the nearest bank.
Lack of other options
Although containing just 0.1 percent of the world’s population, the Pacific region contains one third of the world’s languages, demonstrating a cultural diversity and significant social, political and behavioral complexities. Although there are a range of new technology focused (fintech) providers emerging, there are still many barriers stopping their widespread availability and adoption including digital and financial literacy, group norms, internet infrastructure, money laundering policy and many others.
Challenges
Many people are not using the lower cost options
Most of these payments are personal for the individuals not transactional. The most common reasons cited for sending money are groceries, school fees, funeral and wedding contributions, and medical expenses. These payments often need to be made with little time for planning so reliability, speed and access to collection points are often bigger factors than cost. Given the incredible importance of these payments, trust is a crucial factor and the hassle of needing to visit a branch and completing paper forms can actually lend to a feeling of credibility of a provider.
Digital and financial literacy
Low digital literacy and confidence will make it difficult to get Pacific workers and families to move to new online remittance platforms. There is a high reliance on group norms and word of mouth in choosing providers. Adopting online banking or mobile money also means families need to learn new ways to budget given the prevalence of using physical cash to divide up their money. Improving digital and financial literacy is a focus of many government and aid initiatives as, amongst other reasons, improving access to digital financial services contributes to the financial empowerment of women. Research shows that “digital transfers over cash shifted intrahousehold decision-making in favour of women” because the transfers were less observable to other family members.
Read more about this issue in Pacific payments part 2: designing for trust.