KlickEx - Mobile payments in the Pacific

KlickEx and the case of De-Risking.

Since 2009, KlickEx  has offered market leading speed, and the lowest cost inter-bank and retail remittance products. Initially only a wholesale platform, it dramatically reduced costs on $200 sends, from around 22% from New Zealand to the Pacific, to around 0.3% for electronic interbank Payments, and to around 4% for cash/mobile payments, over the past 10 years. Australia was even better for consumers.

Most of these payments are real time, and all of them involve a foreign exchange conversion with immediate settlement, despite serving some of the world’s least liquid sovereign currencies. Such stark changes in costs attracted large volumes and new payments in the electronic and regulated sphere becoming formal for the first time. Traditional operators saw moderate volume growth over this period, and no decline, while KlickEx volumes quickly grew to well above 50% market share, and sometimes 70% of national retail foreign exchange.

KlickEx operates directly in the retail space too – unique in this market, now owning six remittance companies (most are the largest in their markets) operating from Australia, the UK, and New Zealand, to the Pacific.

Importers, exporters, and domestic growth in recipient countries benefitted by a nearly 9% lift in reported GDP and purchasing power, over the first 11 months, due to the shift to formal payment infrastructure. This is a major national and regional benefit that has recently been supplemented by a vast improvement in the tangible, measurable ability to analyse AML and CFT risk in the region. The Australian supervisory/financial intelligence body, AUSTRAC, recently published a data-based assessment of AML/CFT risk in the region, finding the Pacific Islands “Low Risk” across billions of dollars of annual flows. Lower risk in general than some traditional domestic payment services within Australia, and New Zealand.

Previously, heuristic and assumption based scoring of the region had always resulted in ‘unquantified risk’ or ‘unknown’, setting an uncertain tone for de-risking. In 2014, correspondent banking relationships began to be tested. Money transfer operators began to suffer as a result. The relationship between obvious characteristics of remittances, being ‘cash’, ‘payment without invoices’, ‘cross border’/multi-jurisdiction transfers, ‘frequent small payments’, and ‘payments to non-top-10 trading partners’, clashed with the flags of compliance officials looking for illicit transfers, after significant fines were imposed at major banks for very severe (and in some instances, accepted as criminally culpable) shortcomings in reporting processes for activity identified as “obviously suspicious”, or even sponsoring and advertising tax evasion services, or washing transaction data and failing to report known links to crime.

By 2015, KlickEx was ready to grow beyond the pacific, but began to lose bank accounts before world-wide services could even begin. 37 bank accounts in 9 non-pacific countries before they were even launched – and KlickEx had withdrawn its MTOs from a publicised and major South Asian launch, under the threat of losing even more accounts.

Many Pacific retail operations had also lost several correspondent banking relationships, several of which had been restored, but most of which were closed without reason. By this time, up to 70% of remittances were flowing through the KlickEx clearing platform, and KlickEx was on boarding “unbanked” MTOs at a rate of about one per week. By the end of 2016, 100% of corridor specialists into Tonga, and almost 80% of corridor specialists into Samoa, we’re relying entirely on KlickEx for correspondent services. The number of operators using banks, had dropped to zero in some cases.

And then KlickEx was targeted in New Zealand too. While KlickEx doesn’t absolutely require banking system access to operate its clearing service (as many of the countries it operates in, do not have formal payment systems, or electronic inter-bank exchanges, other than the ones that KlickEx provides) – these infrastructures play an important role in enabling competition, store of funds, and access at low cost – particularly in the send side markets.

However, regulator rhetoric had spooked send-side officials into a frenzy of risk aversion, and pushed the image of non-bank money transfer operators into the peripheries. Despite more than 80% of the Pacific not having bank accounts, MTOs we’re seen as fringe operators, operating where Banks would not. This gave the impression that they would go where banks chose not to go, because of high risk. And blanket assumptions were made.

Assumptions were that a bank would always provide a service where a risk/reward payoff was sufficient, and history had proven that banks would even do this, if it were illegal. And therefore, fewer bank products, might mean, less willingness to do illegal activities. Sound logic, in isolation, perhaps. And so in the Pacific, the core reality of very high cost of bank account ownership in the Pacific was over-looked as the cause of low banking rates, and the raw unaffordability of banking services in receive markets, suggested to send side banks, that low participation rates were seen as “un-transparent markets”, or “cash heavy” economies, and (therefore) “probably high risk” from some perspective. When the reality was simply, that banking services were “over-priced”, for domestic income levels.

The impact of this, was that the ability to collect and store New Zealand Dollars in particular, for onward transmission to the South Pacific, within the New Zealand Banking system, became nearly impossible. Even KlickEx itself was threatened to be excluded from the send-side payment market, which was at that time accessible only by Financial Institutions able to hold commercial or institutional facilities at one of New Zealand’s few commercial banks.

No new access to New Zealand’s core payment system was being permitted or facilitated by the Reserve Bank of New Zealand, and no new access to the retail payment service (known as the Bulk Electronic Clearing System) had been implemented since the late 1980s.

A solution was needed, and KlickEx initially responded with a cross border CSD platform, which was adapted from its domestic system “VOSnet” which had been designed for cash handling and inter-bank settlements within Tonga, in 2007, and extended to now integrate trade settlements and non-cash assets for cross border currency netting. An advanced multi-currency asset backed repo market.

Large operators were able to use KlickEx to order shipments, and have orders paid for in cash overseas, at lower costs than using TTs, paid for by low cost remittance inflows. Importers flocked to it. KlickEx became (for example) the largest importer of used vehicles into several Pacific countries, purchasing vehicles in cash in NZ, and shipping them to the islands and using the proceeds of sale to fund remittance payouts.

