Interview Transcript: "We need to keep investing in technology and people driving technology"

Emmanuel Daniel (ED): I am very pleased to speak today with Osama Al Rahma, chairman of the Foreign Exchange and Remittance Group, a central bank inspired platform to bringing the licence remittance players in the UAE together as an organization. He is also the CEO of Al-Fardan Exchange, one of the oldest exchanges in the UAE. UAE is a very interesting economy because of its very large foreign employment pool, and the remittance business is very much in infrastructure in this country. You will be at the forefront of the payment industry, the foreign exchange industry, and the remittance business that affect many other countries that are dependent on this capability coming out of the UAE.

Challenging business

ED: The foreign exchange and remittance business are under a lot of pressure today. The bank’s that are in this business, de-risking, and the KYC requirements for them very tough. The regulator of the UAE has told us that they are comfortable with the process of de-risking.

What do you see, as a foreign exchange player and a remittance player, in terms of all the regulations coming on stream right now, is that affecting your business? Is that changing the way which you need to work?

Osama Al Rahma (OAR): Of course, this kind of unprecedented challenges we have been facing in the past few years, especially with the ongoing dynamics of the compliance arena, at the time, we do understand that there is a new normal of adoption to new rules and regulations governing the way we treat the customers, and getting the KYC, and understanding the source of fund. All these kind of systems are being implemented fairly, prior to what we’ve seen as an impact on certain incidents that happened due to the terrorist actions or a certain financial crisis. We need to understand that a lot of laws and regulations came upon these kinds of incidents. Many of these things may have not been studied well, or applied in one country but then it has been distributed to all, which is not sometimes being fairly implemented. But at the end, everybody went through the same channel. When I say everybody, I mean all of organisations, banks, financial institutions, and insurance institutions, including what we call the exchange houses.

One of the facts we need to understand, in this area, in the United Arab Emirates or in the GCC (Gulf Cooperation Council), the activity of remittance has been regulated from the beginning. So, if we speak about the United Arab Emirates, since the inception of the central bank in the early 1970s, they decided that such activity should be licensed only by central bank, which is not the case even in Europe, like in UK, or in the USA. In USA, the MSBs (money services business) has only been regulated or under the observation in 2009. The same thing happened in the UK, only in November 2009, where they had this kind of activity under regulation and observation.

ED: So the business of remittance…?

OAR: The business here since the beginning. So, by default, whatever have been applied to banks, as laws, regulations, or government compliance it issues is being implemented and enforced to all the institutions, including the exchange houses. Now, how this evolved today, what we say today about the tough challenge which is de-risking, is that, in the other parts of the world, there are different perceptions about the level of compliance and the implementation happening. Everybody is perceiving it in a different way. And when there is a categorisation about certain entities in the different parts of the world, or in certain countries, and suddenly, we apply this for all.

Then, we reached the level of an international bank asking their own correspondent here to de-risk their own customer, who they have known for the past, maybe, 20 to 25 years. This kind of dilemma, which is taking place today, needs to be resolved in a more amicable way by having a better understanding and narrowing the gap about the misperception and differences about the way people evaluate other parts of the world.

ED: Given the size of your business, and the nature of the relationship between the clearing houses and the banks in the UAE, and the flow between the retail payment business and wholesale aspects, would reclassifying you as a financial institution help?

OAR: Yes. This is why even our name, we call it a foreign exchange and remittance group, we did not say exchange, because sometimes, the name has an impact, there is a perception, or a negative perception. When people start generalising or stereotyping way of thinking why these institutions in this region have millions of expats to do what we call the official remittances? When we say official, this official channels. This money is park ultimately at the receiving countries within their banks, who benefited from foreign exchange directly through their economies. And that only happened because of these exchange houses, which channelled all these remittances through their official channels as against the unofficial channels – the grey markets – which used to be active earlier because there was no alternatives.

