Bethan Cowper, Head of Marketing & PR at Compass Plus
With more than 28% of the population in the region aged between 15 and 29, the Middle East is an exciting territory for payments. Young people are the fastest growing demographic, making this one of the most youthful regions in the world, with a median age of 22 compared to the global average of 28. However, local economies remain cash orientated, with an estimated 85-90% of retail transactions being carried out by cash and cheque. The cultural tradition of doing business face-to-face is hard to break, and whilst card usage is on the rise, the religious implications of using a credit card remain. Add on top the regional misconception that digital channels aren’t secure, changing the culturally ingrained behaviours in this geography won’t be easy.
The large young population, the rising popularity of internet shopping, and the surge in adoption of mobile phones, make the region the ideal environment for a digital revolution. In 2015, ecommerce sales are expected to exceed $15 billion, an increase of $6 billion since 2012. The region as a whole boasts over 95 million online shoppers whilst the UAE has one of the highest global mobile penetration rates with 78% of the population owning at least one smartphone.
Despite the rise in popularity of internet shopping, people are still paying for goods and services in cash. Cash on delivery is rife, with over 60% of all online purchases being paid for on the doorstep. This is a huge issue for merchants as there are high return rates (approximately 40%), a big time lag between the order and payment, and the need for delivery people to carry cash. Although card issuance has grown significantly, only 23.5% of online shoppers own a card and in many countries cards are mostly used to withdraw cash from ATMs. In Saudi Arabia, for example, 90% of card transactions are ATM withdrawals.
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Cash on delivery is expected to decline as consumers become more confident in online security. The increased uptake of shopping over the internet helps solidify merchant trust, especially across more well-known and established brands and consumer education is a top priority for all ecommerce businesses. A small number of online merchants have removed cash on delivery from the payment options available to their customers, however this approach has not been well-received. Larger e-tailers are spending serious amounts of money on educating the public, whilst others either add charges for cash on delivery or offer incentives such as discounts to encourage their customers to pay online, hoping to establish this behaviour as a habit. Unfortunately, as soon as the incentive is removed, customers have been quick to revert back to like, making this option financially unviable in the long term.
So how can the Middle East move their ecommerce business away from a cash-first mentality towards a less-cash society? The obvious solution is to find a way to use electronic payment channels to provide consumers with a better experience than they get with cash, a compelling alternative that addresses any issues they may have.
The Middle East is stratified, with large areas of underbanked populations, for example in Egypt only 7% of the population has a bank account, to consumers with large spending powers and pockets of expatriate communities, for example the UAE. Whilst credit card issuance is growing in the UAE, other countries are turning to alternative payment methods to reach the underbanked. Banking products need to be tailored to meet consumers’ online needs in order to cater for such diversity.
In recent years the Gulf States have become some of the most progressive in terms of investing in payments infrastructure. In the UAE in particular, the combination of strong support from both the regulatory authorities and the government is laying the foundations for a significant increase in electronic payments in the years to come. As behaviours begin to shift, market opportunities for new products are emerging. One such solution-driven product that is increasingly becoming a consumer favourite is the prepaid card.
Prepaid as a term shouldn’t be solely assigned to cards; the mobile is another channel that can support the prepaid model whilst serving more remote geographies. Prepaid is a smart way for financial institutions to grow their business in what is largely an underbanked (80% of the population), cash-led environment. It is an ideal fit with the Sharia finance principles by not offering credit, and provides a more secure way to make payments online.
Popular across all age groups, prepaid has been heavily adopted in Saudi Arabia, where, according to Euromonitor International, the number of prepaid card transactions increased from 0.6 million in 2012 to 2.8 million in 2014. Kuwait has also been an early adopter of prepaid for online shopping, whilst it remains in it’s infancy in other countries across the region. The key drivers around prepaid circle around online security, no prerequisite to have a bank account, and the attractiveness of budget management tools.
In countries with more established payments infrastructure, prepaid can offer a short term solution to encourage the transition between cash and cards or cash and mobile payments to quell issues around online security; essentially using prepaid as a stepping stone to other banking products. In countries with less developed infrastructure, prepaid can be used as a longer term solution to reach the larger populations of unbanked and underbanked by instilling trust in financial systems. To ensure success, prepaid would need to be packaged differently for each market, and for different demographics within those markets.
As attitudes shift, market opportunities for new payment channels will emerge and solution-driven products will pave the way for a less cash-focused approach. The Middle East is set for change, however, change takes time and the challenges facing ecommerce continue to grow. Prepaid could be a smart way of addressing these issues as a flexible solution that can be tailored to anyone.