February 2006
Exchange Houses have formed the backbone of the money transfer industry in the UAE for many years, using the 'over the counter drafts' mechanism successfully. However, with the growth in the population of expatriates remitting money to their home countries coupled with advancements in technology, customers are now demanding faster, cheaper and more convenient modes of sending money. Wendy Jackson reports on how the industry has responded to these demands.

For the majority of the thousands of foreign workers living and working in the UAE the decision to leave their homes is based on money - earning money to put food on the table for their families back home. And as more and more leave their families behind to do just this, the need to send money across borders to relatives and friends is driving a massive international industry. It's a fact - volumes are up in the 'sending money back home' industry. You only have to witness the massive number of immigrant workers on the building sites throughout the UAE to know that the amount of money now being remitted from the UAE is significant.

That said the industry argues that despite this growth it is also facing an overall efficiency problem, witnessing a decrease in margins as competition between exchange houses grows, banks get on board and the Internet offers a cheaper and more effective way of remitting cash.

Understanding how remittances work
When expatriates send home part of their earnings in the form of either cash or goods to support their families, these transfers are known as workers' or migrant remittances. They have been growing rapidly in the past few years and now represent the largest source of foreign income for many developing countries.

It is, of course, hard to estimate the exact size of remittance flows because many transfers take place through unofficial channels. Worldwide, officially recorded international migrant remittances reached US$232 billion in 2005, with US$167 billion of that going to developing countries.

How is the money transferred?
A typical remittance transaction takes place in three steps. Step One: the expatriate sender pays the remittance to the sending agent using cash, cheque, money order, credit card, debit card, or through an Internet transfer. Step Two: the sending agency instructs its agent in the recipient's country to deliver the remittance. Step Three: the paying agent makes the payment to the beneficiary. For settlement between agents, in most cases, there is no real-time fund transfer and instead the balance owed by the sending agent to the paying agent is settled periodically according to an agreed schedule, through a commercial bank.

In the case of informal remittances, which are not recorded, are often settled through goods trade.

The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender plus a currency-conversion fee for delivery of local currency to the beneficiary. And for some smaller money transfer operators the beneficiary is also required to pay a fee to collect the money.

In addition, remittance agents may earn an indirect fee in the form of interest by investing funds before delivering them to the beneficiary. This is usually the case when a bank acts as a remittance agent and works well in countries where overnight interest rates are high, for example.

How much does it cost?
Transaction costs are not usually an issue for large remittances because, as a percentage of the principal amount, they tend to be small. Besides, major international banks are eager to offer competitive services for large-value remittances. But in the case of smaller remittances say under US$200, which is typical for expatriate workers in the UAE remittance, fees can be as high as 10-15 per cent of the principal. The World Bank suggests that an Indian expatriate sending US$200 back home to India from a major money transfer operator in the UAE could pay up to US$11 in fees.

Key developments
According to Standard Chartered Bank the developments within the remittance industry have been fourfold.

"There has been a significant rise in volumes, the launch of web enabled services, an increase in the speed and accuracy of executions and a stringent monitoring of payments due to Know Your Customer (KYC)/Anti Money Laundering (AML)/Sanctions requirements."

One example of such a development is Emirates Bank International (EBI), who after tying up with ICICI Bank in India and Bank of Beirut in Lebanon, now allows its customers to remit online between their account here in the UAE and their accounts bank home.

I also asked Louis Scotto- Emirates Bank General Manager- Retail Banking what had been the driving force behind this at EBI. "The developments at EBI have come about due to the huge population explosion in the UAE of mainly NRIs (Non Resident Indians) who require value added banking services. As such we have gone the extra mile to provide remittance services the one service most NRIs specifically require, to our customers in addition to servicing their normal banking requirements."

According to tellers at some of the UAE's busiest exchange houses, Al Ansari, UAE Exchange and Al Fardan, they too have seen a boom in the industry due to the expatriate population, mainly from the sub-continent and South-East Asia, increasing in volume. "It is expatriates from this part of the world," said one teller who could not be named for legal reasons, "who rely on exchange houses like this one to send money back home to their loved ones. And as we compete for business our service has improved by way of more distribution points, reduced prices and more innovative ways of making the transfer of money faster and more efficient."

The teller went on to say that for a long time exchange houses had to compete with the age old money transfer method of Hawala, which was often much cheaper and seen as more reliable. "Now our services are competing in price and efficiency with Hawala whilst also maintaining the stringent AML records that the industry is now legally required to hold."

