The Hahm et al. paper examines the potential of Fintech to lower remittance transaction costs in Pacific SIDS, fostering sustainable development. The ladder framework outlines adoption stages, emphasizing the interconnectedness of availability, accessibility, awareness, literacy, and trust. Remittance, defined as fees sent by foreign workers to their families in their home country, plays a crucial role in the economic context of Pacific SIDS. The study aligns with effective altruism by addressing a specific and a neglected problem, if solved, potentially benefiting vulnerable communities and contributing to global sustainability.
Introduction
The term sustainability refers to the aim of living in balance with the environment and the community without causing a significant harm. There are 3 main, inter-connected aspects of sustainability: environment, social and economic. These 3 terms are connected to each other as the welfare of the society is heavily connected to the environment and the economic situation it’s in (1). Financial technology (Fintech) based companies play a key role in the process of transforming to a sustainable society with their effects on financial inclusion, sustainable investment platforms and regulatory technology (2).
Hahm et al., focuses on the region of the world deemed as “paradise”: Pacific small island developing states (SIDS), and how can fintech address some of the key problems of Pacific islanders (3). Pacific SIDS are economically fragile. Hence, these countries are more vulnerable to external economic shocks (4). Pacific SIDS countries’ one of the main income sources are remittances. However, transaction costs for sending money to Pacific SIDS remain among the highest in the world. As Tonga’s 43.2% of GDP is based on remittances, reducing the transaction costs would benefit SIDS economies massively (5, 6). The UN sustainable developmental goals target for transaction costs is 3% (7). While the global average sits around 6% for 200 $, the average transaction cost over the 14 years (2009-2022) for Tonga is 10.6% (6). For Vanuatu, this average is 14.6% (7). If the UN goal of 3% is achieved, 20 million AUD will be saved by Tongan households (6). For Fiji and Vanuatu, this number increases to 30 million AUD (8, 9) and 29 million AUD (10, 11) respectively. The authors examine if fintech can help reducing transaction costs and what can be done to increase the fintech adoption rate in the Pacific islands.
Summary
The authors identified 3 main reasons for the high transaction costs: small size of transfers, geography of Pacific SIDS and de-risking practices imposed by global institutions. The population of the Pacific SIDS countries are highly dispersed affecting the viability of physical banks. Fintech companies mostly operate digitally, thus, this tackles the geographical problems. Moreover, due to digital operation, Fintech companies have minimized operating costs such as rent. Fintech companies also use less intermediaries leading to lowered transaction costs (3). Between 2nd quarter of 2016 and 4th quarter of 2018, average transaction costs charged by online companies is 5.8% in Pacific SIDS. Mobile companies charge a slightly lower rate of 5.3%. The world average is 4.5% and 3.8% respectively. Hence, the authors suggest that fintech can be a viable option for reducing the transaction costs for Pacific SIDS (3). In the second part of the article, the focus is on how to increase adoption of fintech in these islands. The authors analyze the fintech environment in Pacific SIDS by analyzing it with 5 elements: availability, accessibility, awareness, trust, and literacy. Their analysis show that many of the Pacific SIDS countries do not have basic infrastructure for digital platforms. The countries that have the infrastructure lack the customer awareness needed for a strong fintech base. They crafted policy recommendations for SIDS country groups based on their readiness stage regarding the 5 elements used for analysis. Overall, the authors concluded that for sustainable development of Pacific SIDS countries, creating a basic infrastructure for fintech is key (3).
Contextual Background
Remittance refers to the fee sent by a foreign worker to their own family in their home country (12). Thousands of workers from Pacific SIDS go for seasonal work to Australia and New Zealand and send money to their families (13). This is not unique to Pacific islands as many migrants send money to their families at their home country. In 2021, India and China households received 140 billion dollars combined in remittance (14). UN is aware of the potential of the positive impact of reducing remittance transaction fees and the goal for 2030 agenda for sustainable development goal is to reduce the average of remittance transaction costs to 3% and eliminate all the transaction costs higher than 5%. This goal alone serves 11-2 (out of 17) of the sustainable development goals (SDGs) at household, community, national and international level. One striking outcome of remittance is in poverty reduction in household level as every 10% remittance increase per capita decreases the poverty share of poor people by 3.5%. As climate change is one of the main reasons of migration, increased remittance income due to less transaction costs can allow the countries to combat with climate change related shocks more efficiently, instead of migrating to a new country (15).
