The UAE is now ranked number 1 for both foreign investment inflows and outflows within the Middle East, West Asia, and North African region, putting them comfortably in the top 20 globally.
Given that around 90% of the workforce is made up of expats too, money transfers are integral to the UAE economy for both workers and investors. It is surprising, then, that individuals are losing up to 5% per cross-border transaction. In respect to investing money in the UAE, this is the equivalent of a year’s return in property value or a high-interest savings account.
With a 28% increase in FDI last year and continued positive net migration, the higher-than-necessary costs of sending money to the UAE needs to be addressed.
Remittance: The true cost of transfers to the UAE
Earlier this year, money exchange houses began increasing remittance charges for the first time since the pandemic. It was projected that the costs of remittance made through physical branches may rise by up to 15%, and the increase came about mostly due to regulatory pressures.
However, this is mostly outward remittance, which reached almost $670 billion in 2023, most of which was to developing nations. It should also be noted that remittance costs in the UAE remain almost half below the global average cost of 6.2%
Remittance is far less common into the UAE because it’s the hub where migrants come to work. However, the inflows that occur are mostly through bank transfers, and are usually for business or investment.
The cost of doing business
Businesses are facing similar friction to entering the UAE despite its otherwise welcoming environment. With over $20 billion in inflows per year, small and large businesses make up a significant portion of the money transfer volumes.
Large businesses do often have the luxury of private banking – an industry that is growing in the UAE – in which they can receive bespoke currency exchange rates. However, this is out of reach for smaller firms, and it’s a deceivingly big problem because SMEs represent over 95% of UAE businesses. For many of them, their options to cut down on money transfer costs remain the same as most migrant workers.
The cost of a bank transfer to UAE
The cost of these bank transfers depend on where you’re sending them from (the US has very high fees), but typical rates around the world are $20-30 as a flat fee – though HSBC claim it to be as high as $35 to $45 – and around 2-3% as an exchange rate spread. The spread is essentially the difference between the “real” mid-market rate, and the one you’re given.
For a $1,000 transfer from the US to the UAE, this may then result in a $45 flat fee and a $30 loss from a 3% spread. That totals $75, which is 7.5% of the total amount. Of course, if this were the payment to suppliers, it could render profit margins untenable, and the same goes for an investment.
However, the tolerance for high fees seems to grow for individuals who are not looking at annual yields and margins, but instead sending it to family or personal savings. For reference, sending that $1000 via MoneyGram would have cost £3.99 in fees but an exchange rate spread of 3.73%, meaning $41.29 was lost. This would be more in line with a typical bank transfer as opposed to an upper-end costing one.
It is possible to find banks that are cheaper on both fronts, but they’re rarely as competitive as the alternatives. The difficulty in simply switching to another bank to take advantage of their cheaper rates – which could be an afternoon of printing documents and a trip down the local branch – reflects why their costs are greater too: regulations are tighter on banks, and the infrastructure used is older and less flexible.
Money transfer companies & currency brokers
Cash remittance costs are high due to cash being riskier and requiring more administrative labor, while wire transfers at banks are costly due to their regulation and legacy systems. However, there has emerged a new alternative in the past 10 years, which are known as money transfer companies.
These are digital companies enabling customers to do bank to bank transfers are a preferential cost and are generally easier and friendlier to use than their legacy counterparts.
When sending money to the UAE from the UK, a live comparison of the transfer fees tells us that an average provider in this space like XE will charge 1.01% of any transfer to and from UAE below $50,000 (above this mark it becomes incredibly cheaper).
This means that in the earlier $1000 example, only $10.10 is lost in the transfer. However, Wise comes in even cheaper at a spread of 0.49% and a fixed fee of $1.10, which totals $6.
For larger transfers, the differences between legacy means of transferring money internationally from and to UAE, are even more stark. The rates could be as low as 0.2% in total, and customers with large requirements are assigned with a private currency dealer that helps them not only commence the transfer and follow up on it, but also transfer at an optimal timing where the currency rates are favourable. You could for example book a transfer that executes only when a certain rate has been reached, which is what most businesses would do because at such high volume of currency exchange, every cent makes a large difference.
Conclusion
It’s difficult to break out of the dependency on banks, and for some, there is no alternative to the cash used by remittance companies. However, given the freedom to use them, fintechs are now providing not only a far cheaper and faster money transfer service, but a more sophisticated and useful one, too. The choice between such companies is a far more rewarding search than the traditional options, and it may just be the difference of staying solvent, growing a business faster, or retiring a year earlier.
Featured image credit: Edited from freepik
