Bruno Gremez
5 min readNov 1, 2017

High international money transfer costs: how can FinTech improve the situation in the Middle East?

By Bruno Gremez and Samir Kasmi, Fincluziv, Smart Fintex and CT&F Partners and ex-bankers (BNP Paribas, Société Generale, ABN AMRO).

The cost of international money transfers is an important driver of competitiveness in a globalized economy. This is the reason why the World Bank established in 2008 the so-called Remittance Prices Worldwide (RPW), in order to monitor remittance prices across all geographical regions of the world and to measure progress towards cost reduction objectives.

According to the latest RPW report of September 2017, the global average remittance price reached 7,21% in Q3 2017. The main conclusions that we draw from this report are two-fold.

First, although they have declined by almost 2,5% since 2009, remittance costs are still very high, and as a matter of fact they are considered as too high by the World Bank. As a result, both the G8 and G20 have committed to reduce global remittance costs to 5%.

Second, there seem to be very significant differences in costs among the remittance channels. Banks remain the most expensive channel with transfer costs of 11%. So-called MTO (money transfer operators) like Western Union or MoneyGram and post offices show transfer costs of 6,14% and 6,56% respectively. Very interestingly, mobile operators cost around 3,1% and are by far the most competitive.

The latter is a very significant development. It shows that modern, efficient, mobile payment channels can offer competitive payment services, and more importantly, that mobile operators can become drivers of financial inclusion. Indeed, in many countries, there is a growing gap between the proportion of people having access to internet and mobile phone services, and those having a bank account.

In its 2016 report, the GSMA (a global body representing the interests of mobile operators) outlined that the mobile money industry, by getting more widely established, brings financial inclusion to a growing number of previously unbanked and underbanked populations across the developing world.

Financial inclusion is also an issue in the Middle East. According to the World Bank’s Global Findex Database 2014, only 14% of adults in the Middle East have a bank account at a financial institution or through a mobile money provider, showing no improvement compared to the previous study made three years earlier. That puts the Middle East far behind other regions. Globally, account ownership is 62%. In developing economies, it is 54%. Sub-Saharan Africa is at 34% and South Asia at 46,4%.

Account ownership is a first step toward financial inclusion. But the benefits really come from people actively using their accounts to save and make payments. While the unbanked population is defined as those not having access to any financial service, people with only one bank account who use it only to receive their salaries and withdraw all the money at once without using other financial services are considered as underbanked.

According to a recent article in the Khaleej Times, it is estimated that in the UAE almost half of the population is underbanked. To some extent, the cost and balance deposit thresholds imposed by local banks to bank account holders explain this. Indeed, consumers must maintain minimum cash balances in their account, failing which they incur bank account maintenance charges. For many low and medium-income people, bank accounts are simply too expensive to maintain. They then receive their salaries through bank accounts controlled by their employers and withdraw all the money instantly.

At the same time, the UAE lead global rankings in terms of smartphone penetration. We have written recently that the combination of new regulations and financial technology developments in Europe facilitate financial inclusion. FinTechs increasingly offer efficient and cheaper simple banking products like accounts, payment services and international transfers to (underbanked) populations.

If the UAE lead global rankings in terms of smartphone penetration, can that help underbanked populations in the UAE gain access to more affordable financial services, and especially international money transfers? The answer to that question is inevitably linked to prevailing banking regulations.

The Central Bank of the UAE has issued at the beginning of 2017 new regulations to promote the adoption of FinTech while ensuring adequate consumer protection and financial stability. Most relevant in these new regulations are the definition of Retail Payment Services Providers (Retail PSP) and Micro Payment Services Providers (Micro PSP).

These regulations impose a set of criteria to PSPs to operate in order to safeguard the interests of consumers, the most relevant being logically the segregation of funds. This is very important since segregated funds mean that they are adequately protected and cannot be used by the PSP to fund their own needs and / or take any (intermediation) risk, which would potentially put customers’ funds at risks. This sort of segregation of funds has been an integral part of regulations applicable to FinTechs in Europe and has resulted in lower capital requirements for those FinTechs since their risk profile is very moderate.

At the same time, the new UAE Central Bank regulations also limit the size of payment flows and of transactions facilitated by PSPs. They further impose specific ownership requirements. A Retail PSP must be majority-owned by a commercial bank and a Micro PSP must be majority-owned by either a commercial bank, a telecommunication service provider / operator, a transportation company licensed by the National Transport Authority, or a monetary / financial intermediary licensed by the Central Bank.

These new regulations will hopefully facilitate the entry of new players into the market through cooperation between these new players and existing banks for instance. Some of these new players could play a vital role in the economy by improving financial inclusion.

For instance, new players could offer efficient and affordable financial services to serve those segments of the population that are currently not targeted by local commercial banks, because of too high cash balance requirements and / or too high account maintenance charges as mentioned above.

New players could also offer more efficient and cheaper remittance services to those segments of the local population that need it the most, like the low and medium-income people from South-East Asia who remit sizeable funds to their home countries.

The Word Bank calculates in its 2016 Migration and Remittances Factbook that the total amount of remittances outgoing from GCC Countries amounted to USD 98 billion in 2014. Countries like the UAE could leverage these remittance outflows to boost financial inclusion. The population effecting such remittances need efficient and cost-effective channels to transfer money home. FinTech payment service providers can become crucial for financial inclusion.

Bruno Gremez

Fintech entrepreneur based in Seattle, WA, USA. Co-founder of AcceleWage. Ex-banker (BNP Paribas & ABN AMRO). https://www.accelewage.com