This system impacted and benefitted over 80% of households across its markets, due to the sheer scale of KlickEx’s operation and footprint. But it was clear that more was needed.

KlickEx’s sophisticated AML/CFT services kept track of payments, missing cash deliveries, trucks, and aircraft. Over $2m in cash and bank cheques were flown cross boarder in a single day (Tonga’s GDP is $2m per day), as testing for non-bank supported settlements peaked. But soon, bank cheques would be under threat of withdrawal too. With the Reserve Bank of New Zealand still not able to provide non-bank entities with payment services, even more attention and thought needed to be brought to the issue of continuity of “settlement in the event of total market failure”.

KlickEx formed APFII.org, the Advanced Pacific Financial Inclusion Infrastructure Organisation, which was tasked with providing alternative settlement methods to its rapidly growing list of members.

Submissions to several governments to fund and form a bank, were unsuccessful. KlickEx, and its UN funded mandate for cost minimisation, were not able to attract the capital required to sustain a NZ bank license – which was about $50m in paid in capital, and $200m in deposits, according to rules set nearly 40 years prior. Although hundreds of millions of dollars in flows, sometimes above 35% of GDP in the receive countries, was under threat, the mantra from the regulators was “capitalism”: if there’s a problem, there’s a cost, and a cost will have a price, and the price will attract capital, and capital will solve the issue. All very exemplary, until the people you are dealing with, who suffer the most from the problem, are absolutely poor, and don’t have money to pay for the solution. And with KlickEx charging under 0.1% on average for its volumes, neither did KlickEx.

“Raise the Prices” said the World Bank.

Funding the process of becoming a bank, wasn’t the cheapest solution. Venture capital – of the order of Fifty Million Dollars – would require 15-20% return on equity at that time, and with a Fintech boom, it was getting more promises for 10x growth than they could reasonably filter. Blockchain-this, and distributed-ledger-that, were promising 100,000 times faster, and 99% cheaper transactions, totally independent of banking systems, and all the target markets were bigger than the Pacific.

A $50m investment was going to cost us $7.5m or $10m per year, just for the capital component, for some of the lowest income countries to get access to an already scaled NZ payment system, that cost our users less than 1% of that ($7.5m cost) when it was provided by a commercial bank, on commercial terms.

If we could have accessed capital at the same cost as banks, maybe we could have survived. But that amount of capital was overkill, and no amount of dialogue with politicians, government departments, Regulators, or licensing authorities was making head-way. The problem was “too hard”, and “tricky”. The solution was simply money, influence, or something else.

That other option, was Time; The 1950s, to be exact. And a lot less money. In the 1960s, New Zealand went to Electronic Inter-bank settlement. It was one of the first countries to do it. And ever since, New Zealand has been a highly “banked” population, and a relatively cashless society. But before that, cash actually moved. As it still did in the UK in the 1970s and 1980s, and as it still does in the USA today.

KlickEx had the market share, scale, technology, and know-how to step the New Zealand leg of its operation, literally ‘back in time’, to ensure safe settlement, and continuity of services, at low cost. Without the support of the NZ banking system, send side payments would triple in costs, but still remain under 1% – extraordinarily low by global remittance standards.

And without international correspondent banking, the settlement costs would still cost about the same: 3-5 days, and a game of Russian Roulette on fees. But we needed more infrastructure. But what infrastructure?

As fortune would have it, part of our team had come from marine insurance, shipping, and freight services. During our time in the Pacific, we’d sent countless containers of food, aid, and other supplies into our receive markets, following hurricanes, disasters, and tsunamis. We know how to ship. We know how to innovate. And we know how to deliver.

And so the business went shopping: the only proviso: Any proposal must cost less than a bank. In 2016, with only one NZD account left, APFII SPV purchased an option to buy a 170 foot long mini-oil tanker, and two ex NATO warships to cart cash, at high speed across the vast expanses of the Pacific Ocean. The warships were capable of 40 knots, or making payments within the islands overnight. The tanker was there, just in case landfall wasn’t possible.

And all of a sudden, we had the third largest fleet in the Pacific, by tonnage, bigger than most navies of the region. And we were making the news-wires: Seen as champions of resiliency by the Pacific Nations and emerging economies, and with scepticism by developed economies, KlickEx never went offline. Not once. We had liquidity shortages, sure, as we moved nearly 20% of GDP by all means possible, but we never took longer than a TT would have taken to resolve a shortage. Our transaction rate average delivery time remains under 41 seconds from New Zealand, Australia, or the UK, to the remotest islands in the world, cleared funds. We gained the respect of our regulators, showing them that the pacific would survive a first degree contingency, we earned the trust of our customers and competitors, and eventually, we were awarded with the Holy Grail of payments: membership of the send-side payment infrastructure.

In 2017, we replaced the ship-line with a blockchain, and donated the tanker to become a helicopter capable, emergency response vessel for the Blue Ocean Foundation, on a mission to make the Pacific better. It is now the largest New Zealand Flagged Private Yacht.

IBMs Blockchain services became our primary resiliency infrastructure, and we’ve since deepened the partnership with IBM – launching with them, the world’s first full scale blockchain payment service to move from pilot to production at nationally significant financial institution.

Our work in the Pacific remains some of the best working examples of digital financial service uptake in the world, from our financial inclusion, and healthcare programs, to remittance, international bill payment, and mobile money. And as a result of the tremendous focus, resiliency, and determination, KlickEx was awarded a New Zealander of the Year medal, for services to the community. Known as the “local hero” award, it was presented by the acting CEO of New Zealand’s government owned bank, Kiwibank at the end of 2017. And the story continues.

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