Number Crunching

The Middle East payments industry has been aided by a robust regional economy. Even during a period of major challenges for financial institutions across the world, the regional payments sector proved to be remarkably resilient, in part due to its high per-capita GDP and a diversified population. The UAE in particular has proven to be an attractive market for payment processing companies, backed by efforts to position itself as an international tourist destination and a global hub within easy reach of approximately 2 billion people. Infrastructure spending on sectors such as retail, travel, and tourism has also boosted the growth prospects for the regional payments industry.

As payment processors focus on increasing size, scale, and reach through a combination of geographic expansion and innovative product offerings, globalization forces have had a strong impact on the Middle East’s payment processing industry as well. The Middle East has developed a strong financial services industry from which regional payment organizations are emerging. Moreover, these companies are not only looking to support international schemes but are putting into place schemes of their own. This has generated many benefits for the regional payments sector, especially for customers, as increased participation will naturally lead to product innovation and lower prices. The potential for local schemes is further enhanced by the fact that the bulk of transactions are made intra-regionally, requiring a rather small regional footprint of acceptance locations.

Two major forces from Southeast Asia that have emerged as strong global participants: JCB and China Union Pay. The Shanghai-headquartered Union Pay is now available in 140 countries including the UAE, while JCB, the only international credit payment brand based in Japan, is being used by 84 million card members. With questions being asked regarding foreign exchange on transaction costs that local banks have to pay for affiliation with international card associations, and the need for routing even domestic transactions through a switch located outside the country, the market has seen the rise of a number of regional payment schemes, customized to the needs of the local customer. This is particularly true of closed-loop schemes where charges between issuer and acquirer are eliminated as they are the same entity. These schemes also mean no competition within the brand, since this would be a franchise setup with only one franchisee in each market. Regional payment schemes can also use local market knowledge, enabling them to devise loyalty programs and benefits that understand customer requirements, instead of a one-size-fits-all approach.

Despite their obvious potential, it is important to note that the growth of regional payment schemes in the Middle East has been both gradual and complementary to established global schemes. Regional payment providers are first focusing on the under-served segments of the payment card market such as prepaid or contactless payments, before moving into the more profitable debit and credit cards. This is in keeping with industry intelligence from payments associations, which states that prepaid cards will see the biggest growth over the next five years, with transaction throughput expected to double by 2018.

Some of the factors contributing to this growth will be the introduction of e-commerce and the transition away from a cash-based society. E-commerce is on the rise in the Middle East with over 50% of UAE consumers having used an e-commerce platform, while Saudi Arabia and Qatar follow closely behind with nearly 48% saying they have transacted online. Moreover, shopping transactions via mobile phones are also expected to grow strongly in the region increasing by almost 20% in the next few years. This growth corresponds with smartphone-in-wallet ratios climbing steeply every month. On the other hand, the transition away from cash in the Middle East is a tremendous opportunity for industry participants. Only about 10% of payments in the Middle East are made electronically. Within this, the UAE is amongst those most rapidly moving toward a cashless society with one of the fastest improving payment systems. In fact, non-cash transactions in the UAE account for 26% of consumers payments by value, compared to 19% in Saudi Arabia and 7% in Egypt.

With Dubai’s transformation to a global tourism, shopping, and business hub with a massive catchment area, the payment processing industries represents a tremendous potential for growth. While international players are active in the market, regional players are expected to have an increasing role in devising bespoke solutions for the region. With this, these regional players aim to capitalize on a fast-growing market due to the integration of e-commerce and transition away from a cash-based society.