Why Middle Eastern CIOs need to embrace fintech and digital payment trends

Across the Middle East, banking and payment preferences are changing at an unprecedented pace. CIOs and other technology executives need to keep up with these trends, as fintech (financial technology) and various forms of digital payment services are opening up opportunities for businesses to innovate, expand operations and enter new markets.

A record 95% of consumers in the Middle East will consider using technology like contactless, biometric, or QR payments within the next year, according to the Mastercard New Payments Index global survey.

“As the demand for emerging payments and choice continues, it requires a wider range of payment solutions, insights, and products to meet the accelerating enthusiasm for the future state of play,” says Pankaj Asthaana, vice president of digital payments at Mastercard Middle East. “With huge investments in 5G, the advancement of real-time payment infrastructure, and growing smart city amenities in several GCC [Gulf Cooperation Council] countries, there is enormous scope for new open finance mechanisms and the wider adoption of new payment methods.”

Research indicates that this shift will be permanent. Ninety percent of payment practitioners interviewed in McKinsey’s “The Future of Payments in the Middle East” survey predict that at least half of consumers enjoy the safety, convenience, and added value of digital payments so much that they will not revert to cash again in the future.

Twenty-five percent of Middle Eastern and North African (MENA) investment deals belonged to the fintech sector in 2021, thanks to business-friendly regulations in the GCC. Market Data Forecast found that Middle East investment in fintech is expected to soar to US$3.45 billion in the next five years.

Fintech offers rewards to enterprises

Generally speaking, fintech is essentially technology, including new software applications, that is applied to financial services or the management of transaction operations within businesses.  Companies from all industries can reap the benefits: offering more services to customers at a fraction of their previous cost, creating new customer segments and revenue streams by adopting in-demand digital payment methods, and connecting specific products to customers through data-rich digital wallets. Fintech makes it easier for entrepreneurs to establish businesses, make cross-border payments, and get the funding they need to scale up. Adopting fintech solutions is a must for business leaders who want to gain a competitive edge.

“The future of finance is increased collaboration between humans and machines. As technology reaches every aspect of the customer journey, banks, fintech, and other financial institutions have a lot of room to collaborate to provide better customer experiences, innovate new products, increase operational efficiency, and reduce cost through automation, data intelligence, API monetization, and ecosystem partnership,” says Sashi Mundhra, head of Financial Insights and Future of Industries at IDC Middle East. “Many fintechs and banks are already identifying joint revenue and growth opportunities in the MENA region.” 

Some examples are a partnership between the Emirates Development Bank and UAE-based fintech company YAP to create a business banking app for SMEs that was launched in September 2021, and a partnership between Visa and The Entertainer Business that created a new rewards app for premium cardholders. This year, Saudi Telecom Company’s STC Pay mobile wallet teamed up with French tech company Thales to introduce contactless cards, mirroring the country’s Vision 2030 goal to make 70% of transactions cashless.

Here below are some of the top payment and banking trends in the MENA region this year.

Digital wallets benefit customers, businesses

 A 2021 McKinsey study found that 60% of Middle Eastern payment practitioners expect digital wallets to become the most preferred mode of payment in the next five years. Broadly speaking, digital wallets are electronic payment systems, usually comprising apps that can be downloaded on computers or mobiles devices, that allow the user to store funds and make purchases. Digital and mobile wallets offer drastically reduced waiting and payment times, easy access to receipts, and a more streamlined shopping experience both in-store and online.

“With so many payment options and touchpoints available, it is quite natural to make one ready for all kinds of possible payment methods,” Mundhra says. “However, the focus should be on payments methods that are most rewarding, convenient to use, and hassle-free — for both customers and merchants. In the MENA region, mobile wallets are one of the most prominent payment methods because of the ease of use and reward differentiation they bring to the table compared to traditional card-based or contactless card payments.”

Customers aren’t the only ones benefiting from the rise of digital wallets: Businesses should utilise data sets from digital wallets to engage customers in new ways.

