Closing of bank accounts of money transfer operators (MTOs) is raising remittance costs


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As I mentioned in my previous blog, a renewed focus on Anti Money Laundering and Combatting the Financing of Terrorism (AML-CFT) regulations in Australia, the UK, and in the USA are impacting banks and MTOs.

Three effects on the remittance markets are observed. First, Banks stopped offering low cost remittance services. Second, banks closed accounts of MTOs. Two major banks, the Commonwealth Bank and the National Australia Bank, have closed already the accounts of MTOs in Australia. Recently, Westpac announced that it will close the bank accounts of MTOs serving Somalia by the end of this month. And third, small MTOs also closed since they could not any longer operate without bank accounts.  

These developments in the remittance markets increase remittance prices, reduce competition and encourage the use of informal channels.

The closing of bank accounts has affected remittance costs in the Pacific Islands.

The cost of sending remittances from Australia to the Pacific Islands, such as Fiji and Samoa, is high, above 10%. Sending remittances through banks is more expensive than through MTOs.

Most large banks continue to offer remittance services through online and account-to-account operations. However, the costs of sending remittances using these banks have increased. Their costs are far higher than the 5% target of the G20 (see figure 1).
Figure1. Remittance costs of major banks which closed bank accounts of MTOS have increased costs of sending AUD 200 from Australia to Fiji

Source: Remittances Prices Worldwide database. Third quarter 2013
No data was reported for these banks in the Third quarter 2014 in this database
Send Money Pacific. Updated on October 15, 2014

There has been less competition in the remittance markets. According to a paper prepared jointly by the Pacific Financial Technical Assistance Centre (PFTAC), Pacific Financial Inclusion Programme (PFIP), the Pacific Islands Forum Secretariat (PIFS) and the World Bank Group (WBG), “the number of agents across the Pacific able to send and receive remittances from Australian money transfer providers has since decreased by some 50-60% from its former six thousand odd, and continues to decline.” It also seems that Australian banks are using their market position when closing the bank accounts of MTOs to eliminate competition since these companies operate in the same remittance markets.

The closing of the bank accounts will encourage the use of informal channels in Somalia. According to the Australia 2011 Census, there were 5,687 Somalia-born people in the country. About 49.1% were aged 25-44 years. Westpac was the last bank to service MTOs transferring remittances to Somalia. The account closure will impact migrants’ families living in Somalia who rely on remittances for their living expenses. Since Somalia does not have alternative channels to send remittances, migrants will use informal channels. It will be more difficult to track and monitor suspicious activity of these informal channels. 



Sonia Plaza

Senior Economist, Finance, Competitiveness and Innovation Global Practice, World Bank
December 05, 2014

New technologies like Ripple can fix this problem immediately, my company builds compliant digital currency services to solve just these kinds of problems

October 31, 2014

the using of informal channels is becomming common for all migrants around the world. they use their parents or friends to bring money to their home country instead of local MTOs. And its becomming more and more difficult to work in Africa. World Bank have to recommand to african countries to regulate these sector and permit MTOs to rule correctly their business. We have no specific laws that clarify this activity and the government dont make any effort to review it. Then some banks are very feebleness when they make wires for MTO.

Faisal Khan
October 30, 2014

What would be interesting to know is how is all these bank account closures going to affect the Hundi/Hawala business. In my line of consultancy, a lot many small MTOs have approached me, desperate in trying to find a solution to opening an account. In the absence of such, many will go bust and a few will cross over to the Hawala system. Your thoughts?
Faisal Khan
Payments Consultant.

Stoytcho Vlaykov
October 30, 2014

The remittance industry urgently needs to introduce new offerings which meet customer needs and incorporate AML-CFT features at the same time. Small value transfers which are difficult to cash out but do cover needs such as daily shopping, bill payments, medicine and education are an efficient way to calm banks regulatory fears in dealing with remittance players while meeting 70%-80% of the needs of remittance recipients. Retail networks in emerging markets have a key role to play in providing smart alternatives to traditional cash remittances.

Raj Raina
October 23, 2014

Thanks Sonia for blog. I was wondering if you have the latest development on the "safe corridor" for remittance flow to Somalia that DFID and WB have been working on?

arturo sta barbara
November 05, 2014

it's the job of the government to police money remittances, bank must be protected. there are more legal money operators than illegal. think of people who benefits from money transfers