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January 16, 2014

Exciting growth prospects ahead for Middle East prepaid

In the run-up to Timetric’s Prepaid Summit: Middle East on 19 March 2014, a group of experts and stakeholders gathered in Dubai for a roundtable discussion to examine the opportunities prepaid card innovations offer as well as the current challenges in the market climate. Hannah Smithies reports

By Verdict Staff

In the run-up to Timetric’s Prepaid Summit: Middle East on 19 March 2014, a group of experts and stakeholders gathered in Dubai for a roundtable discussion to examine the opportunities prepaid card innovations offer as well as the current challenges in the market climate. Hannah Smithies reports

Prepaid is becoming the payment method of choice for a growing number of consumers in the Middle East but the prepaid sector is not without its challenges.

Timetric hosted a roundtable discussion in Dubai as part of its preparation for its annual Prepaid Summit Middle East conference to examine the current state of the prepaid sector.

Richard Bialek, head of prepaid, Middle East and North Africa, Visa kicked off with the discussion by summarising Visa’s take on the Middle East prepaid card market, its opportunities and risks.

Says Bialek: "We view prepay as a complementary product to debit and credit. The real target for prepaid is to bring cash transactions onto a payment network, it is not an alternative to debit or credit transactions.

"As a platform, prepaid is a very adaptable product. It could be consumer, corporate, government, pay roll, gift or travel product.

"The challenge for us is the evolving structure for prepay. Banks and companies now want a portfolio of products. We’re moving past market-entry, but we’re still very much in adolescence and additional mandatory processes are needed.

"Despite the risk events in 2013, we saw a doubling of business here in the Middle East over the past year.

"It is the biggest market for prepaid because of a favourable set of regulations driven by the United Arab Emirates and GCC countries.

Bialek says that the biggest programme by spend in the Middle East is a virtual card programme offered by a Saudi bank.

"There is not just one factor driving growth. In the UAE a major factor of growth has been government and corporate pay-roll programmes, but corporates are also looking at prepay to provide corporate incentives.

"Sometimes, customers will take a product we offer and use it in a way we hadn’t thought of, some people use travel cards for their intended use but some blue collar workers use it as a savings account or as a way of accessing services such as online shopping.

"Also in the last year other third parties like processors and programme managers are coming in and creating gains, adding capabilities such as multi-currency. "There’s an increase in sophistication and we are seeing bigger companies with more financial wherewithal and staying power."

Bialek estimates the total value of the prepaid sector in the region to be about $4bn with Visa enjoying compound annual growth of 156%.

He says that prepaid is capturing the attention of a growing number of groups on the one hand but on the other, this will result in regulation becoming a common theme as governments look to gather greater control.

"Our main products driving growth are general purpose and pay roll programmes. In our three year plan our business areas for growth are travel, government and virtual.

"Government growth covers things like welfare programmes which tend to offer small revenue per account, but with lots of accounts it builds a virtuous cycle: More cards in circulation means more awareness and acceptance among consumers and merchants."

Says Bialek, the major challenge for these cards is to grow the number of point of sale (PoS) terminals.

"We see 95-97% cash-in cash-out on most of our programmes but if we could move that 3% point of sale and double it to 6% or 7% we could be talking about $1bn more volume.

"Geographically we see ourselves expanding too. For example, Egypt is such a big market but success depends on how the political situation plays out."

Bialek’s colleague Sumit Tyagi, director of prepaid products, Visa Middle East and North Africa, suggests that the Arab Spring had helped banking:

He adds: "We see a lot of demand coming in because they want a transparent mode of operation."

Bialek agrees but concludes that the future for prepaid is far from clear.

"Prepaid won’t become business as usual next year and it’s not in a steady state. Be ready for dynamic changes next year."

Blakey asks Malek Mroueh, senior director, regional business development, Asia Pac, Middle East and Africa, TSYS about the impact of the incident at Bank Muscat in Oman ending with the bank being fined OMR15m ($39m) after a number of prepaid travel cards were hit by fraud.

"I think it will take a while for the memory of that to die down. It was a tough year," says Mroueh.

"If we stand up as an industry and start talking about what happened and how it was fixed, the education will overcome the fear.

"We have to get some traction in place to get to know how the products work and remind people that you don’t have to replace cash with cards, you must do what’s best for the customer. Education, education, education!"