As the Pacific SIDS face one of the highest transaction costs in the world, reducing this fee with fintech can lead to a leap in terms of achieving the SDGs in the case of remittances. If the suggested policy recommendations in the paper are implemented successfully, the practices can be an example for other remittance dependent countries.
Critical Analysis
The ladder framework used by authors represent the 5 steps for adoption. The steps are availability, accessibility, awareness, literacy, and trust. The authors argue that without completing all steps, fintech adoption cannot be done. Key policy considerations were assigned for each step and these policy recommendations were matched with the countries based on their fintech adoption step (3). The ladder model gives a great overview of the path needs to be taken for fintech adoption in these countries. However, these elements are more connected, thus, instead of treating these steps as from a hierarchical viewpoint, more interconnected strategies can be beneficial. For instance, the authors only highlight the need for availability in for a group of countries where fintech services are limited and suggest supporting an innovative business environment for these countries. However, ignoring literacy, the 4th step, and solely focusing on availability might not be the optimal strategy as if the literacy increases first, it can increase demand for these technologies and it can lead to faster adoption when the technology becomes available to the population. Hence, a strategy involving the intersection of the steps may be more optimal. Another issue that authors state is the lack of reliable data regarding Pacific SIDS countries. Thus, focusing on reliable data collection for more informed and country-specific policy suggestions may be key before working on the availability. In a broad sense, the article contributes to the sustainability and fintech field by highlighting an important barrier against global sustainability and gives general policy recommendations for Pacific SIDS countries regarding fintech, based on their current adoption status.
Comparative Analysis
The policy recommendations regarding remittance are in line in most of the articles. The main recommendations include cost reduction for remittance, tax reductions for remittances for increasing remittance flow, increasing local financial literacy and bank usage (16, 17, 18). In addition, the importance of data collection is also highlighted both in other remittance-heavy regions and in the Pacific region. For instance, financial demands surveys were not conducted in more than %50 of Pacific SIDS, leading to lack of data and a gap of knowledge for many islands in the region (19). Besides the incentives of remittances, it is argued that remittances can cause limited productivity in countries. In the case of Papua New Guinea, the flourishing mining sector caused the “Dutch disease” and increased the wage rates massively (20). Some researchers draw parallels with the case of Papua New Guinea and a Pacific SIDS country, Tonga. In the case of Tonga, the flourishing sector is migrant remittances, and the economy of the country shows many characteristics of a Dutch disease. The strong focus on a specific export activity leads to increased control of resources and higher domestic production costs. All these result in significantly decreased global competitiveness. As the younger generation leaves to other countries and sends remittance to Tonga, this decreases the production in the country significantly (21). In Tonga, Samoa and Cook Islands, remittances are usually not invested in production and it disincentivizes to work (22). The controversy regarding the net effect of remittances on the countries’ economies and people’s welfare remains, and more data collection can provide a better path on policymaking regarding remittances.
Reflection and Implications
The paper demonstrates how fintech can have a significant effect on reaching sustainable development goals in Pacific SIDS countries. Moreover, the authors construct a path for how fintech adoption can be achieved for Pacific SIDS countries using the 5 rung ladder model. The paper also involves country specific details such as Nauru not reporting the received remittance volume or Palau lacking ICT data is beneficial for future researchers and policymakers in terms of where to focus on each country (3). The future research may focus on expanding the available data by data collection in different Pacific SIDS countries and analyzing the outcomes of already existing programs such as Pacific Financial Inclusion program and Vodafone Fiji Innovation Lab. As the data from all countries expands and the results and impact of the programs are analyzed, more informed decisions can be made to make Fintech serve for sustainability in Pacific SIDS.
