Intelligent CIO Africa Issue 01 | Page 71

INDUSTRY WATCH Excerpts from Digital Payments in MENA, A call to action to the banking industry, by Lutfi Zakhour, Charles Habak, Booz Allen Hamilton MENA countries have the opportunity to double or in some cases triple adoption of digital payments over the coming years. Digital technology is rapidly changing the nature of social interactions and commerce. Digital retailers continue to bridge the divide between physical goods and digital services. However, despite the evolving consumer landscape, digital payments adoption remains relatively low across North Africa and Middle East, due in large part to the prevalence of outdated retail payments infrastructure and regulations, as well as to the lack of viable digital wallet solutions that effectively incentivise the broad ecosystem to displace cash in favor of digital payments. As a result, MENA countries remain predominantly cash-based despite their advanced information and communications technology infrastructures and digital services adoption. This prevalence of cash creates notable social costs to MENA countries, ranging from 1.5% to 2% of GDP annually. In addition, it hinders central banks from effectively monitoring transactions and ensuring compliance, and significantly reduces revenue generation for commercial banks from fees, interest, and cross-sell activity as the majority of financial transactions continue to take place outside of their established infrastructures. Cash predominance also impedes the development and growth of financial technology and e-commerce startups and small and medium-sized enterprises, which are confined to small pools of digital transactions, and also decreases their opportunities to partner with banks. This is in stark contrast to western countries, where banks are partnering with startups and SMEs to increase the competitiveness of their endto-end offerings while limiting their information technology investments. www.intelligentcio.com Five recommended actions for MENA central banks #1 Introduce digital payments regulations Regulators should issue new digital payments regulations and directives to foster innovation and competition in the market, accelerate growth, and offer greater consumer protection while ensuring the right balance between effective market uptake and overall payment stability. Regulations should include key requirements such as licensing and authorisation, capital and safeguarding, governance, limits, and compliance. Regulators should also adopt a more dynamic approach to refreshing and revising their regulations over time as digital payments adoption increase and market dynamics rapidly evolve. #2 Enhance or carve out retail payments operations MENA central banks need to consider increasing the speed of innovation and service levels of their retail payments operations through performanceenhancement programs or more concertedly through carve-outs of their payment operations via wholly owned entities or public private partnerships. However, minimum readiness levels must be achieved as a prerequisite to potential carveouts. Management functions within the central bank with sufficient knowledge and capabilities need to be well established to subsequently monitor the new entity’s service levels and performance. #3 Collaboratively design and roll out infrastructure The launch of a new retail payments infrastructure should be carefully designed in collaboration with banks and other key ecosystem stakeholders. Furthermore, the design should be initially owned and incubated by business functions, focusing largely on providing a safe, secure, and convenient service to end users. #4 Establish ecosystem-engaging governance Central banks in the MENA region need to set up a governance structure that comprises industry stakeholders—namely banks and other key institutions, such as large corporations. Such governance ensures the development of innovative solutions that directly meet market demand while enabling the rapid identification and onboarding of champion banks and corporations. #5 Promote pragmatic financial inclusion Most central banks seek to improve financial inclusion, but in practice financial inclusion is often only achieved if costs are driven sufficiently low. MENA central banks should work closely with commercial banks and other financial institutions to reassess the 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. While initiatives such as wage protection systems have rapidly brought the unbanked into the banking system in many MENA countries, large opportunities remain to extend financial services beyond basic payroll and account services. INTELLIGENTCIO 71