By :- Nathan Lynch, Regulatory Intelligence, Thomson Reuters
The de-banking of Australian remittance providers has created a perfect opportunity for global digital payment companies to expand their offerings in the jurisdiction, sources said.
The traditional small-scale “bricks and mortar” remittance industry is facing a combination of regulatory challenges, bank account closures and the threat of digital disruption from major online players. Apple, Google and PayPal are treating Australia as a priority market and testing ground to expand their peer-to-peer (P2P) payment offerings.
PayPal: making significant inroads in Australia
This week ANZ Banking Group announced it had partnered with Apple Pay to support payments over iPhone devices. At present Apple Pay is only available in Australia to holders of American Express cards. U.S. giant Alphabet has also announced that its Google Wallet and Android Pay services will launch in Australia in the first half of this year. The announcement means Australia’s 24 million residents would be the first market outside the United States to access the service, which facilitates P2P transfers as well as “tap and go” payments.
In addition, PayPal has made significant inroads into Australia after registering as an authorised deposit-taking institution (ADI) with the country’s banking regulator. PayPal is licensed as a “purchased payment facilities provider”, which means it can hold funds on behalf of customers but cannot provide more traditional banking services such as charging or paying interest on deposits.
The “limited ADI” status has been central to PayPal’s efforts to expand its payment infrastructure in Australia, including supporting cheap, fast P2P payments between PayPal’s users in 203 different markets. PayPal is also planning to expand its Xoom service to Australia but has not yet set a firm timetable.
At present Xoom facilitates money transfers from the United States to Australia, Bangladesh, Pakistan and Singapore. It also allows people to send money from the United States to some of the Asia-Pacific region’s largest remittance markets, including China, the Philippines and India. Senior officials from PayPal and Xoom said they were treating Australia as a priority market for their regional expansion in the remittance business.
“PayPal is most penetrated in western developed markets; that’s usually where we most of the cross-border P2P. Of course that includes Australia as one of our markets,” said Meron Colbeci, senior director for global consumer product management at PayPal.
“Traditional” remittance sector
Within the traditional remittance sector, however, there are mixed views about the digital transformation that is taking place. Some remitters view technology such as bitcoin, for example, as a potential solution to the problems they face with domestic banks and their correspondent banking partners. Remitters are exploring whether they can use alternative transfer methods to move funds abroad. Even this does not help remitters if they lose access to domestic bank accounts which are considered essential for accepting cash and incoming transfers.
Thyer McCaffery, founder of the International Payment and Transaction Monitoring Association (IPTMA), said the wholesale closure of remitters’ bank accounts in Australia had created a clear opportunity for foreign players to enter the domestic market. He said the larger digital players could challenge the so-called “de-risking” process and often had direct relationships with the correspondent banks that are understood to be driving the account closures.
“The Australian banks’ behaviour in de-risking their remitter clients is undoubtedly supporting large foreign businesses to the detriment of local businesses. The international remittance companies that have accounts with international banks with a presence in Australia have a fall-back on their banking, whereas Australian remitters don’t have that,” he said.
Regulatory Intelligence has spoken to several former remitters who were forced to leave the industry as a result of bank account closures. In some cases the process had taken two years to play out as they moved their accounts from bank to bank, sometimes finding a new institution with just days to spare.
One former remitter, speaking on condition of anonymity, said the pressures of digital disruption had not hit the industry yet but the bank account closures had been fatal for many small and medium-sized operators. He said many “de-banked” remitters were opening accounts for separate companies with different directors and using those entities to circumvent the banks’ ban on remitters. Grocery stores, travel agents and import-export companies were all being used as a cover to avoid detection by the banks’ transaction monitoring software, the source said.
“The traditional clients of remitters, especially on the recipient side, often have a low level of technological sophistication. They’re not going to easily make the transition to using Google Wallet or PayPal. These people like to see face-to-face the person who’s handling their payments. I think over time this will change but right now there’s a real demand for traditional remittance services,” the source said.
“I think technology is going to disrupt this industry but it will be a gradual process among the main users of traditional remittances,” the former remitter said.
The Asia-Pacific region receives more than $113 billion in remittances each year, making it the world’s most lucrative remittance market, according to the United Nations’ International Fund for Agricultural Development. India and China are the top recipient countries, with the Philippines following close behind.
The remittance corridor between Australia and the Philippines is critical for local remitters. Both traditional and digital remittance providers have identified this for the local industry, but this will not happen without challenges for the digital disruptors.
While the senders of funds may be working in Australia and have access to banking services, for example, in many cases the recipients cannot afford a bank account. Remitters said in many cases Filipino customers need to have a minimum balance of 500 pesos (A$14) to retain a bank account.
“They just don’t have that sort of money in savings. They expect cash to be delivered and then they’re ready to walk and pick up those funds,” a former remitter said.
Market participants said these types of customers dealt in relatively small, regular remittances which could prove very cost-effective if customers embraced digital technology. On the other hand, it may be difficult to transition the recipients to digital technology and banking services.
This is a challenge that the major digital players are spending significant sums to resolve. In July last year, for example, PayPal acquired Xoom for $890 million, due partly to its success in attracting first-generation immigrants in the United States who have moved from an emerging market. Those customers then promote Xoom to friends and family in their home countries.
