Digital is no longer new, but the norm. This is true across all industries, but particularly so when it comes to payments. Growth in the digital payments industry is being seen worldwide, driven by state-sponsored systems in Brazil and India, telco-driven models in Kenya and the rise of fintech in the GCC, to name a few examples.
In 2021, McKinsey & Company predicted that “digital wallets will be the most preferred mode of payment in the next five years across the Middle East” and ACI has described the region as the fastest-growing real-time payments market globally. Transactions in the region are expected to reach $2.6 billion by 2027, representing a compound annual growth rate of 30.6%. Moreover, advances in technologies including contactless payments, mobile wallets, blockchain, and biometric authentication are only boosting the growth of the digital payment industry. What’s next, then?
The global adoption of digital wallets
When it comes to providing a good service—new or not—, simplicity is key. The global growth of digital wallets responds to this desire to simplify payments and reduce their complexity, something that banks have sometimes struggled to deliver.
“I think the GCC has a lot of variability when it comes to doing digital wallets and it depends on the type of digital wallet you’re talking about,” said Godfrey Sullivan, Senior Vice-President, Head of Strategy and Acting Head of Products, Solutions and Digital Partnerships CEMEA at Visa, during a panel at the Bahrain Fintech Forward conference.
“The GCC has a lot of variability when it comes to doing digital wallets.”
Godfrey Sullivan of Visa
Looking at the Middle East, certain companies in this space have been able to rise up to the challenges and meet customers where they are faster than others. While products like Apple Pay have seen ubiquitous adoption throughout the region, other companies in the sector have seen different amounts of success. Stc pay has seen great growth in Saudi Arabia. In Bahrain, the BenefitsPay app has been a real success story, creating a template for many other countries around the world.
Financial inclusion
Digital payments are not only speeding up transactions, they’re also increasing access to financial services. Currently, about 67% of the adult population in the MENA region remains underbanked or unbanked. That’s about 136 million people. Many of them are digital-native and, therefore, ready to adopt these digital wallets, especially when they don’t have access to normal banking infrastructure.
“Digital wallets are very important in closing the gap when it comes to financial inclusion,” added Miriam Kiwan, Vice-President, Middle East and Africa, at Circle. She highlighted the great potential of the combination of digital payments alongside other new technologies such as blockchain, artificial intelligence (AI) and stablecoins.
“If you combine digital wallets with regulated payment stablecoins, for example, which we issue together with a KYC protocol, and some of the recent ID standards, you have an amazing tool that will completely run in parallel to the traditional banking system and specifically impacting these underserved communities,” Kiwan said.
“Digital wallets are very important in closing the gap when it comes to financial inclusion.”
Miriam Kiwan of Circle
In doing this, companies can help onboard these communities into the web3 ecosystem in a seamless manner. “By providing them this opportunity, you’re helping them have a better economic prosperity for the future,” Kiwan said. They can decide a better future for themselves and their families, and they can create businesses on this new economy, which completely changes the landscape of what we call financial services today.”
The role of blockchain
How will blockchain technologies define this new financial landscape? In simple terms, blockchain provides ease and speed, alongside lower costs. In a region that is home to large remittance corridors, these characteristics are key. Add this to a young and tech-savvy population and the Middle East becomes immediately a fertile ground for these technologies.
“Blockchain is a crucial part, I think, of the developments of the industry, especially in the MENA region, where the governments are driving innovation and knowledge economies and focusing on these tech developments,” Kiwan explained. “If you think about the huge amount of retail businesses, as well as B2B cross-border payments that are going across different regions, you’re talking about really large amounts.”
Improving cross-border transactions
Nations have also been taking steps to ensure that the financial industry improves their costs, accessibility, transparency and speed. In a meeting of the Financial Security Board of the G20 countries which took place in Saudi Arabia, the nations established a series of targets financial institutions were to meet by 2027.
“The Financial Security Board [of G20 countries] wants every single finance institution to offer a cross-border solution from a digital channel,” said Cem Soydemir, Head of Payments Go-To-Market, MEA, South and Central Asia, at Swift. The Board further added that 100% of the cross-border payments should happen in less than one business state and 75% of them should happen in less than one hour.
“In order to enable instant and frictionless cross-border transactions, we need to work all together.”
Cem Soydemir of Swift
The Board further looked at transparency and costs. In addition to providing clear information regarding fees, financial institutions have also been asked to ensure cross-border transactions would cost no more than 1% of the transaction amount. Moreover, there should not be any single corridor that would cost more than 3%.
“These are the targets that have been given and we are doing our homework,” Soydemir said. At the moment, he highlighted that 50% of cross-border payments are happening end to end in less than five minutes, and 90% of them hit the end beneficiary within one hour. “We are now progressing, but it shouldn’t be kept by the Swift network only,” he noted, stressing the importance of collaboration in achieving these targets.
The fragmented nature of the cross-border payments landscape makes that collaboration a necessity. Swift’s goal is to be the one to connect separate networks by partnering with other players in the sector, such as Wise, to validate that end beneficiary accounts exist and are enabled to receive funds, before attempting to do the transaction.
Soydemir added, “In order to give an ultimate solution to the end-users to enable instant and frictionless cross-border transactions, we need to work all together.”
Securing financial futures
As technology becomes more and more embedded within financial transactions, so should cybersecurity. According to Sullivan, Visa faces high fraud levels in account-to-account payments, and as many as 70,000 cyberattacks every day.
“In the online world, you have a big challenge and that is how to identify you as the actual person who is conducting this transaction,” Sullivan said. “Across our network, we have worked around the limitations of the internet and so we send out one-time passwords to verify a particular transaction. We send out six million of these per day. It’s an incredible burden on the industry, and it’s an inefficient customer experience.”
To improve this from an efficiency point of view, Visa is incorporating important innovations such as pass keys, which connect a private key on a phone to a particular account. “Thereafter, it’s a seamless checkout experience using the biometric authentication of your mobile phone, whether this is face ID, a fingerprint or a passcode,” he added. “We think that’s a big deal for merchants. We think that’s a big deal for customers. You bring the seamlessness that we have in the offline world into the online world and it removes all of the scams around stolen credentials, as well as the burden of one-time passwords.”
In addition to passkeys, financial institutions have also turned to AI capabilities to fight financial fraud. To stop malicious actors, the company is collaborating with governments to develop the best-in-class fraud detection capabilities. After all, this is a challenge that cannot be solved in siloes.
The regulatory push
GCC nations have been behind many of the innovations in the financial sector, particularly when it comes to regulations. The journey began with digital assets and has been continuing through other technologies such as stablecoins and even central bank digital currencies (CBDCs). Bahrain and the UAE have taken great strides on this front, and other nations such as Qatar and even South Africa, are following their lead.
“It’s heartening to see these developments in the region because, without this, we cannot expect the industry to grow,” Kiwan noted. “Without this, we cannot onboard institutional users into the space. We cannot have large partners like Visa, for example, really embrace this.”
The region has been taking the initiative on this front, something that, as Kiwan stressed, does not come without challenges. “We have to recognise that regulators have a very challenging task,” she said. “They have to balance the ability to allow innovation to thrive in their ecosystem, but at the same time, they have to ensure that there is consumer protection.
Stablecoins, CBDCs, blockchain and metaverse technologies are all set to be a part of the future of finance. At the end of the day, it will be up to both regulators and businesses that ensure that these innovations are introduced in a manner that prioritises transparency, efficiency, security and accessibility for all.