Increased competition
It seems everyone wants a piece of the action and as competition increases fees on transactions are finally coming down and customer service improving. "The driving force behind all these developments is an improvement of customer service in the face of increased competition as more and more banks and exchange houses fight for a piece of the pie. Couple with, of course, technological diversity and demands from customers for a more efficient service," says a spokesperson of Standard Chartered Bank.

The spokesperson goes on to explain how economic development in the UAE along with an increase in FDI (Foreign Direct Investment) had also led to the remittance service having to assess its commercial viability. "And of course post 9-11 compliance with AML initiatives have forced the industry to change the way it does business. Standard Chartered has always been alert to money laundering and are refining our capabilities incessantly. These include initially and periodically learning more about our clients and their remittance patterns (KYC policy) and adopting more efficient systems to detect money laundering attempts at the source of transactions." 

How banks are getting in on the act?
Commercial banks, finding that the remittance business is a good source of revenue and profits, have jumped onto the bandwagon, looking for ways to interject themselves in the flow of funds between expatriates and their families at home.

"Where we compete is by constantly automating services, by training staff and improving productivity," says Standard Chartered Bank. "However, as a bank we also have many advantages over exchange houses, including our ability to be flexible on the face of volumes and lower operational costs, due to our outsourcing and offshoring initiatives.

In addition, we can also offer a larger and better-knit distribution network, superior technology and corporate services. We offer a wide range of currencies, including exotic currencies and because our remittance service is web-enabled it can utilised 24/7."

Scotto also refers to EBI's Internet service, "Offering our customers online remittance services through their Internet banking account (Banknet) alleviates the need to go to exchange houses to remit regularly, As the customer can remit from his home or office desk he/she is saved from the hassles of travelling, parking and waiting at exchanges. Internet remittances are also cheaper. EBI, for example, charges just AED5 to remit to ICICI bank in India. An exchange house would charge more in the region of AED10."

So how are the exchange houses coping with the onslaught of cheaper web-enabled money transfer propositions? The teller at the exchange house I visited was in no doubt about the competition they faced from banks but believed there were enough customers for everyone. "What you have to remember is that a huge percentage of the NRI population and the expatriate population from Pakistan work as, for example, gardeners or in the construction industry and have no access to computers.

Therefore they are unable to benefit from web-enabled services that the banks offer.

And that's where we come in by offering a straightforward and legal way of remitting money back home. That's not to say that exchange houses don't embrace new developments. We make efforts to improve our services and have launched some initiative products just recently."

He also points out "because money transfer operators have been around for so many years many expatriates don't think of the bank as place to send money. They think of the bank as a place to save money. And some don't have the correct forms of identification required to do business with banks."

Product development
There is no doubt then that money transfer services are improving. The increase in competition has bought down fees for the customers and the advancement in technology has improved the efficiency of the money transfer itself. According to Standard Chartered, technology has enabled them to adapt a "single system initiative in core banking, to continuously automate mundane and time consuming manual procedures, improve speed and system functionality and tailor solutions for larger and priority clients."

Scotto says EBI's "straight through process with little or no manual intervention has given its customers speed and accuracy to the whole process.

As for money transfer operators and exchange houses the most exciting product to hit their stands was in the form of a pre-paid remittance card solution. It works simply by the person remitting applying for a card. He/she receives a card with a pin number and the person he/she remits also receives a card. The card the receiver has functions as an ATM card and the person remitting simply loads the card up at any participating exchange bureau knowing that the person in the home country can now go to any ATM machine and withdraw cash in the local currency.

Lifeline
The remittance industry is facing phenomenal growth as more and more people descend on countries away from home to earn their living. And the UAE, one of the fast growing economies in the world, is one place more than most where the changes to the industry are being seen and consumer demands being met.

Aside from this, the remittance industry also has another role, especially in the developing world, where the influx of money sent to families from their husbands, brothers, sons and daughters working abroad, is their lifeline to food, education and a better life.

Remittances are typically transfers from a well-meaning individual or family member to another individual or household. They are targeted to meet specific needs of the recipients and thus, tend to reduce poverty. In fact, World Bank studies, based on household surveys conducted in the 1990s, suggest that international remittance receipts helped lower poverty (measured by the proportion of the population below the poverty line) by nearly 11 percentage points in Uganda, six percentage points in Bangladesh, and five percentage points in Ghana.

For those people working here in the UAE and for their families back home, remitting money is probably one of the most important aspects of home and work life and for this reason alone the industry must remain customer focused and competitive.

© UAE MONEYworks 2006