Conclusion
Fintech can be one of the most efficient solutions for driving transaction costs down for remittance. The impact of driving down the costs of remittance is particularly important for sustainability in Pacific SIDS countries due to high transaction costs and remittance-heavy economy. Increasing the adoption rate of fintech in these countries is necessary to achieve these goals. Depending on the fintech adoption stage of the country, different actions must be taken such as building a basic digital infrastructure and increasing financial literacy. The lack of data for some countries limits the possibility for tailored policy recommendations. Hence, more data needs to be collected regarding this topic (3, 19). Some argue that Pacific SIDS countries such as Tonga are showing characteristics of a Dutch disease due to their remittance heavy economy (22). Thus, more research needs to be conducted to understand the net effects of remittances on the countries’ sustainability and overall economy. Overall, the paper demonstrates how fintech can be an effective tool to achieve the sustainability goals in Pacific SIDS and gives policy recommendations for fintech adoption in Pacific SIDS.
References
1. Johnston, P., Everard, M., Santillo, D., & Robèrt, K. H. (2007). Reclaiming the definition of sustainability. Environmental science and pollution research international, 14(1), 60-66.
2. Arner, D. W., Buckley, R. P., Zetzsche, D. A., & Veidt, R. (2020). Sustainability, FinTech and financial inclusion. European Business Organization Law Review, 21, 7-35.
3. Hahm, H., Subhanij, T., & Almeida, R. (2021). Finteching remittances in paradise: A path to sustainable development. Asia & the Pacific Policy Studies, 8(3), 435-453.
4. United Nations Conference on Trade and Development. (2012). UNCTAD XIII pre-Conference event: Expert group meeting on addressing the vulnerabilities of small island developing states (SIDS) more effectively.
5. National Reserve Bank of Tonga, “Remittance Receipts Peaked in December 2021”
7. World Bank, “Remittance Prices Worldwide Quarterly: An Analysis of Trends in Cost of Remittance Services”, Issue 45, March 2023, 7, https://remittanceprices.worldbank.org/.
8. The World Bank, “Remittance Prices Worldwide: Sending Money from Australia to Fiji”, 27 February 2023
9. Remittance total sourced from Reserve Bank of Fiji, “RBF Annual Report August 2020 — July 2021”. The World Bank, “Personal Remittances, Received (Current US$) — Fiji”, 27 February 2023
10. The World Bank, “Remittance Prices Worldwide: Sending Money from Australia to Vanuatu”, 27 February 2023
11. The World Bank, “Personal Remittances, Received (Current US$) — Vanuatu”, 27 February 2023
12. Yang, D. (2011). Migrant remittances. Journal of Economic perspectives, 25(3), 129-152.
13. Department of Home Affairs. (2019). Department of Home Affairs input to the Joint Standing Committee on Mi- gration inquiry into migration in regional Australia. Australian Government.
16. Lopez-Cordova, E., & Olmedo, A. (2006). International remittances and development: Existing evidence, policies and recommendations. Occasional Paper, Inter-American Development Bank.
17. Ratha, D. (2013). The impact of remittances on economic growth and poverty reduction. Policy Brief, 8(1), 1-13.
18. Connell, J., & Brown, R. P. (2005). Remittances in the Pacific: An overview.
19. United Nations Development Programme. (2017). Financial Services Demand Side Surveys.
20. Auty, R. 1993. Sustaining Development in Mineral Economies: The Resource Curse Thesis, London, Routledge.
21. Sturton, M. 1992. Tonga: Development Through Agricultural Exports, Pacific Islands Development Program Economic Report No.4, Honolulu
22. MacMaster, J. 1993 Strategies to Stimulate Private Sector Development in the Pacific Island Economies, in R.Cole and S. Tambunlertchai, Eds , The Future of Asia-Pacific Economies, Canberra, National Centre for Development Studies, ANU.
Remittance Hell in Paradise
Brief Summary and Relevance to EA
The Hahm et al. paper examines the potential of Fintech to lower remittance transaction costs in Pacific SIDS, fostering sustainable development. The ladder framework outlines adoption stages, emphasizing the interconnectedness of availability, accessibility, awareness, literacy, and trust. Remittance, defined as fees sent by foreign workers to their families in their home country, plays a crucial role in the economic context of Pacific SIDS. The study aligns with effective altruism by addressing a specific and a neglected problem, if solved, potentially benefiting vulnerable communities and contributing to global sustainability.
