Facilitating the transition to digital transactions
Economic behaviours are changing to enable the transition to a more efficient, cost-effective and secure payments ecosystem
In 2016, India took a bold step by discontinuing high-denomination currency notes and launching government-led campaigns, such as Digital India, to make the economy less cash-driven.
These initiatives worked. Mobile wallet usage, India’s Unified Payments Interface (UPI) instant payment system and digital banking grew significantly, accelerating the country’s digital economy.
Between 2016 and 2022, the UPI digital payment platform facilitated 7.3 billion transactions worth INR11.9tn ($142.7bn), according to the Press Information Bureau of the Government of India.
The UAE’s commitment to a cashless economy is similarly underscored by rapid growth in digital payment transactions.
In 2014-19, digital payment transactions in the UAE increased by 9 per cent annually, significantly outpacing Europe’s 4 per cent growth rate, says global management consulting firm McKinsey.
The Covid-19 pandemic further boosted the rise in digital payments. A McKinsey survey shows that nearly 80 per cent of payments practitioners said non-cash payments grew by more than 10 per cent across the Middle East during the lockdown periods.
The launch of the instant payments platform Aani by Al-Etihad Payments, a subsidiary of the Central Bank of the UAE, demonstrates the federation’s commitment to efficient and secure digital transactions.
The platform was launched in October to facilitate the UAE’s transition to a paperless economy by reducing the reliance on physical cash and checks to make financial transactions quicker, more accessible and environmentally friendly.
CBUAE established Al Etihad Payments as a national platform for processing digital payments and managing all retail payment operations, freeing the central bank to focus on regulation.
“The instant settlement feature offered by these payment platforms is undoubtedly advantageous, allowing customers to use their money immediately,” said Jan Pilbauer, CEO of Al-Etihad Payments.
While beneficial, this prompt settlement feature presents challenges, particularly when dealing with large payment volumes.
Highlighting the crucial role of banks, Pilbauer told industry experts at the Mashreq Business Leaders Roundtable held in Dubai on 1 November 2023 that developing supplementary services around instant payments can streamline processes.
“Banks must take up this challenge as an opportunity by introducing additional services focused on enhancing instant payments.
“Instead of overwhelming customers with countless individual transactions, banks can aggregate and present a more digestible overview. This approach is particularly beneficial for high-volume retailers, where traditional straight-through processing may not deliver significant value,” Pilbauer explained.
This argument validates the case for banks to consider an open banking strategy.
Inspiring innovation
Open Banking is a core element in the digitalisation of financial services. It lets customers share access to their financial data with non-bank third parties to create use cases, such as payment solutions that directly connect a customer’s bank account and a range of related services.
Today, there is a growing realisation that traditional banks must evolve and transform to match the agility and innovation of fintech companies.
The comparison is striking. While fintechs leverage open banking to the fullest, traditional banks often adopt a more confined perspective, focusing on retaining clients rather than exploring how to build services around them.
Some traditional banks resist open banking as they perceive it as a threat to their business model.
Additionally, adopting new technologies can be challenging for consumers. And from a business perspective, there are significant costs involved.
Clearly, banks must keep up or face consequences.
“From Mashreq’s perspective, this is undoubtedly an opportunity,” said Victor Penna, executive vice-president of Global Transaction Banking at Mashreq.
“The key lies in how we perceive this innovation – is it a challenge to the status quo or an opportunity for growth?
“This shift towards embracing fintech-like approaches sparks competition, fosters a culture of innovation and introduces new ways of conducting business,” Penna added.
However, establishing an infrastructure that seamlessly integrates all payment methods can be challenging and carries inherent risks.
Then why fix something that is not broken?
The answer is simple: innovation drives improvement.
“Although customers may be content with the current payment systems, introducing new advancements will bring tangible benefits they may not be aware of,” said Waleed Sadek, founder and CEO of Egypt-based digital payment solutions provider PaySky.
“When consumers are satisfied with their experience, any new approach must be truly appealing. This is why we must focus on making the transition viable for everyone involved — consumers, banks and all other participants.”
Sadek added that active support and participation from banks is required to ensure the success of an instant payments scheme.
“Without their endorsement, any technological approach might struggle to take off. We do not want a great idea to remain just that—a brilliant concept without real-world adoption.
“This is our chance to engineer the financial model before introducing it to the market. By doing so, we can ensure that the change is not just technological, but also practical and beneficial for all stakeholders involved,” Sadek explained.
Cross-sector insights
Lessons can also be learned from different sectors to understand how adoption dynamics are evolving.
They provide direction for customising platforms to align with user preferences and adhere to regulatory nuances.
For example, in the real estate sector, embracing digitisation offers a transformative solution for companies seeking efficiency and modernisation.
Group treasury manager at Dubai-based AW Rostamani, Anish Sanghvi, pointed out that the real estate sector has historically relied on manual payment processes involving cumbersome paperwork, delayed transactions and increased chances of errors.
“The shift to digital payments will give real estate players like us a realistic window for managing financial transactions more efficiently. We can then integrate these digital payment systems into our digital journey.”
By incorporating digital payment methods, real estate companies will not only expedite transactions, but also seamlessly integrate this aspect into their broader digitalisation journey.
The payments landscape underwent another notable transformation with the entry of tech giants such as Google and e-commerce players such as Amazon. These firms have leveraged their extensive user bases to promote the uptake of mobile wallets and digital payment solutions.
This shift has expanded the participant base beyond traditional financial institutions.
According to Sanghvi, this unconventional approach has been pivotal in fostering the widespread adoption of instant payment systems and is becoming an emerging trend.
“These diverse participants play a key role in supporting adoption and exploring different channels to boost the overall acceptance and integration of financial technologies,” Sanghvi added.
Promoting financial literacy
Financial awareness plays a key role in advancing adoption, and much can be learned from global implementation examples.
“Promoting financial literacy is pivotal in ensuring users are comfortable with digital payment platforms,” said Fernando Pacheco, senior vice-president and head of cash management products at Mashreq.
India’s success with UPI showcases how infrastructure development can drive digital payment adoption. UPI also stands out with its regulatory framework, encouraging innovation and competition among digital payment providers.
Countries such as Sweden have also invested in advanced digital networks, enabling seamless transactions.
Penna added that Sweden’s shift toward digital transactions is primarily due to its successful educational campaigns.
“Another example is Kenya, where the success of its mobile money service M-Pesa can be attributed, in part, to financial education initiatives.
“Such programmes encourage widespread adoption by familiarising users with navigating digital transactions securely,” Penna added.
However, Mena FinTech Association CEO Gaurav Dhar warned against blind adherence to global references.
Quoting the example of QR code adoption in Asia, Dhar highlighted that its success was not solely about the code itself; instead, it became a standard because people were already accustomed to scanning QR codes as part of their daily activities.
Applying a similar lens to the UAE, he added that Dubai’s Nol public transport electronic ticketing cards saw widespread adoption that was not limited to transportation; they became a standard for transactions due to their ease of use.
“Millions of cards were issued because people found it useful; it became a natural part of their transactions. With the emergence of digital wallets, we must pay attention to these shifts. While impressive technologies such as biometric authentication exist, adoption rates will hinge on a robust use case.”
Dhar stressed that imposing technology on consumers is not the solution; there must be a compelling reason for them to adopt it willingly.
Clearly, a one-size-fits-all approach is not practical; instead, understanding the local context is essential for successful adoption.
