Payments and paytech generally across the Middle East and Africa (MEA) region dominates the wider fintech ecosystem. How does that play out today?
At one point, around 85 per cent of fintech firms in the Middle East and North Africa (MENA) region operated in the payments, transfer and remittance sectors. Although the wider MENA and MEA region is seeing other fintechs across its various subsectors, payments continue to dominate the region.
For example, fintech’s largest segment market was projected to be digital payments with a total transaction value of over $122billion this year. By looking at the past few years, such as highlighted by a report by Medici, African Fintech Report 2020 – in terms of investment deals, it was payment gateway/processor startups who raised nearly half of the total funding value in Africa. Just shy of $260million raised the maximum amount of funding, while mobile/digital wallets startups amounted to the second-highest amount of funding with a nearly 36 per cent share of the total funding amount.
Despite the increase of other subsectors in fintech, why do we still see payments playing out as a future engine driver of the fintech ecosystem in MEA? Well, the region as a whole has been traditionally reliant on cash and is home to some of the richest and poorest regions, offering the world a significant corridor for the likes of remittances and wider international trade and investment to foster. Ideally, payment digitalisation can continue to help the MEA region by making more efficient and digitally friendly ways to send and receive money.
Digital payments are expected to grow at a compound annual growth rate (CAGR) of 15.39 per cent from 2022-2026 in the MENA region.
Even before the outbreak of covid-19, digital payments were growing rapidly in MEA. For instance, according to a study by McKinsey, the number of consumer digital payments transactions in the United Arab Emirates (UAE) grew at an annual rate of more than nine per cent between 2014 and 2019; and Saudi Arabia, which had significant growth in card payments at over 70 per cent between February 2019 and January 2020. These rates are much higher than Europe’s average annual growth of four to five per cent.
McKinsey’s same study found that three-quarters (80 per cent) estimated that noncash payments had risen by more than 10 per cent across the region as a result of the pandemic, and 43 per cent believed that the increase exceeded 20 per cent. Data from some countries indicate even higher rates of growth: Saudi Arabia’s digital point-of-sale (POS) transactions doubled in the year to January 2021.
In the UAE alone, non-cash payments are expected to account for 73 per cent of transaction volume by 2023 (compared to 39 per cent in 2018) and are growing strongly across all payment types (B2B, B2C, B2G to name a few) – according to a report from the MENA Fintech Association in its first volume of the SHIFT report.
One example of potential growth is embedded finance. Despite its infancy in MEA compared to the rest of the world, there appears to be potential in its acceptance and adoption. From various sources, such as ResearchandMarkets.com, MEA’s embedded payment industry is expected to grow and reach to over $5.8billion in 2022. It is expected that its compound annual growth rate (CAGR) will be 26.7 per cent from 2022-2029, whereby in 2029 the revenues will reach over $21billion (21,248.6).
The future is here to stay and digital looks to be further adopted
Various studies during the pandemic have highlighted the wider MEA region, as per the rest of the world, in adopting digital payments.
For instance, the previous McKinsey study discussed showed in its survey that 90 per cent predicted that at least half of new users will stick with digital payments rather than revert to cash. The same study also highlighted that over half of the survey’s respondents believed that strong growth in noncash payments will continue over the next five years; resulting in a cumulative increase in digital transactions of over 50 per cent above 2020 levels across the Middle East.
Also, according to the Mastercard New Payments Index, 95 per cent of consumers in MENA are considering emerging payments, including the likes of wearables, biometrics, digital wallets and currencies, and QR code, in addition to contactless payment solutions. The study showed that 88 per cent of consumers in MENA have more ways and access to pay than back in 2020, and that three-fourths of consumers acknowledged that digital payment methods helped them save money.
During the previous first edition version of the TheFintech Times‘ Fintech: Middle East and Africa 2021 Report, there were other highlights back that confirm more recent studies’ findings as well. First, this included a Checkout.com study in September 2020 across eight countries (UAE, Saudi Arabia, Egypt, Jordan, Qatar, Kuwait, Bahrain, and Pakistan) that highlighted nearly 2,500 consumers would expect to shop more frequently in 2021. Mastercard also highlighted that at least one in nine transactions at the POS were now contactless – in 2020 Mastercard increased its contactless payment total by two-thirds to $136million across MEA.
Last year, Visa also published a study in regards to consumer attitudes towards digital vs physical payments (as well as cryptocurrencies) following the pandemic: Visa COVID-19 Central Europe, Middle East and Africa (CEMEA) Tracker. Visa’s findings highlight significant changes in attitudes to e-commerce following the impact of covid-19: 64 per cent of those surveyed in the UAE reported an increase in their online spending – 87 per cent of those surveyed also stated they would continue to shop online in the post-pandemic world. To note, digital payments have remained the preferred method for transactions, with continued strong use of contactless solutions, including cards, digital wallets and mobile payments.
Economic integration via fintech and digital through cross border payments
Payments continue to be a challenge to the MEA region due to it being largely fragmented. One way this is being worked on is via economic integration with fintechs and wider digital organisations enabling solutions like cross-border payments.
For example, in the Gulf Cooperation Council (GCC) region – Saudi Arabia, UAE, Oman, Kuwait, Qatar, and Bahrain – there is the Aber Project between the Saudi Central Bank (SAMA) and the Central Bank of the UAE (CBUAE). Both central banks created the Aber Project to explore domestic and cross-border settlement via a single regional currency, with IBM as its technical partner. There is also the Gulf Payments Company in the GCC, which was founded in December 2016 and aims to build and develop a system that connects all payments systems in the GCC countries. In December 2020 it launched phase one of its “AFAQ” platform and commenced money transfers between SAMA and the Central Bank of Bahrain (CBB).
In the Arab World, which of course includes the GCC, there is Buna by the Arab Monetary Fund (AMF). Buna, launched in 2020, is a multi-currency payment platform that clears and settles cross-border payments in eligible Arab and international currencies across the Arab region and beyond, with links to major trade partners.
Finally, there is the Pan-African Payment and Settlement System (PAPSS), which aims to be a revolutionary financial market Infrastructure that enables instant, cross-border payments in local currencies between African Continental Free Trade Area (AfCFTA) member nations. The infrastructure aims to help simplify cross-border transactions, thereby reducing the dependency on hard currencies for these transactions. PAPSS will be a key implementation of the newly launched AfCFTA.
Despite the challenges of the pandemic and the late adoption of digital transformation, when compared to other parts of the world, the MEA payments and paytech landscape presents exciting and unique challenges that fintech and wider digital solutions are helping to combat.