Introduction
The term sustainability refers to the aim of living in balance with the environment and the community without causing a significant harm. There are 3 main, inter-connected aspects of sustainability: environment, social and economic. These 3 terms are connected to each other as the welfare of the society is heavily connected to the environment and the economic situation it’s in (1). Financial technology (Fintech) based companies play a key role in the process of transforming to a sustainable society with their effects on financial inclusion, sustainable investment platforms and regulatory technology (2).
Hahm et al., focuses on the region of the world deemed as “paradise”: Pacific small island developing states (SIDS), and how can fintech address some of the key problems of Pacific islanders (3). Pacific SIDS are economically fragile. Hence, these countries are more vulnerable to external economic shocks (4). Pacific SIDS countries’ one of the main income sources are remittances. However, transaction costs for sending money to Pacific SIDS remain among the highest in the world. As Tonga’s 43.2% of GDP is based on remittances, reducing the transaction costs would benefit SIDS economies massively (5, 6). The UN sustainable developmental goals target for transaction costs is 3% (7). While the global average sits around 6% for 200 $, the average transaction cost over the 14 years (2009-2022) for Tonga is 10.6% (6). For Vanuatu, this average is 14.6% (7). If the UN goal of 3% is achieved, 20 million AUD will be saved by Tongan households (6). For Fiji and Vanuatu, this number increases to 30 million AUD (8, 9) and 29 million AUD (10, 11) respectively. The authors examine if fintech can help reducing transaction costs and what can be done to increase the fintech adoption rate in the Pacific islands.
Summary
The authors identified 3 main reasons for the high transaction costs: small size of transfers, geography of Pacific SIDS and de-risking practices imposed by global institutions. The population of the Pacific SIDS countries are highly dispersed affecting the viability of physical banks. Fintech companies mostly operate digitally, thus, this tackles the geographical problems. Moreover, due to digital operation, Fintech companies have minimized operating costs such as rent. Fintech companies also use less intermediaries leading to lowered transaction costs (3). Between 2nd quarter of 2016 and 4th quarter of 2018, average transaction costs charged by online companies is 5.8% in Pacific SIDS. Mobile companies charge a slightly lower rate of 5.3%. The world average is 4.5% and 3.8% respectively. Hence, the authors suggest that fintech can be a viable option for reducing the transaction costs for Pacific SIDS (3). In the second part of the article, the focus is on how to increase adoption of fintech in these islands. The authors analyze the fintech environment in Pacific SIDS by analyzing it with 5 elements: availability, accessibility, awareness, trust, and literacy. Their analysis show that many of the Pacific SIDS countries do not have basic infrastructure for digital platforms. The countries that have the infrastructure lack the customer awareness needed for a strong fintech base. They crafted policy recommendations for SIDS country groups based on their readiness stage regarding the 5 elements used for analysis. Overall, the authors concluded that for sustainable development of Pacific SIDS countries, creating a basic infrastructure for fintech is key (3).
Contextual Background
Remittance refers to the fee sent by a foreign worker to their own family in their home country (12). Thousands of workers from Pacific SIDS go for seasonal work to Australia and New Zealand and send money to their families (13). This is not unique to Pacific islands as many migrants send money to their families at their home country. In 2021, India and China households received 140 billion dollars combined in remittance (14). UN is aware of the potential of the positive impact of reducing remittance transaction fees and the goal for 2030 agenda for sustainable development goal is to reduce the average of remittance transaction costs to 3% and eliminate all the transaction costs higher than 5%. This goal alone serves 11-2 (out of 17) of the sustainable development goals (SDGs) at household, community, national and international level. One striking outcome of remittance is in poverty reduction in household level as every 10% remittance increase per capita decreases the poverty share of poor people by 3.5%. As climate change is one of the main reasons of migration, increased remittance income due to less transaction costs can allow the countries to combat with climate change related shocks more efficiently, instead of migrating to a new country (15).
