Under threat from digital challengers, Middle East banks revamp processing platforms

Cash is fading in the Middle East, and traditional banks are turning to fintechs to expedite upgrades before challenger banks and digital wallets seize the advantage.

Like other markets, the pandemic's shift to e-commerce and political support for digital payments are eroding a longstanding reliance on cash in the Middle East. Saudi Arabia, for example, has a target of making 70% of its payments cashless by 2030, according to Sahana Arun Kumar, managing partner at Middle East financial services consultancy Avrio Impact.

The momentum is aided by legislation mandating payment of salaries into accounts instead of cash, for example in the UAE, said Francesco Burelli, a partner at Hamburg-based Arkwright Consulting. Additionally, due to Covid-19, there has been a massive growth in e-commerce in the region.

U.K.-based e-commerce processor Checkout.com, whose Middle East base is in Dubai, has seen an 86% year-on-year increase by volume in payments processed on its platform in the Middle East, North Africa and Pakistan (MENAP) since March 2020, according to Mo Ali Yusuf, Checkout.com’s MENAP regional manager.

Incumbent Middle East banks are challenged by the new entrants, which aren’t encumbered by legacy core banking and processing systems. Additionally, these challengers are totally digital, catering for mobile-first millennials, Gen Z, and financially excluded consumers. The new entrants can leverage advanced data analytics to give customers real-time product offers, notifications, and spending insights at the point of sale.

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“Innovation and initiatives in the region have focused on wallets more than they have done on physical cards,” said Kumar. “The region is poised for more growth in the digital banking and prepaid wallet space.”
The region is experiencing an upsurge in fintech activity and is a hotbed of digitalization, according to Nauman Hassan, Middle East director of client services at U.K.-based issuer-processor Paymentology.

Wallet providers offering prepaid cards that are active in the region include two UAE start-ups, Now Money, which has partnered with Visa and Commercial Bank of Dubai to target low-income consumers, and Jingle Pay.

In Saudi Arabia, Stc Pay, a wallet provider owned by Saudi-based Stc Telecom, has applied for a banking license and wants to expand into other Gulf countries. Another Saudi wallet, Hala (formerly called Halalah), has already obtained a license in the UAE.

Some incumbent banks have wallet offerings. In September 2020, Mastercard and Emirates Digital Wallet, a company owned by 15 UAE banks, launched Klip, a QR code-based wallet which aims to eliminate cash from the UAE economy and is targeted at the country’s 1.3 million unbanked residents. Oman’s Bank Muscat launched the bmWallet in 2017

Digital banks operating in the Middle East can be standalone subsidiaries of established banks, such as Liv, which is owned by Emirates NBD, or start-ups. Abu Dhabi investment firm ADQ plans to set up a digital bank after obtaining a bank license, and First Abu Dhabi Bank will hold a 10% stake in the start-up.

2021 will be big for digital bank launches in the Middle East, according to Shane O’Hara, CEO of Paymentology, which has just opened an office in Dubai, “Our staff in the Middle East have heard a lot of positive talk about bank licenses being issued,” he said. “The UAE wants to become a big financial center and we expect them to issue new bank licenses in 2021.”

From its Dubai base, Paymentology plans to help incumbent Middle Eastern banks upgrade their legacy cards processing systems in response to digital challengers. In September 2019, U.K.-based neobank Revolut announced plans to enter Saudi Arabia and is currently seeking a local license.

“Revolut sparked a sense of panic among incumbent banks, which realized that, since their customers are using mobile devices, they need to upgrade their systems for digital users,” O’Hara said. “We’re expecting another five years of retail banks around the world rebuilding their architecture to compete with the digital challengers.”

Paymentology is a credit, debit, and prepaid card processor, offering banks a cloud-based platform including real-time data analytics. Its technology is designed for incumbent banks and digital challengers, with clients including Revolut and Standard Chartered Bank’s digital-only subsidiary Mox Bank. Paymentology’s existing Middle East clients include the Bank of Jordan and Jordan-based Bank Al Etihad.

“Traditionally, retail banks weren’t connected in real-time to their cardholders at the point of sale, so when cardholders made purchases, banks couldn’t tell what they were buying,” O’Hara said. “Because we feed real-time purchase data to them, our platform enables incumbent banks to connect with their customers and make offers on their cellphones with the same flexibility that digital challengers such as Revolut provide.”

Offering banks richer data about their cardholders will be increasingly important, O'Hara said. “If a bank can access rich cardholder data at the point of spend, it can have deeper insight into what its customers are buying and offer them a range of new products,” he said. “Banks can give customers real-time e-receipts for their spending and also, based on the transaction data that we process, offer them loans at the time of purchase. For example, if a bank uses our platform, it can see that a customer has just used their card to buy a TV and can offer them purchase insurance or a buy-now-pay-later loan.”

O’Hara was previously one of the founders of U.K.-based Global Processing Services (GPS), which received a strategic investment from Visa in October 2020. “My involvement in the Middle East goes back to my time at GPS when I was involved in setting up gift card programs in the region,” said O’Hara. “So, when we founded Paymentology in 2015, we already had a network of potential Middle East clients and were familiar with the big local banks.”

Middle East banks have a different approach to processing to banks in other regions, O'Hara said. “Banks outside the Middle East think that processing occupies a specific space in their infrastructure and that mobile is separate and core banking is separate,” he said. “But Middle East banks tend to like everything wrapped in one package. So, we’re seeing requests from Middle East banks to do everything in one package, including a payment wallet, a mobile app, and everything else.”

Paymentology partners with core banking system providers such as Thought Machine and Mambu. “It makes sense for us to partner with them because, when a bank wants to replace its core banking technology, it normally considers upgrading its card processing system,” said O’Hara.

The collapse of Wirecard helped Paymentology expand in the Middle East, as it has been able to hire ex-Wirecard staff for its Dubai office. “Wirecard did its Middle East processing from Dubai,” said O’Hara. “We were going to expand our presence in the Middle East anyway, but Wirecard’s collapse forced our hand. We’ve already had some Wirecard customers in the region asking us to work for them, and we expect to win contracts in 2021 from former Wirecard clients.”

Dubai foreign currency exchange houses, or companies offering remittances to migrant workers, such as Al Ansari and Alfordan had been Wirecard prepaid card clients. These firms are looking to migrate their processing to another provider such as Paymentology. “The exchange houses issue prepaid cards with a foreign currency wallet attached to them offering accounts in multiple currencies, so it’s technically complex to migrate them to a new processing platform,” O’Hara said. “But we hope to win some exchange houses as clients in 2021.”