Expats in the UAE are turning away from physically visiting their go-to neighboring exchange house branch, and are instead choosing an online platform to transfer money back home, mostly due to movement restrictions brought on by the pandemic. But is this move benefitting expats financially?
Analytics giant S&P Global last week revealed how the UAE' remittances industry, the world's second largest, is undergoing a major change as declining volumes and a switch to digital transfers due to coronavirus-related movement restrictions are now endangering smaller exchange houses.
Gulf remittance to drop 20% in 2020
Remittances from the Middle East and North Africa, which mainly comprise money sent home by migrant workers in the wealthy six-member Gulf Cooperation Council (GCC), are set to fall by 19.6 per cent in 2020, the World Bank forecasts.
The UAE's outbound remittances totaled $44.4 billion (Dh161 billion) in 2018, second only to the US, Saudi Arabia was third with $33.9 billion (Dh124 billion), while Kuwait, Qatar and Oman were also in the top 20. UAE outbound remittances fell 15.6 per cent in March, the most recent central bank data shows.
The near-term outlook for the remittances sector will remain challenged, analysis by Standard Chartered UAE showed, and in the retail space, the impact in the Middle East is largely due to a fall in the wages and employment of migrant workers, who tend to be more vulnerable to loss of employment and wages during economic crises.
UAE money exchanges shift focus
This has prompted several exchange houses in the UAE to shift focus from their mainstream retail branches to boosting their online presence or building their online operations – if they had a functional one earlier, all to make their own digital platforms more attractive to the average remitter.
Moreover, while moving to an online platform to remit is convenient and safer this pandemic, it is turning out to be a move that allows users to benefit cost-wise as well, with the perk of lower charges for larger transactions, when compared to the brick-and-mortar alternative.
In the UAE, remittances must be conducted via banks or exchange houses, making it hard for new remittance entrants to the industry because they must partner with established rivals. Currently, around three-quarters of remittances go through exchange houses and the remainder via banks.
New remittance entrants in the UAE
The high costs, inconvenience and time wasted are a few of the pain points that come with international money transfers. The UAE has seen increased focus on these issues with the recent entry of financial technology firms in the payments and remittances space.
Late last year, Britain's TransferWise, an option that’s currently turning into a popular option among remitters, received a license from Abu Dhabi Global Market, the emirate's financial free zone. Industry analysts say TransferWise's entry in the region has been good news for customers, with the move also allowing local financial technology firms to piggyback on this new development by either offering their own digital services or potentially partnering with TransferWise.
Allowing the ‘unbanked’ to benefit
Local start-ups like Now Money and Denarii Cash are already disrupting the market. Now Money offers the unbanked the ability to make money transfers through its app by allowing employers to deposit money into an employee’s Now Money account. Denarii Cash charges an upfront fee of $2.50 (Dh9.2) for amounts over Dh1,000, but zero fees for amounts below that.
The Denarii Cash app also offers additional services, such as bill payments in the Philippines and they don’t make money from the exchange rate, but based on the mid-market price. The company has partnered with PayTabs and Checkout, as it can only work with existing payments companies licenced by the UAE Central Bank.
To open a local bank account, UAE residents must usually earn at least Dh5,000 a month, which rules out hundreds of thousands of manual and service industry workers. They commonly receive their salaries on a pre-paid card permitting a single free-of-charge cash withdrawal per month, and usually take this cash to a mall where they can visit multiple exchange houses to find the best rate to transfer most of their salary home.
Mobile wallets used to remit too
Some entities have created mobile wallets to woo low-income customers and the shift to exchange house apps could become permanent. Such apps engender greater customer loyalty — once a consumer has passed the necessary know-your-customer requirements to send money through an exchange house's app or a mobile wallet, they are much less likely to complete a similar process again to enrol with a rival provider's app.
MoneyGram is the remittance provider for the mobile wallets of First Abu Dhabi Bank, the UAE's largest bank by assets and telecom firm Etisalat. With banks also eyeing a slice of the remittances pie — having accounted for Dh34 billion out of the Dh165.2 billion outflow from the UAE last year — digital remittances have come into sharper focus.
Accelerated migration to digital
There has been an accelerated migration to digital platforms during the pandemic and experts expect the downward pressure on remittances to continue over the coming months. Abu Dhabi's Al Ansari Exchange, which claims a 31 per cent market share in the UAE among currency exchange companies and has 190 branches across the country, sees remittances to decline no more than 10 per cent in 2020 versus a year earlier.
However, the exchange flagged that the number of customers using the company's digital services to remit money has more than doubled, with its app now accounting for nearly 10 per cent of remittances. Like its peers, Lulu Financial had said it was witnessing a steady recovery after an initial drop in revenues, aided mostly by its digital offering LuLu Money.
Along with the positives, digital remittances present challenges such as cyber risk, as well as high fees and charges – in some cases. Some of the fees and charges, including corresponding banking charges, have been considered to be unaffordable for many low-value transactions. While many money transfer companies have emerged with relatively cheaper solutions they have limited digital solutions.
How this digital push affected costs for expats
The World Bank publishes comparisons of the cost of sending money using different methods on its website with the goal of “making markets more transparent”. It includes 12 destinations or “corridors” from the UAE, including top receivers India, Pakistan and the Philippines.
For popular Middle East and North America currency corridors, such as the UAE dirham to Indian rupee, fees are below the global average of 6.8 per cent. Sending $200 (Dh734) from the UAE to India on average cost 3.45 per cent in fees in the second quarter, according to the World Bank.
The same transaction from the UAE to Pakistan cost 3.94 per cent, while other destination markets are similarly priced: Philippines at 2.67 per cent and Egypt at 3.53 per cent. This quartet are the biggest destination remittance markets from the UAE.
A comparison of costs when it comes to remitting money online versus offline has shown that it is evidently cheaper to transfer money online, when compared to visiting the branches, especially when it comes to banks in the region, as charges are higher when you carry cash and the exchange rates are comparatively more updated online. The move to remit online has also prompted more transparency on charges as the platforms now charge an upfront fee rather than make profit on the exchange rate.