Now, somebody would ask, why the banks wouldn’t take such role. Because these people, who are unbanked, have lower wages, and they are not profitable for the banks.
We have one choice, either to divert them to the official channel, which is the role we are applying today, or we leave them alone to the unofficial? And today’s regime of compliance, which one is more transparent? Which has the KYC? Which is the official way? Because we will apply all these rules and regulations versus the unofficial [channels]. Which do they apply? Nothing. And the forex money, which is needed by these receiving countries, will never reach there because these will be on the value transferred between them.

ED: Do you find that you have a lot more owners on transactions, which are dollar dominated as supposed to than any other currencies? Are there issues related with dollar clearing?

OAR: A big fact is that the dollar is the dominant currency in our business. It is the currency of trade, of settlement, and of payments. It has contributed to almost 70 to 80% worldwide. So, yes, the need the dollar is a must. And most of these saving countries, like India, the Philippines, Pakistan, and other the Asian countries are waiting for the dollars to come.

ED: Have you seen a move that accommodates other currencies more today like the RMB, or the Euro?

OAR: When we speak about the retail side, we will not see to abandon the dollar. Yes, when you speak about the commercial and the corporate type of transactions, you might see the increase growth of the RMB. And the Euro is also the second demanded currency after the US dollars. That is when we speak about the corporate, but when we speak about the majority, are the retail, it is always governed by the US dollars.

Investing in technology amid a tough environment

ED: As chairman of the Foreign Exchange and Remittance Group, what are the three top priorities that are top of your table, right now? De-risking being one of them right now, I guess?

OAR: Re-defining the rule of what we do; how we contribute to the financial inclusion; and how we adopt to the technology today, which is going in a very fast way. To facilitate the customer experience, and making it more transparent and more reliable for the customers.

ED: Is that because of the competition or the technology?

OAR: We can say, both the technology and the adoption to technology have an impact for change. And the customer’ demands have kept increasing. If you don’t adopt to these demands, the customers will go somewhere else. That force us to always think differently and to try to be ahead of the customers’ thinking. We don’t know the kind of sudden changes happening immediately, and even the regulators are welcoming the adoption of the technology. Especially here, there is a draft law on digital payments taking place to re-define how we act. And we can say that even in the other countries, like the introduction of the payment banks in India, for example, which is a new category. So, these are all foundations for digitizing the transaction and allowing different entities to act. This actually confirm the need for institutions, other than the banks, to act as a middle man in between.

ED: How is that changing players like your own exchange house and your peers? Do you find that you have to invest with the technology yourself, or do you just wait for the technology that is being created and that is becoming available?

OAR: Internally, we need to invest and keep investing in the technology and people driving such technology. Second, the whole model is being changed, so there are a lot of expertise with other partners who provide you ready-made technologies in different segments, so you need to collaborate and partner with them. It’s a mix of both, which means the total business model is being changed today. If you ask us, for example, in Al-Fardan Exchange, we have multiple relationships with different technology providers, and we work a lot in trying to always keep the momentum by adopting those who have already done their research and have proven or tested one. Then you start reinventing the wheel from the beginning, and that allows you to always be ahead if you want to have the competitive advantage.

ED: In countries like the UK, it’s exactly in FX, in payments and in remittance, where the new fintechs think that they can dis-intermediate the banks. Because in these countries, the banks charge high fees, they set on the float, they benefit from the whole process, and the FX also is very high to the retail customer. Whereas, you are closer to the ground, and you actually pass on lot of profitability to the customer. Therefore, your margins are a lot smaller. Are you, therefore, somewhat protected from the onslaught of this price-driven technologies? Technologies that makes sense only because of the margins that the banks charge.

OAR: If I may understand it clearly, are we protected? No, we are not protected. We always need to anticipate what is the most visible way of…

ED: Actually, another way of asking the same question is that, is your business margin small enough that new technology players coming in would not find you interesting – that they can compete with the margins that you provide?

OAR: This depends on different offerings. Yes, our models are always on the lower side, which kept us to survive all these years.

