The market for international payments is booming. Every year $10 trillion is sent by people and businesses across borders, a reality of the global lives so many of us live. The chance to work abroad and earn a better salary, expand a business into new territories, or holiday in another country was once enjoyed only by the very few.
Today cheap flights and higher incomes have made this the new normal.
The UAE is home to 9.6 million people, with more than 80 per cent born overseas. It’s the second biggest source of remittances in the world. Money transfers from the UAE reached Dh169.2 billion last year, an increase of 3 per cent from 2017 according to the UAE Central Bank.
That equates to Dh17,625 crossing borders for every single person.
Despite this volume, the cost of making these payments remains shockingly high. World Bank data shows that people are being charged as much as 9.75 per cent to send money from the UAE, with a Dh735 transfer to Sudan costing on average Dh71.66. The cost of transfers to India, the Philippines and Egypt are also on the rise.
Why, in an increasingly digital marketplace, have the fees stayed so high?
While we’ve all become more global, banking remains local. The majority of banks operate entirely using domestic payments systems, calling on a network of partners for all international services. That means your money can change hands two or three times on its journey from Dubai to India or the UK.
Too many steps
This process not only costs more than it should — each partner on that route needs to take a cut for their role. But it means your money moves at a snail’s pace. It’s not unusual for remittances to take three to five days to reach their destination.
The worst part is you could have been told this transaction was “no fee”. Typically, all currency conversion — from holiday money through to international payments — is advertised as “0 per cent commission”, “free”, or at one low upfront fee. In fact, a far greater charge is hidden in an exchange rate mark-up.
The mark-up is the difference between the rate you see on Google, for instance on Reuters or XE, and the less attractive rate the bank gives you when you send money. World Bank data comparing the cost of 20 providers offering payments from the UAE to Egypt shows that every single one added an exchange rate mark-up to their upfront fee.
Without a calculator, the average person doesn’t have a hope of figuring out how much the transaction really costs.
Lopsided rate setting
This pricing model is good for the banks, but bad for the customer. People can’t compare costs, so they don’t shop around, which means they end up being overcharged. It’s a vicious cycle. The Middle East is far from unique, banks and brokers all over the world use the same model.
There are some signs of change on the horizon. Cheaper, digital players are taking a bigger share of the Middle East’s remittance market, and the overall trend in prices between 2014 and today is downwards. But the key to unlocking real change for the customer is in pricing transparency.
The potential is huge — pricing these transactions upfront, without a rate mark-up, would allow people to compare costs between providers and know what they’re really paying. In 2020, a landmark ruling from the EU’s Cross-Border Payments Regulations will come into force.
It states that the customer must know the full costs and charges of international transactions upfront. This is a massive development; for the first time a regulator has mandated transparency for this service on behalf of the consumer.
Europe isn’t alone in taking action. Following high levels of customer complaints, the Australian Government asked the ACCC (Australian Competition and Consumer Commission) to investigate the issue. The Canadian Government recently commissioned a study concluding that Canadians pay an average of 6 per cent when they send money abroad.
And the UK’s FCA has committed to implement rules as good as or better than the EU’s regulations, whatever happens with Brexit.
No more of hidden costs
It’s clear that the tide is turning, and as one of the world’s top remitters, it’s about time the UAE joined the transparency trend. A mark-up of 1 per cent added to all of the UAEs Dh169 billion remittances would mean extra annual charges of Dh1.69 billion that citizens have no idea they’re paying. With total costs as high as 9.75 per cent, the reality could be much more.
Regulators in the Middle East are working to facilitate some badly needed competition. Abu Dhabi’s Financial Services Regulatory Authority is making it easier for global digital providers to enter the market. Global conference Fintech Abu Dhabi will showcase the best that this new set of low cost operators has to offer.
Next year could be the start of transparent, borderless financial services, for everyone.
Kristo Kaarmann is CEO of TransferWise.