The payments landscape in the Middle East is notorious for its reliance on cash. Despite the region’s digitally savvy population and their unorthodox ways, cash has a strong cultural hold and is backed by centuries of conformity, making it difficult for consumers to steer away.
However, the landscape is evolving and various factors are paving the way for digital payments to dominate in the region.
A recent McKinsey report, titled ‘The future of payments in the Middle East’, states that this movement is driven by industry pressures, disruptive forces, changing payment patterns, and the increasing prospects for banks and fintechs in a rapidly evolving environment.
The consulting giant also referenced the new government and regulatory initiatives, alongside the entry of new payment providers, as well as the coronavirus pandemic, as more triggers for the flight from cash globally.
“Many traditionally cash-centric countries in the Middle East are now converting to higher rates of digital payments. The pandemic has spurred a payments revolution of sorts, and it is not one that is going away,” said Mohammed Ali Yusuf, MENAP regional manager at Checkout.com.
Altogether, these factors are conspiring to combat the underdeveloped digital-payments infrastructure and services, underbanked consumer and merchant segments, as well as the strong cultural bias toward cash.
Increasing regional digital adoption
In the UAE, digital payment has been on the rise well before the onset of the pandemic, with payment transactions in the country growing at an annual rate of more than 9 percent between 2014 and 2019, compared to Europe’s growth of 4 to 5 percent, according to the McKinsey report.
“The UAE can go fully cashless by 2030 and join the league of countries moving towards a cashless society, including Finland, Sweden and the UK,” said Jorge Camarate, Strategy& partner and leader of the firm’s financial services practice in the Middle East.
“The young and tech-savvy population, government support and Covid-19 safety and hygiene concerns are the main drivers of cash substitution. In fact, recent surveys and statistics further emphasise this trend, for example, Standard Chartered recently reported that cash withdrawals from ATMs are now half what they were two years ago.”
However, it was Saudi Arabia that observed astronomical growth in card payments, over 70 percent, between February 2019 and January 2020.
“Whilst going cashless is a global trend and digital forms of payments including tap to pay or contactless now account for more than two thirds of transactions globally, excluding the US, in the UAE and Saudi Arabia, that number is even higher,” commented Dr Saeeda Jaffar, Visa’s group country manager for the GCC.
“In fact, 9 out of 10 transactions in Saudi Arabia and 8 out of 10 in the UAE are made with contactless cards or devices. Both countries were already making steady progress towards becoming a cashless economy, thanks to the government initiatives, and the pandemic has only further accelerated this trend.”
Among the payments practitioners who took part in McKinsey’s survey, more than three-quarters (80 percent) estimated that non-cash payments had risen by more than 10 percent across the region as a result of the pandemic, and 43 percent believed that the increase exceeded 20 percent.
Commenting on the rise of non-cash payments in the region, Jaffar added: “Visa’s latest Stay Secure consumer survey in the UAE found that cash on delivery (COD) payments have declined significantly (by 75 percent), while the use of contactless cards and mobile wallets for online or delivery payments has almost doubled (by 98 percent on average).”
Regionally, preferences for payment methods are changing for both consumers and vendors.
McKinsey’s survey indicated that 58 percent of Middle East consumers expressed a strong preference for digital payment methods, while only 10 percent strongly preferred cash.
Visa’s Small Business Recovery 2021 study also revealed that 60 percent of UAE merchants and 84 percent of Saudi merchants surveyed said their customers prefer contactless payments.
“It’s no surprise that in the same survey, the majority of UAE merchants (82 percent) and KSA merchants (71 percent) said investing in digital payments is key to their business recovery,” added Jaffar.
Amidst these changing preferences, digital e-wallets are rising as a strongly favoured method of payment for regional consumers, with 60 percent of those surveyed in the McKinsey report stating that they expect digital wallets to be the most influential digital payment method regionally.
“There is a rise of alternative and mobile payment methods, such as Apple Pay, Samsung Pay and Google Pay as well as home grown digital wallets like Ziina, the social P2P payment application,” commented Camarate.
“GCC governments and regulators are also supporting such innovations through modern, startup-friendly regulatory frameworks.”
Supportive regulation changes
The recent regulatory changes in the Middle East have allowed for the expansion of the regional payments market to include emerging fintechs and tech companies, alongside traditional banks.
“The region’s regulators are supportive of fintech and payments innovation, look to drive digital payment adoption, and encourage collaboration and fair competition,” said Yusuf.
When asked which institutions would have the greatest impact on the future of payments, McKinsey survey respondents ranked banks or bank-backed wallets number one, at 40 percent, another 30 percent selected telecom-company-backed wallets, and 17 percent big-tech companies.
However, the majority of respondents who predicted banks and bank-backed wallets would win were from banks (62 percent of respondents). When respondents had to name their second choice, more than 50 percent of those from banks indicated that big-tech players were best positioned.
Commenting on the threat that fintechs are posing to traditional banks, Camarate said: “To remain relevant, banks and leading acquirers should shift focus from building capability scale to developing solution scale and address the emerging value in the traditionally overlooked long tale of SMEs through partnerships, and collaborative ecosystems.”