Market Watch: Living on wafer-thin margins

The slow growth or no growth in the money exchange house branch network in the UAE over the last few years, raises the vital question of whether the growth of this financial services industry has reached saturation point.

While the total number of money exchange house (including money changers) branches as of end-1998 was 180, it grew marginally to 197 in 1999 and peaked at 214 branches towards the end of 2000.

But this has come down by one branch as of end-2001 to 213 branches. However, some firmly believe that this doesn't reflect any drop in business volume.

"The nature of the remittance business has changed over the last couple of years. There has been a shift in small volume single remittance to larger volume single remittance during this period," observed V. Ramamoorthy, general manager of Emirates International Exch-ange Centre as well as the State Bank of India (SBI) representative in the UAE.

According to the head of another exchange, which has a secondment arrangement with a public sector bank in India, this may be because of the growing number of white collar expatriate employees in the UAE.

However, all admit to the fact that competition among exch-ange houses is hotting up.

"Over the years, while the margins have been falling, the volumes have been increasing and hence there is no need for concern on the average return for the exchange companies," said Niyaz Ali, general manager, Thomas Cook Al Rostamani Exchange Co.

Interestingly, though the UAE has more than 100 money exchange companies, around seven with draft facilities are said to command more than 80 per cent of the remittance business.

"The margins are compromised due to the fierce competition among exchange companies and also because of the growing awareness among cost-conscious customers," Niyaz pointed out.

It is a fact that exchange houses which are into more diversified services can very well afford to live on wafer-thin margins.

Another interesting aspect is that several exchange houses earlier used to gain from float money, whereby exchanges had benefited from the interest accrued from this float money lying with the banks.

Over the last five years, the speed by which the money gets delivered has increased immensely. Now, delivery channels have improved and the recipient can get the money within minutes.

Until a few years ago, remittances had to go only by drafts with the help of postal services. This mode of money transfer inevitably took longer to reach beneficiaries.

However, things improved in the meantime and the next advanced mode of money transfer was through courier services, which was popularly known as mail transfer or MT. But things improved further when banks entered the field and money transfer were done in 24 hours.

Leading Indian banks like ICCI, HDFC Bank, certain branches of Bank of Baroda and State Bank of Travancore (SBT), among others, are very active in this regard.

According to sources, more Indian banks are eyeing this area, since it can improve the banks' popularity among the Gulf-based expatriates in a big way.

But instant money transfer systems have now caught the attention of customers whereby money can be transferred within minutes.

Western Union is very active as the service provider for this mode of transfer. UAE Exchange Centre and Wall Street Exchange also have their own programmes to transfer money instantaneously. The fee for this sort of money transfer varies from Dh10 to 35.

One thing is for sure. Since the UAE Central Bank came out with regulations restricting entry into this business, no new names have been heard of in this industry.

The apex bank has insisted that new foreign entrants have to be LLC companies, whereby they will be forced to cough up Dh50 million as capital, which, according to experts in the field, leaves the business unviable.