Can The Arab World Give Up Cash?

The Arab world has the highest mobile penetration rate on the planet, but they are also the least likely to engage in mobile or online banking. Why?

Customers in Arab countries, such as the U.A.E. and Saudi Arabia, still prefer to use cash and prepaid cards to make payments. According to Wamda, 98.1 percent of purchases in Saudi Arabia are completed with cash. Credit card use isn’t scant, with about a 51 percent penetration rate.

However many Arabs are still hesitant to conduct online transactions or pay with debit or credit cards, due to a lack of regulation and financial infrastructure within the region to protect them.

There are over 190 million consumers living in the Middle East, and the total GDP has been estimated at about $1.6 trillion, reported Cash & Trade magazine. The Middle East’s economy generates more than large markets such Russia or Brazil, and its countries have access to natural resources that allow room for future growth.

The Arab countries with the strongest economic power, and who are members of the Gulf Cooperation Council, are: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the U.A.E. These six countries represent 20 percent of the Middle East’s population, but account for over 60 percent of the total GDP.

Despite the region’s improvement in building a more mature financial market and banking structure, it still suffers from an inadequate clearing and settlement process, underdeveloped electronic channels for money transfers, and of course, its population’s long love for cash.

At present, the financial system in most gulf countries offers electronic transfers. However, these systems were developed on a real-time settlement platform and do not have the common ACH and wire systems that are needed to clear smaller transactions.

In addition to Arab consumers being wedded to cash, it is also significant to note that non-cash payments are predominantly checks. Companies in Dubai have only recently made a shift to pay staff with direct deposit and move away from check distribution for salary payments.

Moving Away From Cash

The Middle East’s payment industry is underdeveloped and the consumer market is extremely disproportionate. Many consumers remain unbanked, and the upper class members are extremely affluent and have high spending power – there is little in between.

Moreover, the card industry needs work since most regional and national card processors are fragmented, which leads to high cost-per-transaction fees.

Debit card use across the region is relatively low. It would be beneficial for financial institutions to drive debit card use amongst consumers. In order to do this, they must be able to convince both merchants and current accountholders to understand the advantages.

The government and banks need to actively educate merchants and explain how accepting more card payments can be better for both local and national purposes. Currently the majority of merchants in Arab countries prefer to accept payments in cash, because they do not trust the banking system and have a lack of card acceptance knowledge.

Some are even unsure of the differences between credit and debit card payments. An increase in card acceptance would also decrease risk of theft and counterfeit currency in shops.

To read the full story at Wamda click here, or to read the story at Cash and Trade click here.

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