Banker Middle East Wages Protection System


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Banker Middle East Wages Protection System

  1. 1. FOCUS: TECHNOLOGY The UAE Wages Protection System, its process and players OCT09 ISSUE111 Print this article On 20 July, the United Arab Emirates Minister of Labour, Saqr Gobash Saeed Gobash, issued a decree defining a very aggressive timeline for the implementation of the Wages Protection System (WPS). Mohamed Belarj, the Chief Executive Officer of Payment Systems Consulting and President of C3 Card explains the background to the proposals The UAE‟s Wages Protection System (WPS) is due to enroll 269,100 companies employing 4.1 million workers by May 2010. The majority of these companies still pay their salaries using cash, making salary payments a tedious effort, performed monthly, bi-weekly or even weekly. This implies all kinds of issues, not least of which are the logistics of monthly distributing preloaded envelopes to every single employee. The process takes days or weeks sometimes, especially as some companies have workforces in the tens of thousands. THE REGULATORY FRAMEWORK Mohamed Belarj is the In 2007 a Federal Law was adopted that requires payment of wages for all Chief Executive workers in the UAE to be performed through electronic means. The law Officer of Payment was in effect as of January 2008. The law attracted a dozen service Systems Consulting providers, in addition to Emirates Post, a few banks and a few exchange (PSC) houses. Past the initial excitement however, the response was not by and large satisfactory, from the Ministry of Labour‟s (MOL) perspective. Most non-bank service providers never got in business with the exception of Worker Equity, Waseela Equity and C3 Card. Other players included Emirates Post, the UAE Exchange and Lari Exchange. On the bank front, a couple of banks showed interest and got into the payroll business, mainly by issuing a branded debit cards, but only two banks (who were already in the payroll business before the Law) crossed the 100,000 mark at the time. All in all the banks have not shown the level of interest that the MOL was expecting. The banks in general have appeared very suspicious and mainly worried about the (potentially adverse) impact that opening the doors to the unbanked Blue Collar population could have on their (the banks‟) distribution channels. In this context, the Ministry of Labour had no choice but to keep up the pressure on companies, especially those having poor payment practices. It has multiplied the initiatives. From tightening controls on the payment of wages to looking into the living conditions and multiplying awareness campaigns on workers‟ rights, the Ministry seems to leave no stone unturned. At the same time, it has upgraded the training for the labour investigators and adopted a zero tolerance policy on violations of labour laws.
  2. 2. THE WAGES PROTECTION SYSTEM In May 2008 a Memorandum of Understanding was signed by Saqr Gobash Saeed Gobash, the Minister of Labour and Sultan bin Nasser Al Suwaidi, the Governor of the UAE Central Bank, to develop a special electronic system to tackle salary payments which gave birth to one of the most comprehensive end-to-end systems, a unique initiative as far as the author is aware - the Wages Protection System.  Central Bank to instruct all banks to open accounts for all companies registered with MOL  Companies transfer salaries of their employees to these bank accounts. The money is then frozen by the Central Bank.  Banks, exchange houses and service providers who have issued cards to employees of their corporate customers load the money to the cards to allow salary withdrawals. In the initial stages they can use means of payment other than cards.  Central Bank unfreezes the monies, allowing the payment cycle to take place.  The system has a comprehensive Management Information System (MIS) and enables the ministry to access payment data directly. WIN-WIN-WIN All in all, the WPS is a win-win deal for all parties involved. For the country, it lays to rest unjustified negative publicity, especially in the context of the numerous efforts deployed by the Government to make sure labour contracts are honored. For many workers, it is in certain cases, a real inclusion into the financial system. Some of the cards are normal UAE switch MasterCard or Visa payroll cards. These cards provide immediate access to the funds wherever the employees happen to be (although some cards are still not usable internationally). When they use the card to withdraw their salary, they may do so free of charge anywhere in the UAE. If they opt to keep their money and behave as a banked customer, they will be charged the AED 2 ($0.54) relative to the Switch transaction fee in the UAE, in common with all other bank customers. The risk of carrying cash is eliminated: workers can use their card safely anytime, anywhere, they can withdraw money or buy goods, or just leave their money on their „virtual account‟ and if they lose their card they do not lose their money. Certain cards also offer additional services such as money remittance at the labour camp or at the work place as well as additional value added services. The workers also benefit from dedicated support via a multi-lingual call centre, and they may benefit at times from other services tested by certain operators such as loans. For the corporations, the WPS automates salary payments and gets the company resource to focus on its economic activity. All in all, it enables the corporations to streamline their payroll processes and enjoy a hassle-free salary distribution. It eliminates the inconvenience and cost, hidden and apparent, of cash disbursement. Branded cards (MasterCard and Visa) take care of specific cases such as off-site employees, remote locations and multiple salary distributions (bi-weekly, weekly). Some operators have secure end-to-end communication systems through which the companies connect and update their data, thus eliminating processing errors.
