While the Middle East boasts one of the highest rates of smartphone penetration worldwide (97%) and is digitally astute in general, the majority of its population still chooses cash over other payment methods. Notably, only a third of retail transactions in this area are conducted electronically.
However, in the rapidly evolving international payments landscape, it is hardly possible for things in this region to remain the same. Read on to find out what the current situation in the Middle Eastern payment industry is, how global events influence it, and what the future holds for it.
Middle East’s Payment Industry Background
As mentioned above, countries across the Middle East primarily deal with cash payments. What’s more, the region was previously reluctant to adopt digital payments due to various factors, including:
- Deeply rooted cultural behaviors
- An under-developed payments infrastructure
- A lack of trust in digital payment channels
- A high percentage of underbanked consumers and merchants
However, the Middle Eastern region’s approach toward FinTech has undergone a big transformation over the past years and is currently embracing drastic changes in the payments sphere.
Changing Payments Ecosystem: the Influence of Global Factors
While the Middle Eastern cash-centric payment system was expected to persist for years to come, there have been significant shifts globally that are affecting every region in the world.
Here are some of the reasons that have helped boost the Middle East’s adoption of digital payments:
- The increasing popularity of eCommerce
- A need for contactless payments due to COVID-19
- Changing consumer behavior
- The growth of the share of young, digitally native citizens
- The demand for real-time cross-border payments
These factors, together with the regional appetite for innovation, are driving progress in the field of FinTech.
Current State of the Middle Eastern Payment Industry
In addition to outside factors helping spark the interest in digital payments in the Middle East, there have been internal initiatives supporting it as well.
For instance, nowadays, the appearance of FinTech companies across Middle Eastern countries is being actively encouraged by government organizations as they promote competition and accelerate innovation.
This approach, paired with the global shift to real-time payments, has paved the way for central banks to create a localized open finance ecosystem beneficial for the development of Open Banking (OB) in the region - more on this below.
MENA - the Promised Land for Open Banking
MENA is an acronym for the Middle East and North Africa region. The World Bank counts 21 countries as part of MENA, which makes this region account for approximately 6% of the world's population.
The large percentage of unbanked residents in the countries belonging to this region offers plenty of room for growth in the Open Banking sector. Features such as fast-track authentication, mobile accessibility, and digital-first finance can give access to an array of financial services to those who have been excluded from the traditional banking system so far.
The OB programs rolled out in the MENA region boast impressive agility due to the clever combination of European-style regulator-driven approaches and US-style market-led initiatives.
Countries in the MENA region are currently actively working on the Open Banking regulations:
- Bahrain and Israel have been the first countries in the MENA to pass OB legislation in 2020 and 2021, respectively.
- Saudi Arabia’s framework went live in the beginning of 2022.
- Dubai and Abu Dhabi authorities are issuing guidelines on API standards to encourage cooperation between FinTech companies and banks.
Such progress in the sphere of open banking and a changing mentality when it comes to digital transactions create a promising future for the payment industry in the Middle East.
What Is the Future of the Middle Eastern Payment Industry?
Recent research has revealed several interesting findings:
- 83% of financial institutions in the Middle East think that digitizing customer journeys is currently the most critical way to stay relevant.
- 73% of FIs plan to invest in or acquire FinTech companies.
- 47% of Middle Eastern FIs intend to launch products and services that focus on a wider payment ecosystem, such as e-wallets and OB solutions.
- The most preferred payment mode in the Middle East in the next 5 years is expected to be digital wallets.
For these forecasts to prove to be correct, financial institutions and businesses in the Middle Eastern region have to be proactive and do the following:
- Keep embracing digital transformation. It is crucial for innovation to become a part of a widely accepted strategy that aims for high long-term ROI and encompasses business, operations, and tech.
- Conduct extensive analysis. FIs must conduct an extensive impact analysis to understand how and what to integrate, create, outsource, replace, or upgrade in their business to achieve lasting success.
- Continue developing the regulations. Similar to the active regulations in Europe and the US, the set of guidelines developed for the Middle Eastern payment industry should be revised and updated regularly.
Bottom Line: How Local FIs Can Adapt to Industry Changes
The emergence of new payment players, the increasing demand for instant transactions, and the spread of open banking initiatives in the Middle East create new market segments that are more inclusive and cater to unbanked users made up of both consumers and retail merchants.
As real-time payments and other state-of-the-art features continue to solidify their positions across the region in the near future, FIs that wish to remain competitive will need to step up and adopt an API-first approach. They will also have to find a balance between embracing open frameworks, generating new revenue pools, and ensuring their relevance in the long run.
Financial institutions that will manage to employ a payments hub strategy with a single customer view will be the ones to offer a compelling omnichannel user experience and reap the benefits of being an integral part of the wider Middle Eastern ecosystem.