How TransferWise will shake up the UAE remittance market

The low-cost online money transfer service is set to be available in the Emirates early next year

A total of Dh169.2 billion was sent from the UAE last year, according to the Central Bank’s 2018 annual report. Pawan Singh / The National

With expatriates making up almost 90 per cent of the country’s population, it is no wonder the UAE is one of the top senders of remittances globally.

TransferWise, the global low-cost online money transfer service founded in the UK, is capitalising on this lucrative market by expanding to the Middle East after receiving a licence this week from the Abu Dhabi Global Market Financial Services Regulatory Authority to operate in the Emirates. It is expected to be available early next year.

"The Middle East was always on our map because of the significant volumes that flow here, but also the costs of sending money," Matt Briers, chief financial officer of TransferWise, tells The National.

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 explosion of FinTech companies in the payments and remittances space. Industry analysts say TransferWise's entry in the region could mean good news for customers.

“TransferWise brings a paradigm shift to the money transfer service in the country and in the region because it solves very important pain points that the customer has been facing,” says Mirna Sleiman, founder and chief executive of FinTech Galaxy, a virtual accelerator in the Mena region.

She says the move will also allow local FinTechs to “piggyback on this new development” by either offering their own digital services or potentially partnering with TransferWise.

A total of Dh169.2 billion was sent from the UAE last year, the Central Bank’s 2018 annual report shows. Global remittances totalled $689bn (Dh2.5 trillion) in 2018, according to World Bank figures. The UAE and Saudi Arabia were the second and third top remittance countries after the US in 2017.

The global average cost for sending money in the second quarter of this year was 6.84 per cent and the average from the Middle East and North Africa was 6.91 per cent, according to a June World Bank report. That is more than double the United Nations Sustainable Development Goal target of decreasing the cost to 3 per cent by 2030.

“The average cost and length of time it can take to transfer money across borders is a significant challenge that continues to this day,” says Jackson Mueller, associate director of the FinTech programme at the Milken Institute Centre for Financial Markets in Washington. “TransferWise, along with other payments providers, are looking to address these challenges head on - that can lead to more money in people’s pockets and greater access to finance.”

Here we examine the effect TransferWise will have on the UAE's remittance industry:

How expensive are money transfers from the UAE?

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 example, from UAE to India, the cost as of May to send Dh735 varied from Dh1.47 with Kotak Click2Remit, a service for customers of India’s Kotak Bank, to Dh37.71 with WorldRemit, a global online transfer service. Local exchange houses, such as UAE Exchange, Al Fardan and Western Union, charged around Dh20.

A transfer of Dh735 to Pakistan also varied widely, from Dh5.73 with GCC Exchange to a whopping Dh89.08 with Dubai Islamic Bank. Other exchange houses ranged from Dh13 to Dh24.

How is TransferWise different?

TransferWise was founded in the UK in 2011 by Estonians Taavet Hinrikus, Skype’s first employee, and financial consultant Kristo Kaarmann. Mr Taavet was paid in euros, but needed pounds, and Mr Kaarmann was paid in pounds, but needed euros to pay his mortgage back in Estonia. They made a private arrangement to put the currencies needed directly into each other’s bank accounts, and the idea behind TransferWise was born.

The platform is now used by 6 million customers worldwide, processing over $5bn in customer payments every month. The service is available in over 1600 currency routes and 49 currencies, with money transfers up to eight times cheaper than the banks in its biggest markets.

“Wherever possible we will pay money out from local liquidity that we have … whereas with a bank, a bank would send this through a correspondent banking network that would actually go through many banks along the way. [That means] a huge amount of capital tied up and a lot of manual processes,” says Mr Briers. “The typical bank costs around £30 (Dh142) to make a transfer internationally. TransferWise is doing it for about a tenth of the cost.”

How does TransferWise do it cheaper?

Instead of marking up the currency exchange rate, TransferWise uses the mid-market rate and charges an upfront fee. The mid-market rate is the midpoint between demand and supply for a currency, so it is the rate you will find on independent sources such as Google and xe.com.

For example, transferring £1,000 from the UK to euros would cost £3.95 at the mid-market rate of 1.15480, so the recipient would get €1,150.24 (Dh4,698). TransferWise also publishes comparisons to major banks on its app and website.

TransferWise can offer lower-cost transfers because of the automated process and because, unlike banks, it is not subsidising other products. Approximately 20 per cent of the money that leaves the UK is now on TransferWise, says Mr Briers.

“People join us because the product is much cheaper, but actually a big wow factor is also the speed,” says Mr Briers. About a quarter of transfers are instant, meaning they are done in less than 20 seconds.

Costs and speed vary depending on source and destination. It remains to be seen what these will be in the UAE. However, Steve Cronin of DeadSimpleSaving.com says TransferWise "is likely to be cheaper than some of the best existing offers from local exchange houses and many times cheaper than banks".

There is also some ambiguity on how TransferWise, which has a “Money Services Provider” licence from ADGM, will operate.

“This is an industry that has been managed and regulated by the central bank. When you’re an offshore company, when you’re based in the DIFC (Dubai International Financial Centre) and the ADGM, you’re not allowed to do transactions with UAE dirhams on mainland,” says Ms Sleiman. “Is TranferWise going to partner with a bank to offer its services or is it going to go stand-alone?”

Where else in the region will TransferWise be available?

TransferWise has expressed its intention to expand elsewhere in the region with Abu Dhabi serving as its Middle East hub. Tim Harley, head of Middle East expansion for TransferWise, said Saudi Arabia and Bahrain are two countries they are looking to next.

“If you go forward five years, we would expect to have full coverage, or wherever full is feasible,” adds Mr Briers.

Will other international players enter the market?

Global players, such as Azimo, have said they are interested in entering the region.

"We believe the GCC market has enormous potential. With a young, tech-savvy population and 70 per cent smartphone penetration, it's an ideal territory for a cross-border payments FinTech," Richard Ambrose, Azimo's chief executive, tells The National.

What other FinTech money transfer options exist in the UAE?

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.

“There are five million people in the country that don’t have a bank account,” says Ian Dillon, founder of Now Money. “The first thing you need to use TransferWise is a bank account and we serve the unbanked customers.”

Denarii Cash plans to allow users to send money from the UAE to the Philippines with zero fees. Currently in a testing phase, the company charges an upfront fee of $2.50 for amounts over Dh1,000, but zero fees for amounts below that. The app also offers additional services, such as bill payments in the Philippines.

“We don’t make money from the exchange rate, so it is the mid-market price,” says Jon Santillan, founder of Denarii Cash.

The company has partnered with PayTabs and Checkout, as it can only work with existing payments companies licenced by the UAE Central Bank.

TransferWise's entry into the market "shakes up the remittance industry overall in the country", says Mr Santillan. "Big companies will start thinking about not going into silos and working with other start-ups to be able to compete."

Mr Briers says many banks in the UK “have lost 25 per cent of their customers to TransferWise”. But some institutions, such as digital bank Monzo, have integrated TransferWise on to their platforms.

“Long term many companies’ strategic option is to think about integrating something like TransferWise and giving customers the service they deserve,” Mr Briers says.