No one can doubt that the payments industry is changing: the choice of payment methods that are now available to consumers and businesses is gaining momentum at what seems like an ever increasing pace. But how has the payments industry evolved? What is driving these advancements? And what will be the long term effects?
It wasn’t long ago that cash reigned supreme, and the adoption of electronic payment methods across the Gulf Cooperation Council (GCC) and Middle East was in its infancy. The migration was driven by banks and the international payment schemes and began with the issue of credit and debit cards, and the provision of POS card terminals to merchants. However, the adoption of these internationally tried and tested products was not sufficient to displace the use of cash for the majority of transactions: partly because not enough was done during the early days to encourage customers away from ATMs and cash withdrawals; and partly because a large percentage of the population were, and in many cases remain, underserved by the major financial institutions.
Slowly the usage of debit cards has moved towards merchant POS and the percentage of cash withdrawals has dropped — a trend that I expect to continue in line with international precedents. The issue of financial inclusion is also being addressed regionally with varying degrees of success; one positive example is the Workers Protection Scheme launched in 2009 by the UAE Government. The main purpose of this legislation was to promote transparency and fair treatment in the labour market — a good thing in itself — however, in order to achieve its objective, the WPS required payment products to be issued to the entire workforce, and so its enforcement has also dramatically increased basic financial literacy among a section of the demographic that had been largely excluded until that time. In the case of WPS, financial inclusion by default has proved to be a welcome by-product that has significantly increased the overall social and economic benefit delivered by the programme.
The roll out of electronic payments, and the creation of digital finance ecosystems, is a necessary step to facilitate long-term changes in the economy as well as providing a means of addressing near-term social issues. It will bring about benefits far beyond just achieving financial inclusion by stimulating and enabling new types of economic activity: the next generation of entrepreneurs will start digitally-enabled businesses and use electronic payments to broaden the geographical reach of their products and services, and better manage their financial recordkeeping. This new transparency will in turn help them to build a track record with financial institutions who may extend loans to help them to grow even more. The positive cycle continues because economic activity such as this also drives up Government revenues and increases the liquidity available to provide grants and funding which can be used to further stimulate domestic and international trade. I am not alone in this vision; recent industry analysis by McKinsey Global Institute indicates that embracing digital financial products could add as much as $3.7 trillion growth to emerging market economies by 2025.
The prepaid concept is used to underpin many new financial services products and I expect that this trend will increase as it enables easy-entry, low-risk, technology-enabled products that do not have the overhead, cost and risk associated with traditional bank accounts. The variety of prepaid card flavours ranges from basic payroll cards (like those used for WPS) to more sophisticated multi-currency travel money products that benefit customers by providing an alternative to using foreign cash or their own credit or debit cards when travelling. Other innovations that may look different on the surface are actually very similar; for example, most ‘mobile money’ and ‘e-wallets’ run on the same principles as prepaid cards, but they use contactless-enabled smart phones or online-only acceptance as alternative instruments to plastic cards.
It is financial technology companies — name-tagged ‘FinTechs’ — and not banks who are controlling the pace of advancement. This trend will continue and more retail financial services products will be distributed by non-bank players or outside of bank branches. How Regulators will understand and react to these changes and the new commercial actors is one of the key challenges that I expect the payments industry to face over the coming years — both in terms of how FinTechs are licensed, and how the new products they operate should be regulated.
Similarly, as we have seen in other industries, the success of new technology and the innovators that create it will be affected by adoption rates and the consolidation that will inevitably occur in the market. In the future, customers will not want to carry many payment methods for different spending types or different networks. Multichannel transaction processing technologies that enable integration across accounts, payment instruments and networks will be important in bringing about standardisation and increasing consumer choice and convenience. I expect that the payments powerhouses — MasterCard and Visa in particular — will continue to take a lead role in the standardisation process by adapting their ecosystems to support and absorb the technologies they see value in, leaving other players with a difficult path to achieving critical mass.
— Andrew Sims, CEO of NEC Payments