“Data harnessing, the application of AI/ML [artificial intelligence/machine learning] across the customer’s digital journey, and leveraging the rich set of data to understand, communicate, nurture, and protect the customer will elevate the engagement of customers across the banking value chain, with payments being one of the most critical parts of the customer journey and experience,” Mundhra says.

Companies can harness the wealth of detailed online and offline shopping data to learn more about their customers’ shopping habits and present customers with targeted offers and last-minute personalised promotions at checkout.

COVID fuels use of contactless payments

In the wake of the COVID-19 pandemic, customers in the Middle East quickly shifted to contactless payments like RFID technology and QR codes, and most experts expect the change to be permanent: the McKinsey study found that 53% of those surveyed predict that contactless card payments will be the leading method of payment in the Middle East by 2026.

After COVID hit the region, several governments adopted rules to drive enterprises toward e-commerce, mandating that all merchants offer online shopping and forms of contactless payments.

“Contactless payments also saw a push during the COVID-19 pandemic and will continue to be a major payment method, with offerings such as credit cards, debit cards, Tap & Go, Apple Pay, and Google Pay as players in this region,” Mundhra says. Other methods utilise biometric technology to authenticate payments without needing to input a PIN code, such as facial recognition and a smartphone or a fingerprint sensor on a biometric card.

“Contactless technology has been a digital catalyst for consumers to explore new payment options because of its fast, secure, and touch-free experience,” Asthaana says. Mastercard’s research predicts the trend will continue to grow, reporting 1 billion more contactless transactions in the first quarter of 2021 than in the first quarter of 2020.

The rise of non-banks

 The increasing volume of online purchases mean that banks are facing a new kind of competition. Payments practitioners identify tech and telecom companies as a growing threat to traditional banks.  Forty percent of merchants in the McKinsey survey chose fintech companies as their partner of choice for transitioning into e-commerce — in stark contrast to only 7% choosing banks.

“Fintechs can widen consumer choice, with convenient and easy services like opening a new bank account with a smartphone, real-time payments, instant financing, real-time credit scores, and more,” Asthaana says.

New solutions cut cross-border payment costs

The Middle East is one of the most important regions for cross-border payments, with the UAE and Saudi Arabia making up two of the three biggest remittance corridors in the world. New solutions for international payments are making businesses and individuals leave behind pricey transfer fees at traditional banks.

Buna, a cross-border payment platform managed by the Arab Monetary Fund, allows users to send and receive money in local currency, and at a fraction of the cost with traditional banks. Financial messaging service provider SWIFT will launch a platform in 2022 that is interoperable with regional banks and will facilitate instant account payments across the Middle East and Turkey.

Open banking presents new opportunities

“Open banking is a collaborative ecosystem in which data is shared, with customer consent, among financial institutions, merchants, and fintechs. While the open banking experience varies across markets, there are many opportunities for financial institutions, banks and fintechs,” Asthaana explains. “By addressing consumer needs instead of banking needs, banks can remain top-of-mind for customers and play the role of a third-party provider with their own customer-facing offerings.”

Bahrain led the GCC region in establishing new regulations and guidelines for open banking in 2018; Saudi Arabia and the UAE followed suit with their own policies that will come into effect by early 2022. Egypt has slowly begun introducing regulations allowing the establishment of digital banks, but obtaining a banking license could take several years. In a country where approximately two-thirds of the population is unbanked and working in the informal sector, fintech faces an uphill battle.

“The growth opportunities presented by such technological change are huge, coupled with support from the government in the MENA region in terms of regulations, be it for open banking, payment recognition, providing fintech incubation chambers, or generally providing the push for a cashless economy,” Mundhra says.

If a standardised framework across the Middle East region is eventually established in cooperation with governments and financial institutions, it would increase the adoption of fintech solutions that benefit customers and companies alike. Oman Banks Association CEO Ali Hassan Moosa urged financial institutions to adopt new banking and payment technology as soon as possible: “One thing that banks cannot afford to do — whether in Oman or elsewhere — is to ignore fintech.”