But at the end, we will need to understand what’s happening. Sometimes, the consumer’s behaviour is changing. Some consumers may be willing to pay a little bit more provided that you are providing them something out of his Smart phone, which will save him the trip, the journey, and the other stuff. So, the pricing is maybe a variable factor down here, versus the duality of the service and the convenience you provide to the consumer. And we also need to understand this kind of changing behaviour by the consumers; their ability to adopt to different models; and the way we deliver to them our services. That would allow us, maybe, to adopt to certain issues. I will not consider it as challenges, we hear a lot about the total experience we provide to the customers, it makes a value for them.

ED: Even in this environment, what do the Hawalas do that gives them the competitive advantage in this environment?

OAR: Convenience, lower pricing, due to there is no overheads for them. They are not subject to capital adequacy and regulations. They are out of the market. Versus you’ve been regulated, you have certain criteria, you have capital requirements, and you have your compliance issues, so all these are huge operational costs for you. Versus somebody doing the business without any costs almost, so he can offer the cheapest, which makes the people to go there.

I can remember, in the mid 1990s, we sat with the Filipino banks, they were trying to overcome what we call the cargo at that time, which was the grey market remittances in the Philippines. I was very clear with them, I said, they offer what they call door-to-door, which is a brilliant service. They knock your door, they take the money, and they deliver to the door of the recipient. And they offer a floated rate which is much better than the official rate. And I said, “If you want to compete with them, you need either to match, or to do better than them.” And this is what they have done. They went and they offer the door to door. And they offer the floated rate, and then immediately they were able to capture the majority of the customers. There is no competition of the grey market today.

ED: Despite, as much technologies you can put into the business, you only as good as your price at the end of the day.

OAR: And the customer is aware of these. He knows very well the value of what he is doing.

Combating fraud in the cyber field

ED: What is the experience of fraud and risk in this business, how exposed are you to fraudulent transactions?

OAR: With the shift to the cyber field, we are also subject to the cybercrimes and the cyberattacks, and the fraud happening on this level, because we are adopting to the latest technology, where we need to raise the level of our controls and protection within the system, but also within the people, within the policies and cultures. But yes, the fraud is when you take wider tide, we are a part of what is being attacked. So we have to always be aware, and again we have to spend on the security side of the technology.

ED: When we think about the FATCA and the rules that US putting on the global payments today. Then you have sort of grey area, like the on-boarding about Vietnam or Myanmar, these are countries which have some form of liberalisation now, but not fully yet. So the situation is not really very clear. How do you think about doing business with remittance system from Iran for example, or to Iran?

OAR: As of us, we go according to what is having clarity. Even for us, as an institution we never dealt before, even before the sanctions. It is a choice for different entities. But as of now, there is no clarity. We do understand even with the international banks, especially in the US, there is a direct communication with the official treasury people and others about the way forward. Until there is a clarity, these kind of actions we don’t go forwardly, before we have full clarity and if there is a green light from the central bank.

ED: So the business type that you wouldn’t take on board until?

OAR: At this moment, this is not something which… because what we do have is something that has lot of opportunities, the current market, which we have to focus on.

Growing remittance business

ED: You seems to be the man has passion on about the fact that remittance business affects GDP on several countries, so you have Pakistan, India, Philippines, and Indonesia and so on. What about countries which are effectively left out, like Somalia and some African countries? Which are left out today, which are sizable population here, I mean the UAE. Are they wise around providing remittance services to these countries, without getting into trouble FATCA, even the European?

OAR: The FATCA is something related to the US citizens who maintaining certain account abroad and they are supposed subject to the taxation. This should not affect or any impact on the remittances to these countries which are in bad need and serious need to every single dollar that remittance cost today, because one dollar can make a whole family to survive. And I believe, you know with the case taking place, with the Barclays in the UK, these things are being revealed clearly, and it’s been even reach the level of Congress of the United States. Due to the de-risking mainly, rather than seeing the impact, and I saw in one of the round table sessions in Washington DC, the whole African countries have nothing to do with the either terrorism or others, they have been cut totally from the access to dollar. And, these countries are depending on the imports for everything, including their fuel for their own people, then the IMF intervenes to support them in certain initiatives. De-risking has to be more wisely looked into and its negative impact on different stake holders of the communities or countries sometime.

