HOW FSI INCUMBENTS CAN STAY RELEVANT THROUGH THE GCC’S PAYMENTS EVOLUTION

By Luka Celic, Head of Payments Architecture – MENA, Endava

Banks and payment services providers (PSPs) have been the region’s engines of economic growth for as long as anyone can remember. It is therefore jarring to imagine that this dominance is now under threat. After all, venerable banks and credit card companies have elegantly embraced the Internet, mobile banking, and the cloud to deliver self service banking to millions of customers. But consumers, especially digital natives, have never been known for congratulating an industry for a job well done. Instead, with each convenience, their expectations only grow. The siege reality of the pandemic accelerated a shift in consumer behaviour, and Middle East banks and PSPs now face challenges on three fronts.

The first is FinTechs. from Saudi Arabia’s BNPL (buy now, pay later) pioneer Tamara and Qatar’s unbanked oriented platform cwallet, to online financial services, Klarna, tech startups have been able to tap into rapidly changing consumer markets. New companies find it easier to pivot. And like speed boats racing against aircraft carriers, they weaved effortlessly to fulfil a range of desires amid high smartphone connectivity rates and a range of other favourable market conditions. By one estimate from 2022, BNPL alone accounted for US$1.5 billion (or 4%) of the Middle East and Africa’s online retail market.

The second threat is open banking, which comes in many forms, but one example is the instant-payments platforms being introduced by central banks such as those in Saudi Arabia and the United Arab Emirates. To get a sense of how this could play out, we need only look to Europe, where players who once relied on payments through card schemes are now pivoting towards open banking enabled payments. Closer to home, Al Ansari Exchange recently announced its customers can now transfer money and settle bills via the recipient’s mobile number, enabled by the UAE’s Aani IPP.

And finally, comes big tech. To augment its e-wallet service, Apple has signed up to an open banking service in the UK. The open banking framework which banks enabled through their investments is being exploited by a Big Tech firm that has access to 34% of UK smartphone users. Unsurprisingly, this sparked a fierce antitrust complaint by UK’s banks. Other big names will surely follow as they continue to craft ways of offering the digital experiences that garnered them user loyalty in the first place.

THE BALANCE

Apple Wallet is aimed at blending payment methods, loyalty cards, and other services into a single experience. But such moves have raised regulators’ eyebrows regarding a lack of interoperability and the preservation of competitive markets. Hence, Apple’s open banking foray — a gesture to calm the nerves of a finance market that fears having to compete with a company armed with countless millions of user transactions from which to draw insights. The massive user bases of tech giants will give any FSI CEO goosebumps. How does a traditional bank lure an Apple user? Open banking initiatives open the door to greater competition and innovation, both of which are good for consumers. But the only way to ensure both is by building an ecosystem that balances innovation with regulatory oversight.

FROM INCUMBENT TO INNOVATOR

Yes, smaller businesses have freedom of movement that larger incumbents do not. But that does not mean that there are no paths for banks and PSPs. There are, in fact, several strategies that larger FSI companies can employ to capitalise on the open banking revolution.

The first of these is collaborating to create ecosystems that provide users with frictionless experiences. Established FSIs already have access to a wealth of information about their customers and must now consider how to integrate data sources to create highly streamlined and frictionless workflows. A customer applying for a loan could then see their details auto populated, and credit history already accounted — all without the hassle of lengthy phone calls, application forms, or submission requests. In an age when instant is everything, it’s easy to see why the former approach could foster loyalty, while the latter would only serve to drive customers towards more capable competitors.

Card companies and issuer banks could also work with acquirers to smooth out the rough landscape that has arisen from the advent of digital payments. Acquirers traditionally acted on behalf of the merchants that accepted payment methods to recoup funds from the PSP through the issuing bank. This system has served the industry well, but with more payment methods emerging, acquirers have branched out into mobile wallets, QR codes, and gateway services. Gradually the relevance of established players has dwindled as their lack of representation at the critical checkpoint has diminished their significance. Incumbents must work to turn back the tide by recognising that acceptance and acceptance ownership are becoming increasingly important for maintaining market relevance.

Another strategy is diversification. Veteran FSIs may feel like they’ve lost ground to nimble start-ups and Neo Banks, but history shows value in patience — established FSI players now benefit from the investments of early innovators, and double down on payments innovations which have already shown the most promise. Moreover, if they diversify their portfolios through acquisitions, innovations, and partnerships, they can secure their future. Mastercard presents an excellent example with their US$200m investment into MTM payments. This single move has given the company access to MTM’s 290 million strong subscriber base, allowing these customers to become familiar with Mastercard products before getting entrenched with mobile wallet alternatives.

WHO’S ON TOP?

If we look at the rise of BNPL services, we see an origin story with — at least — major supporting roles for large card providers. But open banking has sidelined them in just a few years. BlackBerry was a stock market darling just five years before it sought a buyer. Traditional FSI players must innovate; they must collaborate with emerging disruptors; they must diversify. They can survive and thrive if they do these things — after all, they already have much of the infrastructure, and experience required for success. Middle East banks and PSPs have the existing user bases, so they have the scale to get out in front in the era of open banking. All they lack is the kind of compelling use cases that will entice the banking public. PSPs and their issuers could offer embedded payments, for example. The right services at the right time will be warmly received by consumers, no matter the scale of the offering institution, so there is every reason to believe that incumbents will come out on top against FinTech and Big Tech.