As the Pacific SIDS face one of the highest transaction costs in the world, reducing this fee with fintech can lead to a leap in terms of achieving the SDGs in the case of remittances. If the suggested policy recommendations in the paper are implemented successfully, the practices can be an example for other remittance dependent countries.
Critical Analysis
The ladder framework used by authors represent the 5 steps for adoption. The steps are availability, accessibility, awareness, literacy, and trust. The authors argue that without completing all steps, fintech adoption cannot be done. Key policy considerations were assigned for each step and these policy recommendations were matched with the countries based on their fintech adoption step (3). The ladder model gives a great overview of the path needs to be taken for fintech adoption in these countries. However, these elements are more connected, thus, instead of treating these steps as from a hierarchical viewpoint, more interconnected strategies can be beneficial. For instance, the authors only highlight the need for availability in for a group of countries where fintech services are limited and suggest supporting an innovative business environment for these countries. However, ignoring literacy, the 4th step, and solely focusing on availability might not be the optimal strategy as if the literacy increases first, it can increase demand for these technologies and it can lead to faster adoption when the technology becomes available to the population. Hence, a strategy involving the intersection of the steps may be more optimal. Another issue that authors state is the lack of reliable data regarding Pacific SIDS countries. Thus, focusing on reliable data collection for more informed and country-specific policy suggestions may be key before working on the availability. In a broad sense, the article contributes to the sustainability and fintech field by highlighting an important barrier against global sustainability and gives general policy recommendations for Pacific SIDS countries regarding fintech, based on their current adoption status.
Comparative Analysis
The policy recommendations regarding remittance are in line in most of the articles. The main recommendations include cost reduction for remittance, tax reductions for remittances for increasing remittance flow, increasing local financial literacy and bank usage (16, 17, 18). In addition, the importance of data collection is also highlighted both in other remittance-heavy regions and in the Pacific region. For instance, financial demands surveys were not conducted in more than %50 of Pacific SIDS, leading to lack of data and a gap of knowledge for many islands in the region (19). Besides the incentives of remittances, it is argued that remittances can cause limited productivity in countries. In the case of Papua New Guinea, the flourishing mining sector caused the “Dutch disease” and increased the wage rates massively (20). Some researchers draw parallels with the case of Papua New Guinea and a Pacific SIDS country, Tonga. In the case of Tonga, the flourishing sector is migrant remittances, and the economy of the country shows many characteristics of a Dutch disease. The strong focus on a specific export activity leads to increased control of resources and higher domestic production costs. All these result in significantly decreased global competitiveness. As the younger generation leaves to other countries and sends remittance to Tonga, this decreases the production in the country significantly (21). In Tonga, Samoa and Cook Islands, remittances are usually not invested in production and it disincentivizes to work (22). The controversy regarding the net effect of remittances on the countries’ economies and people’s welfare remains, and more data collection can provide a better path on policymaking regarding remittances.
Reflection and Implications
The paper demonstrates how fintech can have a significant effect on reaching sustainable development goals in Pacific SIDS countries. Moreover, the authors construct a path for how fintech adoption can be achieved for Pacific SIDS countries using the 5 rung ladder model. The paper also involves country specific details such as Nauru not reporting the received remittance volume or Palau lacking ICT data is beneficial for future researchers and policymakers in terms of where to focus on each country (3). The future research may focus on expanding the available data by data collection in different Pacific SIDS countries and analyzing the outcomes of already existing programs such as Pacific Financial Inclusion program and Vodafone Fiji Innovation Lab. As the data from all countries expands and the results and impact of the programs are analyzed, more informed decisions can be made to make Fintech serve for sustainability in Pacific SIDS.