ED: Where is your conversation right now? Do you see a recourse, do you see an alternative channel?

OAR: It is all about the dialogue. Here in UAE, we are having a good day with the central bank, with banks federation and with other stakeholders. Internationally, I believe a lot of stakeholders have to seat on one table and start this kind of dialogue. It’s all about understanding each other, and where is the real risk lying, and then how we can tackle these specific issues, instead of just de-risking. This I believe is the fastest way to just be away from everything, which is not the ethical rule for banks or for financial institutions.

ED: Do you find that you are also victim of de-risking, do you find the corresponding relationships?

OAR: We are. We have more correspondent relationships, we do not have that much accessibility. Even in some areas, international banks forcing the local banks to cut relationship with such entities. Including not only us, it is not only related to exchange houses or financial institutions, even for SMEs. We saw here, in some top banks, excluding and de-risking the whole SMEs, which we know as the government initiated, it is promoting SMEs as a contributor to any developing economy. So, this is happening all over, which I believe it is time. And I believe this kind of de-risking is only a consequence to what has happened earlier due to the sanctions and penalties. We understand their situation, we are not criticizing those institutions, maybe it is time now - that era is over maybe. And it’s time to look normally to these things, rather than with panic or with reactive mood.

ED: The business that you are the chief executive of the Al-Fardan Group, is that a family business? And how many generations have been in the business? How is the business changed over time?

OAR: This is a group of companies. And the business since 50s, we started with jewellery and pearl trading more than 100 years. But then they diversified, and part of that was in the early 1970s, the 1971, exactly, they established the remittance and exchange. And it has also real estate and other parties. It is a family own business, and we are now the second and third generation.

ED: And the core business is the exchange?

OAR: One of its pillar, I can say.

ED: How is that changed over time?

OAR: This is allowed us to survive actually. The ability to change, the ability to adopt, made us to grow as a business, from few branches, one branch in 1971 to almost 30 to 60 branches.

ED: You are one of non-banks financial institutions allowed access or rather direct connectivity with SWIFT. How did that help your business? How are you involved in the supply chain sort of structure? How you able to service your own customers as a result of this direct conductivity?

OAR: SWIFT have their own regional office in Dubai and they have seen when we started from 2007 to 2008, they started to engage the exchange houses. As part of their activities, they have seen a tremendous number of the transactions taking place through this exchange houses. Why? Because alternately we correspond with banks. And the SWIFT is the most direct messaging system among the banks in the world. Once you are there, you are part of this circle. And, since we are parking all our funds through the banks, so the SWIFT will be the most ideal messaging system when we compare to its reliability, and security with the banks. This is why it has been supporting us a lot, business wise and operationally.

ED: But does that encourage you to build on your interfaces, so that you can provide a linkage directly to your corporate customers?

OAR: To the corporate customers, not yet, we haven’t extended that one. But it also gives you, I’m talking about internally between us and our banks whether it is using it for the payment as MT 202 or for the freewill of the statements as MT 925 or 950.

ED: That disintermediates you between your own tradition bank relationships; you don’t need to go to the bankers.

OAR: Your accessibility to the banks. And provide your banks also a comfort as well.

ED: That you are a part of the network in that regard. How do you see the industry changing in the next three to five years? What do you think will happen in the remittance and FX business in the Dubai or the UAE?

OAR: In UAE, it is always driving the innovation. And innovation becomes part of the strategies, parameters and indicators of the government, of the ministry, and of the departments. And going forward as a smart city and a smart country, this also forces us to be part of these changes. We can see this happening in every part, and the seamless financial activities and payments related to all the smart things happening, we need to be part of it. This is why we’ve been engaged also by the central bank to be part of the future of digital payments as well.