According to Deloitte, the Middle East has one of the highest smartphone penetrations in the world at 97%, yet despite this, the digitally astute population has famously remained loyal to cash, with only one third of retail transactions being made electronically. A number of factors have stunted the adoption of digital payments; from the previously under-developed payments infrastructure, the number of underbanked consumers and merchants, the ingrained cultural payment behaviours, to the lack of trust in digital channels. However, significant change is underway: suffice to say that the last 5 years have been undeniably transformative for the payments landscape in the Middle East.
Changing consumer preferences has been driven by shifting demographics, the popularity of e-commerce, rising international travel with new payments experiences, and the successful introduction of the xpays and digital wallets. Alongside these factors, the pandemic significantly expedited changes in consumer behaviour and, combined with the young digitally native population, central bank initiatives and strong governmental support, the trajectory of the digitisation of the payments landscape is becoming exponentially steeper. The stubborn cash-centric payment trends that were forecasted to take years to shift are being overtaken by an insatiable regional appetite for emerging technologies with a focus on convenience.
The introduction of fintechs across the Middle East has been actively encouraged, with government initiatives creating an environment for greater competition and accelerating innovation; with fintechs now making up over a third of all financial businesses. Combined with the well documented global move to real time payments (RTP), this has led central banks to build a localised open finance ecosystem conducive to optimising Open Banking in the region, consolidating the lessons learnt from other such regional schemes.
This fast-paced and fluid payments environment has raised serious issues for the well-established banking players and the legacy systems already in place. Complex legacy system architectures equate to limited manoeuvrability, scalability and system responsiveness which becomes a huge burden in an increasingly future-focused ecosystem swiftly filling up with newer more agile payments players. These modern disruptors offer immediacy and transparency; 24/7 availability; instant access and notifications and above all, the convenience of personalised customer experiences.
It is unsurprising then, that a recent McKinsey & Company survey found that 83% of FIs in the Middle East believe that digitising customer journeys is now the most important way to remain relevant; with 73% planning to invest into or acquire fintechs; and 47% planning to launch new products and services that engage a wider payments ecosystem such as e-wallets and those built upon open banking initiatives.
So how should FIs in the Middle East respond to this changing environment, salvage market share and future-proof their businesses? Embracing digital transformation as part of a wider business strategy that addresses long-term ROI and encompasses business, operations and technology is a herculean task. FIs need to carry out extensive impact analysis, whether to integrate, buy, build, outsource, replace or upgrade parts or all of their business in order to create an integrated payments hub with a single customer view.
System modernisation is not a simple revenue-generating plug-in, no matter how many fintechs and service providers an FI partners with, which, if unchecked can even exacerbate complexity; whereby the institution becomes a systems integrator rather than the owner of the value-chain.
True, effective and long-term transformation ultimately comes down to the underlying technology. This is what dictates complexity and responsiveness with legacy infrastructure rails only hindering progress. In an instant payments world, can FIs in the Middle East continue to run on payments platforms that are card-centric? In an Open Banking world, can systems afford not to be architected as API-first? In a real-time payments world, can batch-oriented systems go the distance? And, in an agile and integrated payments ecosystem, can an FI compete to remain relevant on antiquated technologies?
Emerging payments are coming to the Middle East – driven by governments and central banks, the growing popularity of ecommerce and the demands of the younger generations to move away from less-convenient, traditional behaviours. With the proliferation of new payments players in the region, instant payments and open banking initiatives will create new opportunities for increasing market share and ultimately, new revenue channels from new market segments inclusive of unbanked users made up of both consumers and retail merchants. FIs need to ensure they have the right payments platforms in order to cement their position as part of the change that consumers want to see.
The advantages of transformative digitisation include innovation, collaboration and integration; putting FIs in a position whereby they can embrace open frameworks and generate new revenue pools whilst ensuring relevancy by playing an integral role in the wider Middle Eastern payments ecosystem both now and well into the future.
The clock is ticking for those FIs currently working on legacy infrastructure from as far back as the 90s that were not designed for the everything-now world of today. FIs need to employ a payments hub strategy with a single view in order to offer a compelling, real-time omni-channel user experience to their customers. As RTPs and other such initiatives continue to take hold in the Middle East over the next few years, only FIs that have the technical capabilities to adopt an API-first, rather than API ready approach will truly be positioned to reap the full rewards of being part of the wider ecosystem. Don’t be left behind, ensure you are open for the future of payments.