The Covid-19 pandemic has accelerated the uptake in digital payments across the Middle East, with digital wallets and contactless payment methods set to dominate and shape how transactions take place in the future, according to McKinsey.
More than three quarters of Middle East respondents to a survey by the global consultancy estimate that their use of digital payment modes has increased by about 10 per cent across the region due to the Covid-19 pandemic. The majority of them expect this shift to be permanent.
About 90 per cent of those surveyed believe that at least half of new users will stick with digital payments and not revert to cash in the post-pandemic era.
“Even before the pandemic, digital payments were growing rapidly … [the] impressive growth rates have been boosted further by the pandemic,” said McKinsey.
The number of consumer digital payments transactions in the UAE grew at an annual rate of more than 9 per cent between 2014 and 2019, compared with Europe’s average annual growth of 4 to 5 per cent, according to the consultancy's estimates. Card payments in Saudi Arabia's the Arab world's largest economy, surged more than 70 per cent between February 2019 and January 2020.
“The Middle East payments market has recently expanded to include FinTechs, tech companies and telecoms companies alongside incumbent banks … a shift enabled by regulatory changes such as those introduced in Saudi Arabia in late 2019 and the UAE in 2021,” McKinsey said.
More than half of those polled also expect strong growth in non-cash payments over the next five years and the flight from cash is evident not only in the growth of digital payments, but also in consumer preferences.
About 58 per cent of Middle East respondents expressed an inclination towards digital payment methods while only 10 per cent said they prefer cash.
Almost 60 per cent of survey participants said they expect pass-through digital wallets, or e-wallets, to be the most influential digital payment method.
McKinsey’s survey also found that non-bank entities are poised to capture market share.
When McKinsey asked survey respondents which institutions would have the greatest effect on the future of payments, about 40 per cent ranked banks or bank-backed wallets as number one, while nearly 30 per cent went for telecoms-backed wallets and 17 per cent backed big technology companies.
More than four in 10 respondents expect over half of all small and medium-sized merchants to start selling online in the next five years. However, changes in the regulatory environment may be needed to fuel wider adoption of digital payments by merchants, the report said.
Open banking, a regulatory reform that requires banks to share customers’ financial data – with their consent – with other banks or authorised financial services providers, is now under way in several Middle Eastern countries.
Bahrain issued open-banking rules in 2018, followed by a framework with guidelines on data sharing and management late last year. Saudi Arabia also plans to launch open banking early next year.
“These reforms are expected to have broad ramifications for the payments business,” the report said.
When respondents were asked what government action would be most effective in driving customers towards digital payments, 27 per cent said regulatory approval for open banking, while 20 per cent backed incentives to drive the shift to digital payments.
Cross-border payments are important in the Middle East, with two of the world’s three largest remittance corridors in the UAE and Saudi Arabia, McKinsey said.
The two countries handled $78 billion in payments last year, equal to 7 per cent of their combined gross domestic product, according to the World Bank.
Two thirds of McKinsey survey respondents said arrangements between countries for real-time settlements and the scaling up of digital money transfer operators will be key drivers in cross-border transactions.