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FSB Meeting on Correspondent Banking Service Restrictions, and the Pacific’s update to the 21st World Bank Global Remittances Working Group: Pacific Update, 12th – 13th October 2017. Washington, D.C.

The Pacific has successfully evolved from the highest-cost remittance region in the world, to the world’s lowest-cost multi-currency region for small value cross border payments, in the period 2009-2017.

This is due to strong leadership in technological innovation, enhanced regulation, and more competition as a result of shared core infrastructure for small financial institutions. Several countries in the Pacific region have populations who now use digital/mobile wallet services at a higher rate than anywhere else in the world, per capita; and this is coupled with some of the highest rates of economic dependency on remittances, as a percentage of GDP, at a national and macroeconomic level.

The Pacific is once again, an exciting case study for the ongoing efforts in the rest of the world, to match the results of our community of Small Island Developing States (SIDS) in driving down costs of remittances, and the early uptake of gateway financial products. However, significant reversions (due to factors outside of the control of the Pacific’s regulators) are being observed, causing progress to regress, and the future to look bleak, despite so many overwhelming positives. De-risking is a critical issue.

Data Points and Cost Levels:

• 40% of cross border payments over the KlickEx Payment system, which is the core of the regional APFII infrastructure, are bank to bank, and cost under ⅓ of a percent in fees, including TT charges for beneficiaries outside the APFII group countries, well down from 7-13% in 2012.

• 60% of transactions involve cash at some point, and cash use on the send side (NZ, Australia) has almost doubled in the past 24 months. Some MTOs are reporting drops from 80% electronic payments, to 20% electronic payments as MTOs and even their customers are blocked from using MTOs via bank transfers.

• ‎Costs on a $100 payment involving at least one leg as cash, has not risen despite de-risking, and remains low at between 4% and 6%, and usually under 3% for USD 200.00. This is down from 22-27% in 2009, and is in part due to the support that de-banked MTOs are receiving from APFII’s cash handling and clearing infrastructure.

The single biggest barrier to additional cost reductions is now de-risking. No other issue is close, including KYC or compliance, and de-risking accounts for up to 60% of the operational costs that participants reported as ‘barriers to lower consumer prices’.

Access to correspondent banking relationships is extremely important to all emerging markets, and a key precursor to the success of the World Bank’s efforts to eliminate poverty through financial inclusion, competition, trade, enterprise, and private initiative.

Next Steps for APFII: Beyond facilitating the trend of reducing the price of remittances, now at a cost plateau of possibility because de-risking remains pervasive, APFII is now moving to address financial inclusion in additional ways.

• In October 2017, KlickEx, a systemically important APFII member, extended its clearing systems to process increasing amounts of regional transactions on IBMs Blockchain transaction service. In partnership with IBM, the Pacific is now the world’s only multi-country blockchain backed payment infrastructure.

• Leveraging “Distributed ledgers”, APFII is launching a mission to provide life insurance to 100% of Tongan households by 2H 2018. This will be expanded to the other Pacific markets, and expanded to health insurance also, based on low administration advantages of smart contracts referencing a DLT that is synchronized with verified payment-system data.

KPI: To resolve de-risking and return electronic payment volumes to 80% of all transactions. Currently, this has fallen by half, to 40% due to lack of infrastructure in send markets, such as Australia, NZ, and the US. Actions:

• APFII is planning to invest $300m next year to build out the financial platforms in partnership with IBM, local Pension Funds, and local/strategic Central Banks (*several NGOs and non-member FIs have expressed interest to co-participate) to implement this.

• $100m of the above will also be committed to resolving de-risking outside the Pacific, with the participation of 3x National Payment System expansions already underway, with 5x observer markets including HK, the UK, US lining up access to send county clearing systems – again with the strong support of deepening operational and technological partnerships.

• When successful, APFII Members will consist of nearly 3,000 FTE staff, and two million monthly customers, covering 25 countries, and real time payment and trade finance facilities to over 110 countries.

About The Advanced Pacific Financial Inclusion Infrastructure Organization is an industry body coordinating regional efforts to enhance competition and provide common services for the efficient delivery of financial inclusion services in the Pacific.