How Digital Disruption is Impacting Traditional Banking in the Middle East?

With the rising prevalence of digital transactions, what transformations can we expect to see in the banking and payments sector in the Middle East in the next few years?

As digitalization continues to advance in the region, the payments landscape in the Middle East is at a critical juncture. Despite a highly tech-savvy population with smartphone usage soaring between 80 and 90 percent in major markets, the region remains heavily reliant on cash payments. Merely a third of retail transactions are conducted electronically, largely due to a lack of digital infrastructure and services, inadequate access to banking services among consumers and merchants, and a preference for physical currency. Nevertheless, novel government policies and regulatory initiatives combined with new payment providers entering the scene at a local, regional, and global level are spurring rapid changes. The recent outbreak of the COVID-19 pandemic has only exacerbated the move to digital channels, triggering a shift away from cash as seen in other parts of the world.

McKinsey solicited the thoughts of Middle Eastern payments experts as it investigated the payments industry and its potential future effects. Through their research, they discovered the various shifts that could impact the industry in the next five years, such as industry pressures, payment preference changes, and the prospects of different players such as banks, tech companies, and fintech in an ever-evolving environment.

The digital payment sector has been on the rise, even before the pandemic hit. In fact, the UAE experienced a 9 percent annual increase in consumer digital payments transactions between 2014 and 2019, which far surpasses Europe’s average growth of 4 to 5 percent annually. Saudi Arabia also saw a considerable surge in card payments, boasting a whopping 70 percent growth between February 2019 and January 2020. 

As this information comes to light, it’s evident that the payment landscape is changing rapidly, and players in the industry will need to keep up with the pace to thrive in this dynamic space.

According to a survey conducted by McKinsey, cashless payments in the region have witnessed an impressive surge in growth during the pandemic. As per the results, 80 percent of payment practitioners estimated an increase of more than 10 percent, while 43 percent believed that the rise was more than 20 percent. The rate of growth was even higher in some countries such as Saudi Arabia where digital point-of-sale transactions doubled in the year up to January 2021.

The good news is that this trend is expected to continue. In fact, 90 percent of the respondents in the survey believe that the shift toward digital payments will be permanent. Furthermore, more than half of them expect the strong growth in cashless payments to continue for the next five years, resulting in an increase of over 50 percent in digital transactions above 2020 levels across the region.

The trend towards cashless transactions has not only been accelerated but is also here to stay. People have become comfortable with the convenience and security offered by digital payments and this trend is expected to grow significantly in the years to come. The shift to a cashless society may have been brought about by the pandemic but its permanence is the result of its widespread adoption.

In today’s banking industry, nonbank payment providers are predicted to emerge victorious by 60 percent of survey respondents. To remain relevant amidst this evolving market, banks need to prioritize digitizing customer journeys, according to 83 percent of respondents. The second most important action is to acquire or invest in fintech, as recommended by 73 percent of respondents. Additionally, launching new products such as e-wallets and building an ecosystem, partnering with large ecosystem players or conglomerates, and forming a separate entity that can act like a fintech and compete more agilely are other viable options that banks could consider. First Abu Dhabi Bank has already taken a step towards the latter strategy by separating Magnati as a stand-alone payments business in the UAE.