In the Pacific Islands region, cash is king. But a transformation to digital financial services could unlock economic dividends needed now.

The undertaking would be no small feat. Massive gaps exist between digital and traditional financial services in the Pacific Islands, driven partly by low trust in storing and sending money digitally and a lack of infrastructure across the region.

Given how dispersed and thin Pacific Island markets are, mobile phone solutions could be the most beneficial for the region. Mobile phone-based QR code systems revolutionised payment methods in Indonesia, for example, replacing traditional point-of-sale (POS) devices and boosting onshore spending from tourists – particularly from China, where 95.7 per cent of mobile phone users pay by scanning QR codes.

Shifting from card-based systems – typical in developed countries such as Australia – to QR code payments, mobile phones can offer a straightforward solution for Pacific Islands.

Shifting from card-based systems – typical in developed countries such as Australia – to QR code payments, mobile phones can offer a straightforward solution for Pacific Islands. QR code payment systems are cost-effective for businesses and convenient for consumers. With a smartphone and internet connection – boosted further by connection to localised satellites such as Starlink – even small businesses or market stall operators can adopt QR codes as a seamless payment option.

While mobile solutions could be the most fruitful for the Pacific, barriers to uptake would still exist. Regionwide, although Fiji is an exception, the Pacific Islands have some of the lowest rates of mobile phone subscription. In 2022, the mobile subscription rate remained comparatively low, at 47 per cent when compared with 62 per cent for the entire Asia-Pacific region.

Despite these low rates, the outlook is positive. Mobile subscription and internet connectivity should improve as technology grows cheaper and more accessible in the islands. By 2030, it is predicted that regional smartphone adoption will grow by ten percentage points, and smartphones will account for 90 per cent or more of mobile connections in most Pacific markets.

Donor countries could help spur this growth, for example by selling refurbished smartphones from their own domestic market to the region, thereby also addressing sustainability issues.Owning a phone is one thing – having reception is another. Australia and other major development partners should accelerate bringing mobile phone connectivity to isolated communities. China is for instance doing this in Solomon Islands.

Pacific Island markets are small and less competitive, patterned with a mosaic of challenges unique to each nation.

Meanwhile, buoyed by momentum in national financial inclusion strategies and enabling regulatory environments for fintech expansion, mobile money services are growing in the region – currently around nine mobile money services operate in six Pacific Island countries. In landmark reforms, for example, Vanuatu’s banks made their debit cards and EFTPOS machines interoperable, promoting financial inclusion, driving growth, and bringing efficiency to the market. But Vanuatu’s strategy does not stop there, pursuing other national policies such as preferential foreign exchange calculators to incentivise transition to mobile wallet international payments.

Mobile phone solutions are but one idea to drive regional digital transformation. And while the QR code payment system appears successful in Indonesia, Pacific Islands would need their own tailored, convenient and effective solutions reflective of local market conditions and needs. Because, unlike Indonesia’s bustling fintech scene, Pacific Island markets are small and less competitive, patterned with a mosaic of challenges unique to each nation. Pacific-led fintech therefore needs local solutions – ones formed through collaboration with public, private and multilateral sector partners working to future-proof the region.

As the Pacific’s future economic resilience remains high on the agenda, and international banking services exit the Pacific en masse, local fintech innovation can help pave the way towards a more inclusive and resilient Pacific financial ecosystem that provides an alternative to traditional bricks and mortar banks.

This article was first published on Lowy Institute’s blog site The Interpreter. Dr Jessica Collins is Project Director of the Australia-PNG Network and a Research Fellow in the Pacific Islands Program at the Lowy Institute. Dr Hilman Palaon is a Research Fellow at the Lowy Institute in the Indo-Pacific Development Centre. His work focuses on digital economy issues in the Indo-Pacific region.