Will UAE’s new digital banks help bring down remittance charges?
More fintechs too would force a major rethink on what remittance charges should be
Dubai: Will the cost of remittances from the UAE and other Gulf countries drop? Or be eliminated completely?
More in the financial services industry are convinced this is the direction, and that the Dh20 plus charges per transaction on remitting will be brought down. And leading such a change could be the UAE’s all-digital banks and remittance-focussed fintechs.
“Over time, transaction fees will be coming closer to zero, as infrastructure costs will go down,” said Olivier Crespin, co-founder and CEO of Dubai-based digital bank Zand.
In addition, digital banks have the possibility to offer many ancillary products to their clients and pursue other potential revenue streams.
That’s the key point - the remittances will become part of a wider bouquet of services offered to clients, and this way the costs involved can be spread out.
This (remittance) continues to be a competitive space. We might see a drop in charges, especially with the introduction of blockchain and other technologies that could help drive down the cost and efficiency of this process.
Can cryptos dictate the remittance future?
The thinking is that it can, especially with blockchain, which until now has been more used in the context of Bitcoin and other volatile crypto-coins. But there is a digital future where blockchain can be deployed across multiple layers within financial transactions - and help drive down costs to consumers.
The use of the underlying technology can settle transactions instantly and cut down the capital costs associated with the current remittance settlement system. The tech promises to address some of the shortcomings of traditional payment systems such as speed, access, transparency and - most important - the transaction cost.
International transactions present the most scope when it comes to disruption, says Mustafa Domanic, Partner at Oliver Wyman. "The current system is seriously ineffective, so a new alternative would be welcomed," he said.
The obvious choice here would be cryptocurrency because it is both seamless and instant. However, there are obstacles in the form of regulation and control.
Domanic reckons if regulators come on board, international transactions would become much cheaper, and with players offering discounts, it’s possible that charges could reach zero.
At present, most transfers take place via SWIFT, and are converted into dollars before converting again to the final currency. This process naturally incurs costs.
“Cryptocurrency would bypass this, which means that an international transfer could one day cost as much as a domestic one,” said Dominic. “But because it is a protected system and an entrenched part of the banking system, it will take many years before we see any change and will depend on global disruption speed.”
Push to lower remittance charges
Some of the pressure on the financial services industry is already there. The United Nations has set an ambitious target to reduce transaction costs of migrant remittances to less than 3 per cent, and eliminate remittance corridors with costs higher than 5 per cent. But by 2030.
Between now and then, fintechs could yet force legacy remittance businesses to change course before then.
“As more expats start utilizing digital services for remittances, primarily mobile platforms, this offers banks as well as traditional exchange houses in the UAE an opportunity to reduce their physical branches, which is a major cost,” said Alok Kumar, co-founder and CEO of Zywa, a UAE-based teen-focused fintech.
This way, they can spread their fixed costs across a larger set of products(and services), which can increase their revenue and, thus, have more leverage to offer competitive prices.
As more fintechs enter the market with the promise to elevate/speed up delivery of financial services, remittances would become a commodity/feature within that. This means the rates would be the defining competitive advantage.
Financial institutions offering the most affordable rates will bring with them a competitive advantage. That plus the combination of blockchain and UN pressure should be what remitters in the UAE and worldwide should watch out for.