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outdated retail payments infrastructure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.
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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.
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