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Banks to profit from digital payments

Central banks need to adopt a more strategic approach to regulatory policymaking to realise the full potential of the digital economy

Last updated: September 15, 2018 | 22:25

GN Focus staff report

4 MIN READ

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A modern payment infrastructure has the potential to create new and sustainable revenue streams for commercial banks in the region, said global consulting and technology firm Booz Allen Hamilton, in a new report released on 4 April.

The report, titled ‘Doubling Digital Payments in MENA’, recommends that in the face of a slowing global economy, regional central banks adopt a more strategic approach to regulatory policymaking in order to realise the full potential of the digital economy in the Middle East and North Africa region.

“For banks in MENA, it’s either keep up with the digital focus of consumer payment habits, or risk becoming irrelevant,” said Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton MENA and co-author of the report. “Decreasing reliance on cash and addressing the growing challenges related to retail payments should be top priorities for central and commercial banks if they are to unlock the benefits derived from the creation of an inclusive digital economy.”

Just 9 per cent of current retail payments by volume in the UAE are made digitally, compared with 42 per cent in the UK and 75 per cent in Sweden. MENA countries can double or even triple the rate of adoption of digital payments by creating new payment infrastructure and introducing regulations to promote digital commerce and drive innovation and protect against cyber fraud.

“The digital economy has the potential to unlock economic growth, stimulate the e-commerce industry and generate new, sustainable revenue streams for commercial banks right across the Middle East and North Africa,” Zakhour said.

“At a time of economic slowdown and tightened liquidity, financial services institutions can stimulate robust and organic growth by adopting a more proactive approach to the new global payment reality,” said Charles Habak, Principal at Booz Allen Hamilton MENA and co-author of the report. “The focus must remain on champion solutions – tailored payment models that are viable and can be scaled up in the region.”

The report identifies key recommendations for central and commercial banks in the region, such as introducing digital payment regulations, enhancing retail operations, collaborating on design and infrastructure, establishing an inclusive governance system, promoting pragmatic financial inclusion, balancing cooperation and competition, developing new products to meet consumer demand, building healthy consortia to increase market strength and partnering with fintech start-ups.

For MENA Central Banks

1. Introduce digital payment regulations: In order to drive innovation and competition, regulators need to issue new digital payment directives, including licensing and authorization, capital and safeguarding, governance, limits and compliance. This will accelerate growth and offer greater consumer protection while efficiently balancing an effective market uptake and overall payment stability.

2. Enhance or carve out retail payments operations: MENA central banks should consider speeding up innovation and enhancing quality of service in their retail payment operations through performance-enhancement programs or carve-outs of their payment operations via wholly owned entities or public-private partnerships.

3. Collaboratively design and roll out infrastructure: Collaboration with other banks and stakeholders is key to building a new retail payments infrastructure. The design should initially be owned and incubated by business functions, focusing largely on providing safe, secure and convenient services to end users.

4. Establish ecosystem-engaging governance: MENA central banks need to set up a governance structure that includes industry stakeholders such as banks, entrepreneurs and SMEs, technology players and other key corporations to ensure continuous evolution in the ecosystem.

5. Promote pragmatic financial inclusion: Initiatives such as wage protection systems have created considerable opportunities to extend financial services beyond basic payroll and accounting. Looking past commercial obligations and working to achieve lower costs is the first step towards financial inclusion. MENA central banks should work closely with commercial banks and other financial institutions to reassess segments with true potential and volume for digital transactions as a starting point, and help identify suitable and cost-efficient offerings that can effectively cater to their needs.

For MENA Commercial Banks

1. Engage with central banks to roll out a modern central infrastructure: Commercial banks need to work proactively with central banks, or through consortia, to co-design and roll out a modern central infrastructure and digital payments platform. They should also seek to collaborate with technology players, telecommunication providers, payment aggregators and national identity authorities to capitalize on growing technology disruptions and increase revenue streams with more compelling market offerings.

2. Establish the right balance between bank cooperation and competition: Commercial banks in the region need to commit to governance structures that strike the difficult balance between collaboration and competition with their peers. Healthy competition is a key driver of innovation.

3. Develop new products and services to match consumer demands: To compete with regional and international technology players, commercial banks need to design and roll out innovative products and services to match evolving consumer needs. Governance, cooperation, speed, modernization and strength of organizational links are central components of launching these new products and services.

4. Build healthy consortia to increase competitiveness and market strength: Commercial banks should look to the capabilities of non-bank stakeholders for niche areas of new bank products and services. Similarly, technology players can extend infrastructure; telecommunication providers can help strengthen communication security, promotion, and distribution; payment aggregators can provide SMEs with integrated e-commerce and e-payment platforms; and national identity authorities can bolster customer authentication services to enhance the overall value proposition of banks.

5. Partner with and incubate Fintech startups: To stay ahead of the curve, banks need to build more agility into how IT innovations are adopted. By partnering with or contributing to the incubation of FinTech startups, banks can offer more competitive products and services while incurring less upfront costs. If executed properly, these partnerships can marry the resilience and compliance of bank-based models with the innovation and entrepreneurship of startups, creating compelling offerings that will create new channels of revenue.