Want to help developing countries? Make it cheaper to send them money, Business Spectator, 23 November
Few things are more admirable than a worker going without so they can send money back home to their family. Chances are that within a short distance of you right now, there’s someone working long hours to send money back to relatives in Manila, Port Moresby or Mumbai. According to the World Bank, remittances to developing countries are worth half a trillion dollars annually – twice the value of foreign aid.
Yet many of those hard-earned dollars never get back home. On average, someone who tries to send $1000 to a developing country will see $77 eaten up by transaction fees and exchange rate spreads. A full-time worker who wanted to send half her salary home would be toiling away for more than a week every year just to pay financial middlemen.
There are simple things the Government can do to help address this. At the Brisbane G20 Summit last year, countries committed to reducing the transaction costs of sending $1000 to just $50. At a time when our foreign aid as a share of national income is at a 40-year low, any other assistance we can provide to developing nations is sure to be welcomed.
How do we cut the price of transferring cash? A standard economics answer is that the best way to reduce prices is to increase competition. But for a market to be competitive, consumers and businesses need access to information, particularly on prices.
Alas, this transparency does not exist today. Financial institutions will often build a commission into their advertised exchange rate while simultaneously promoting ‘no fees or charges’ associated with their services. Indeed, it doesn’t even help to compare the advertised exchange rate to the market rate, since financial institutions can access better rates by virtue of their size. The consequence of this lack of transparency is that the profit margins on remittances have increased in recent years.
Improving transparency means financial institutions should be required, by law, to have full fee disclosure. They should clearly state a single fee per transaction, denominated in Australian dollars. This is not an onerous requirement. It is no different to the comparison rates we already enjoy when we are shopping for car loans, mortgages and credit cards. Institutions would be required to use a transparent foreign exchange reference rate so consumers can easily assess which rate is most competitive. Finally, the advertising of ‘no fees or charges’ when a commission has already been built into the exchange rate is, frankly, pretty dodgy. The ACCC should be investigating these claims in the same way it investigates any other form of false advertising.
None of these ideas involve radical reform. These are sensible measures recommended by the World Bank, the IMF and the UN. Many other G20 countries are undertaking similar measures to boost competition and improve transparency in regards to remittances, including in Germany, the United States, Japan and Korea. And the importance of remittances for poverty reduction, financial inclusion and international commerce will only continue to grow as technologies like M-Pesa, the mobile phone based money transfer system in Kenya, become more mainstream and widely used.
Moreover, price transparency can sit comfortably alongside rules that prevent money-laundering, drug purchases and the financing of terrorism. These offences should and are strictly monitored, with tough penalties for breaching them. But there’s nothing inconsistent about being firm with the bad guys and transparent about the prices you’re charging honest customers.
Proper price transparency on remittances won’t just flow to developing countries. They will benefit Australians travelling abroad, studying overseas and receiving transfers from other countries as well as Australian exporters. The benefit of remittances to the Australian economy has been estimated at up to half a billion dollars a year by the Australian Centre for Financial Studies. Remittances represent a substantial contribution to the social welfare of Australians.
In a technology-rich economy, it makes no sense for exchange rate fees to exceed the price of mailing the physical banknotes to the destination country. Full price transparency for remittances would help those in need, boost our economy, and help our exporters. Oh, and meet our G20 commitments. Any takers?