Conclusion
Fintech can be one of the most efficient solutions for driving transaction costs down for remittance. The impact of driving down the costs of remittance is particularly important for sustainability in Pacific SIDS countries due to high transaction costs and remittance-heavy economy. Increasing the adoption rate of fintech in these countries is necessary to achieve these goals. Depending on the fintech adoption stage of the country, different actions must be taken such as building a basic digital infrastructure and increasing financial literacy. The lack of data for some countries limits the possibility for tailored policy recommendations. Hence, more data needs to be collected regarding this topic (3, 19). Some argue that Pacific SIDS countries such as Tonga are showing characteristics of a Dutch disease due to their remittance heavy economy (22). Thus, more research needs to be conducted to understand the net effects of remittances on the countries’ sustainability and overall economy. Overall, the paper demonstrates how fintech can be an effective tool to achieve the sustainability goals in Pacific SIDS and gives policy recommendations for fintech adoption in Pacific SIDS.
References
1. Johnston, P., Everard, M., Santillo, D., & Robèrt, K. H. (2007). Reclaiming the definition of sustainability. Environmental science and pollution research international, 14(1), 60-66.
2. Arner, D. W., Buckley, R. P., Zetzsche, D. A., & Veidt, R. (2020). Sustainability, FinTech and financial inclusion. European Business Organization Law Review, 21, 7-35.
3. Hahm, H., Subhanij, T., & Almeida, R. (2021). Finteching remittances in paradise: A path to sustainable development. Asia & the Pacific Policy Studies, 8(3), 435-453.
4. United Nations Conference on Trade and Development. (2012). UNCTAD XIII pre-Conference event: Expert group meeting on addressing the vulnerabilities of small island developing states (SIDS) more effectively.
5. National Reserve Bank of Tonga, “Remittance Receipts Peaked in December 2021”
6. The World Bank, “Remittance Prices Worldwide: Sending Money from Australia to Tonga”, 3 October 2023, https://remittanceprices.worldbank.org/corridor/Australia/Tonga.
7. World Bank, “Remittance Prices Worldwide Quarterly: An Analysis of Trends in Cost of Remittance Services”, Issue 45, March 2023, 7, https://remittanceprices.worldbank.org/.
8. The World Bank, “Remittance Prices Worldwide: Sending Money from Australia to Fiji”, 27 February 2023
9. Remittance total sourced from Reserve Bank of Fiji, “RBF Annual Report August 2020 — July 2021”. The World Bank, “Personal Remittances, Received (Current US$) — Fiji”, 27 February 2023
10. The World Bank, “Remittance Prices Worldwide: Sending Money from Australia to Vanuatu”, 27 February 2023
11. The World Bank, “Personal Remittances, Received (Current US$) — Vanuatu”, 27 February 2023
12. Yang, D. (2011). Migrant remittances. Journal of Economic perspectives, 25(3), 129-152.
13. Department of Home Affairs. (2019). Department of Home Affairs input to the Joint Standing Committee on Mi- gration inquiry into migration in regional Australia. Australian Government.
14. World Bank Group. (2020). Covid-19: Remittance flows to shrink 14% by 2021. Retrieved from https://www.worldbank.org/en/news/press-release/2020/10/29/covid-19-remittance-flows-to-shrink-14-by-2021
15. United Nations. Remittances and the SDGs. Retrieved from https://www.un.org/en/observances/remittances-day/SDGs
16. Lopez-Cordova, E., & Olmedo, A. (2006). International remittances and development: Existing evidence, policies and recommendations. Occasional Paper, Inter-American Development Bank.
17. Ratha, D. (2013). The impact of remittances on economic growth and poverty reduction. Policy Brief, 8(1), 1-13.
18. Connell, J., & Brown, R. P. (2005). Remittances in the Pacific: An overview.
19. United Nations Development Programme. (2017). Financial Services Demand Side Surveys.
20. Auty, R. 1993. Sustaining Development in Mineral Economies: The Resource Curse Thesis, London, Routledge.
21. Sturton, M. 1992. Tonga: Development Through Agricultural Exports, Pacific Islands Development Program Economic Report No.4, Honolulu
22. MacMaster, J. 1993 Strategies to Stimulate Private Sector Development in the Pacific Island Economies, in R.Cole and S. Tambunlertchai, Eds , The Future of Asia-Pacific Economies, Canberra, National Centre for Development Studies, ANU.