The COVID-19 pandemic has triggered a surge in digital adoption across industries. One of the more pronounced shifts has been a move from cash towards digital payments. This move becomes more even more noteworthy in markets such as the Middle East that have been traditionally cash-biased. Reports estimate the digital payments landscape in the Middle East is set for major growth. It is now estimated by some experts that cash use could go below 5% of the total spending in the Middle East.
A report from McKinsey revealed that 58% of the consumers in the Middle East now prefer digital payments methods while only 10% lean strongly towards cash. A Mastercard global survey shows a record 95% of consumers in the Middle East will consider contactless payments such as QR payments, biometric, or contactless over the coming year.
The push towards digital payments
The governments in the region have never shied away from embracing the most modern technology and investments in these areas have seldom been an issue. This seems to be the case in the matter of digital payments as well. Government interest and favorable regulatory changes have become key enablers of digital payment adoption.
As is the case around the world, an increasing number of smartphones users and the ubiquity of the app-powered ecosystem are also contributing to the adoption of mobile payments. In fact, in the Middle East, robust payment options are now becoming an integral part of what the consumers want from merchants and online experiences.
The growing popularity of e-Commerce has also contributed to the rise of digital payments in the Middle East. As more retail shopping moves online, the need to provide more digital payment options only keeps increasing.
Businesses that are outside the finance industry are also looking at this digital trend as an avenue to offer more value-added services.
Market data estimates that the Middle East investment in fintech will touch USD 3.45 billion in the next five years. Another report estimates that the embedded finance sector is expected to “grow up to five times by 2025, from a current valuation of $22.5 billion to over $250 billion”.
White label credit and debit cards are thus now gradually becoming more coveted by brands and innovative new players in the Middle East and helping organizations build better engagement with their customers.
The pandemic indelibly changing customer behavior. Also, the rise of the millennial consumer, who is more digitally savvy than the previous generations, has made businesses lean even more towards enabling digital payments not only for convenience but also to drive user experience.
The benefits and challenges of digital payments in the Middle East
The rise of digital payments increases the number of touchpoints between customers and the brands that they engage with. This provides deeper insights into customer spending patterns and gives organizations the capability to improve customer experiences by delivering greater relevance and personalization. With FinTech exploding in the Middle East, businesses are now in a position to leverage these services at a much lower cost than before owing to responsive regulatory changes.
The Middle East, however, is still fragmented when it comes to payment methods, policy and regulation, infrastructure, and consumer preference. Merchants also operate payment strategies at a more granular level. This is a hurdle on the path to rolling out comprehensive digital payment programs that will propel a cash-driven traditional culture towards a digital future.
Given the diversity of the right and the customers, it is harder to understand customer preferences and what could compel them to join the digital payments wave. The answer lies in providing the right payment solutions and program design but the question is, how to know what is “right”?
For example, cards and card-based wallets are experiencing strong growth as compared to account-based wallets that are a hit in Asia. Saudi Arabia, for example, has witnessed a 10% increase per month in card-based payments since the pandemic and payments via pass-through card-based wallets by 18 percent per month.
While customer preference is moving favorably towards digital payments, lower merchant discount rates (MDRs) are also needed to push the digital payments wave. Presently the MDR rates in certain regions in the Middle East such as UAE are comparatively higher than in Europe. Addressing this regulatory issue can push customers to adopt digital payments faster as it allows attracting the customer with more attractive customer rewards.
The regulatory approval for Open Banking complemented with giving customers incentives to shift from cash to digital payments can further accelerate the growth of digital payments in this region. Enabling open banking in the Middle East can help drive better and more elevated customer experiences by giving customers user-friendly and relevant offerings instead of having them depend solely on banks with traditional offerings. The era of open banking is drawing nearer, and it is time for banks to quickly formulate their strategies or risk disintermediated. Europe shows how banks can be net winners even as fintech starts gaining ground as seen in partnerships such as that of Goldman Sachs with Apple to launch the Apple Card.
The regulatory changes allow new players to enter the payments business. However, to drive and win the digital payments race, having the right, contextual and personalized card programs, solutions that solve specific pain points, and providing the right value proposition and customer experiences become vital towards driving the payments revolution in this region. The Middle East stands at the start of a long and exciting journey to become a world leader in digital payments.