Xoom has developed a unique model where the sender requires an internet-enabled device but the recipient can receive cash in a “traditional remittance” manner, even via a courier service. John Kunze, vice president of Xoom, said the mobile internet had transformed the industry, with two-thirds of remittances now originating from a mobile device.
“We’re not talking about paying back IOUs or small gifts, what we’re talking about is maintaining and sustaining lives back home,” Kunze said. “You can use technology to bring a better experience, to bring a more affordable one and to bring a more secure one to consumers.”
Kunze said bridging the gap between technology and tradition would be central to digital companies’ success in transitioning customers to their platforms. “We have cash pickup networks that are as big or bigger than anyone in the business, wherever we operate,” Kunze said. “In some markets home delivery is important and in those markets we do offer home delivery, where a courier will show up, ring your doorbell and give you an envelope with cash.”
Regulators … and rents
In the context of these innovative services, some traditional remitters worry their “bricks and mortar” businesses may end up becoming the video stores of the payments world. The businesses are saddled with high fixed costs and lack the economies of scale to bear the cost of a complex and costly regulatory environment.
McCaffery said it was unfortunate that the digital disruptors were able to take advantage of a hostile banking environment in Australia to win market share. He said the digital disruptors should be compete on cost, speed and service, not on the fact that they can access Australian banking services. He said the major digital players and even the larger remitters had an advantage as they were able to use their scale to convince banks to keep their accounts open.
“A bank will look at a remitter if they’re of a certain size. For instance, there’s a bank in Australia that will open accounts for a remitter if it’s worth their while getting a major consultant to do an audit. But the small remitters don’t stand a chance,” he said.
Anti-money laundering regulator AUSTRAC is the best source of information on official, or legitimate, remitter activity in Australia. AUSTRAC launched its remittance sector register in 2011, with a staggered deadline of May 2012 (for individual remitters) and November 2012 (for networks). Remitters must renew their registration every three years.
Despite industry expectations that remitter registrations would have plummeted since the bank “de-risking” process began, AUSTRAC’s data shows that the numbers have been relatively stable since mid-2014. In June 2014 there were 5,527 remitters registered with AUSTRAC; in June 2015 that figure had fallen by just 2.75 percent to 5,379. At the end of March 2016 there were approximately 5,250 registered remitters. This number was made up of approximately 4,710 unique businesses (as remitters can register in a number of different categories).
McCaffery said the number of remitters operating officially in Australia had undoubtedly plummeted in recent years but this might be yet to show up in official figures due to the time lag with registrations. “There’s no question that the banks have de-risked and now the remittance companies have fallen off the radar. They’re either doing it illegally or not at all,” he said.
From an AML/CTF perspective, remittances are high-risk. The Australian Federal Police (AFP) have identified huge amounts of illicit money flowing into and out of Australia through remittance agents across the Asia-Pacific region. In some cases remitters will hold multi-currency accounts in jurisdictions such as Hong Kong or Singapore and can use this as a hub for international payments flows.
In many cases legitimate customers may not be aware that their funds are not “remitted” but are simply “netted off” in a hawala-style scheme. Instead of transferring funds the remittance agent may simply hand the customer cash that is the proceeds of crime.
Anti-money laundering experts believe it is inevitable that there will be consolidation in the remittance sector as a result of the twin pressures of regulation and digital disruption. Some say privately that they are concerned that the illegitimate operators will be the only ones that can survive these twin pressures.
The AML regulator is aware of these threats. A spokeswoman for AUSTRAC said the regulator was vetting all applications to provide remittance services on a case-by-case basis, with entities being required to demonstrate they could meet strict compliance obligations.
“Registration automatically expires for all entities that do not renew, and remittance service providers need to re-apply for registration if they do not renew by the due date. Our renewal process identifies entities that are not engaging in their compliance obligations through the renewal process,” she said.
Focus on compliance
Among the major digital players, meanwhile, compliance with AML/CTF obligations is a priority. These entities are well aware that being found in breach of AML/CTF regulations could undermine their significant investment in the remittance business.
Kunze said the pressures of AML/CTF compliance were affecting organisations of all sizes. He rejected the claim that larger players enjoyed an advantage due to their scale and direct relationships with the major international banks.
“The companies that are under the most pressure, large and small … are the ones that perhaps don’t have AML compliance and consumer protection running at their core. We see lots of companies that are under intense pressure from either correspondent banking relationships or payout partners or domestic banking relationships,” Kunze said. “The way that one has to deal with these challenges is by showing up and proving to anyone who looks that you are absolutely running a safe and compliant business,” he said.
In the longer term, Kunze said Xoom believed the focus on AML/CTF compliance would be good for the payments industry as a whole.
“While it seems like it’s having some negative impact on the industry, in the long term it’s very good because it forces everyone in the business to ensure that they’re running a safe business,” Kunze said.
He also said in many respects the international scale and reputation of the major digital players meant that they experienced greater regulatory and law enforcement scrutiny than the smaller market participants. Scale offered commercial benefits but it also came with responsibilities, Kunze said.
“While scale is a big advantage for PayPal, over the entire industry scale does come with the mandate to run AML compliance, consumer protection and a safe business on that scale as well. So we have to keep moving the ball forward on this as we grow,” he said.
Head Regulatory Analyst | Australia & New Zealand
Financial and Risk