  3. 3. There is value for the corporations when they allow their workers to get certain sophisticated products that respond to their financial needs. A happy employee is a productive employee. For the Ministry of Labour, it streamlines the control process, making it paperless, online and up-to- date. The system will cut the cost of lengthy, paper-intensive investigations and one-on-one reviews. It will allow the MOL to focus on processing the exceptions that make the most damage to the system. For the Central Bank, it is an opportunity to regulate the salary distribution and control the systemic risk introduced by agents distributing huge amounts of cash through non- compliant channels and proprietary cash disbursement networks. For the service providers, it is a new business opportunity, different for each category of players. WPS PLAYERS Besides the regulators and the companies themselves, there are four types of players: the banks, the exchange houses, Emirates Post and the non-financial service providers. Banks in the UAE have offered a mixed reaction to this opportunity. Some banks have seen the business as an opportunity to increase market share and got involved early in the game. Others have responded more conservatively. Most banks have set a payment limit below which they would not take employees. Some banks start at AED 3000 ($810), some at AED 2500 ($680) and some AED 5,000 ($1360) or above. Yet others entered the market-place aggressively only to curtail their activities after issuing only a few thousand salary cards. For the banks, the Blue Collar market has (as Churchill would put it), “all the virtues I dislike and none of the vices I admire”. There is a clear inadequacy between the concept of a bank and the profile of its target customers on one side and the payroll population on the other side. There are many issues that the banks have with this business. The most important one is that most of the banks have designed their service and distribution channels to serve select high net worth A, B and to certain extent C categories and not the mass population. There are also issues with the seasonality of payroll payments. Salaries are processed at once, typically within the first week of the month which puts a lot of pressure on the ATMs and other channels. The Blue Collar population does not mind lining up and queuing, especially if there is a free transaction on the machine. And of course, there is a capacity issue. The blue collars would add two times more customers than there is today in the banking system and all at the same time, which could put undue stress on a bank‟s channels and processing capabilities. Yet, others have grasped the opportunity. The exchange houses have been very active from the start. They see the payroll business as a threat if they stay out of it and as an opportunity if they can control it. If they leave the business to the service providers, there is a risk they will lose their remittance business as these players implement money transfer modules for the employees to transfer directly from the salary account, partnering with banks or using card-to-card modules.
  4. 4. On the other hand, there is a big opportunity if they manage the payroll also to process remittances for those customers, thus offering an end-to-end service. The issue with exchange houses is that they mainly use their (rather limited) network of branches and deliver cash manually. This of course results in other capacity issues. The non-financial service providers, are monoline companies created specifically to tackle the payroll business. These businesses implement their own channels including ATMs both on camps and on mobile trucks, dedicated support and multi-lingual call centres. Their strengths lies in the fact that payroll is their core business and they are committed to making it happen in the best conditions. OPPORTUNITY AND CHALLENGE In order for the WPS to be a success, there has to be partnerships between all players. Every category has its own strengths and can build on the other category‟s unique strengths. A bank/service provider partnership model can be potentially very successful, tending to expand the pie for both parties. The bank can confidently increase its corporate customer base without any additional stress on proper channels or dilution to the brand. The service provider acts as a buffer zone and allows the bank to enjoy the corporate relationships and the cross-selling opportunities with what is considered as „white collars‟. Recognising this, some of the key players are looking to outsource this business, mainly the service aspects of it. Obviously there are many issues the banks will look into to make sure the service providers are up to speed in terms of „know your customer‟, data management, and a real contingency planning and back-up options. The exchange house/service provider partnership can allow the exchange house to focus on its core business and yet have access to thousands or hundreds of thousands of customers, without implementing the infrastructure required to support the payroll transaction. WPS IMPLEMENTATION A very aggressive schedule has been set to enroll the 4.1 million workers by May 2010 as follows:  4,100 companies employing 2.1 million people are required to join the system by 30 November 2009.  35,000 companies employing 1.1 million employees are required to join by 28 February 2010.  230,000 companies employing some 900,000 employees are required to join by 31 May 2010. This implementation will have significant impact on the ATM switch and will require extra capacity that the players will have to put in place so as to avoid additional strain on the current ATMs. In conclusion, WPS is a superb system that will put the UAE again at the forefront of innovation. However, we believe it needs to be implemented with flexibility and maybe additional timeframes in order to allow more players to get onboard and avoid messy implementation. It is indeed desirable that many more new players enter the market over the next few months, with better propositions that will enhance the value for corporations and employees and ease the burden of the new traffic.