Abu Dhabi Islamic Bank’s head of partnerships,Tanvir Shah explains that the Oman event was too close for comfort and a number of CEOs were wary:

Says Shah: "Most senior bankers don’t understand prepaid so we need to reassure people. It simply does not mean $40m are going to get wiped off. It was just a specific card that got hit for a specific reason".

Blakey asks about other events of the past year and Hashmat Pereira of Samba Financial Group talks about infrastructural challenges:

"Even if you have the correct product with a USP, we don’t have a common distribution and reloading network in the UAE, so it’s an enormous challenge. This needs to be addressed in order for the product to make a profit otherwise schemes won’t be able to achieve growth."

Mroueh agrees that without proper infrastructure there would be stagnation, but the breadth of services offered by prepaid demands more complex deposit points than those used by businesses such as general purpose mobiles.

"Every info kiosk desk would need the ability to transact, how do you manage that, how do you as a bank guarantee the funds?

"There’s almost nothing that involves a transaction that you can’t replace with a prepay card. It boils down to whether you can do it profitably, cheaply and make it more convenient to the customer. If you can then you have a winning product."

Mroueh flags up the as yet underutilised ecosystem around prepaid and points to another form of stagnation:

"In Asia they have Hello Kitty cards and people buy them just to collect so the funds never get spent.

"On the other hand the Manchester United cards are a great example of an ecosystem. It will give you privileges you can’t get any other way, even with all the money in the world, such as meeting the players.

"If you offer that, people will be willing to pay for prepay and then it will become valuable. If you give prepaid away for free it is not special, but then there are some cards you have to give away."

Chauhan agrees that loyalty is enticing business: "Loyalty is big where has it been implemented in other countries."

Mroueh agrees: "iTunes cards are grand examples of exactly that. The most successful prepaid cards are mobile scratch cards because there is need and desire."

Says Shah: "For loyalty cards and airline cards, banks could work in partnership with telecoms and banks. Telecom has been a player and they are interested."

However, Mroueh has concerns."As a bank, telecoms are your biggest threat. You don’t have to look further than Kenya and Safaricom is very powerful."

Blakey argues that while telecoms were a threat, banks have an important advantage over telecoms: "In every survey I’ve read, consumers have said they trust banks the most despite all the scandals in the last five years. Can we think of a good example of a bank working with a telecom?"

Mroueh warns: "Banks shouldn’t give up their customer base, they must retain control. If telecoms move billing into the telecom structure there’s no more Visa or Mastercard.

"In order to compete, we as a banking community need to get a grip on services to rural people, they have significant value as a collective. The telecoms are a cheap and convenient channel to provide services to them.

"I think there is a segment of virtual prepay cards where it will work if money is never cashed but just circulated and it is ideal for regulators.

Blakey points out a number of exciting things that are happening in the government sector in the US and asks what growth we might see in the UAE in the next five years.

Says Bialek: "In the US there is $700bn in volume on prepay with around $350bn closed loop and $350bn open loop, and it comes from multiple levels; federal, state and welfare disbursements.

"The relief cards in Pakistan were also a success as they were quickly distributed and ATMs were deployed. That was a response to a disaster.

"Some disbursement is ongoing which is most attractive, like pensions, or co-ordination with post offices and then you have one time relief type programmes."

Mroueh says you are talking big numbers if you can get the government on board but the challenge is the amount of effort it takes.

"It’s a huge effort to convince them you can save money and you have to work out if it is worth putting limited resources into that."

United National Bank’s Ashish Khosla adds: "In my previous position in Saudi they did a successful programme with the government which serviced people who were illiterate via ATMs. The screen asked simple questions and showed pictures of the notes. The rural population numbers were large enough for a bank to do it.

"Government involvement will be restricted where there aren’t many local clients, especially when there’s a small population. Where there are many people there is the scope to do more."

Mroueh adds: "In the UAE you have a national ID which is a chip card. There is nothing to stop that being used as a payment card."

Emirates Islamic Bank’s Altamash Khan reveals that EIB is looking to offer banking services on an ID card but they want all government departments to accept one product before going for it.

"If the government want to do it and replace cash handling for cards of course that would drive momentum towards prepaid."

Looking ahead, Mroueh says: "We must be careful of linking virtual to prepaid, they’re not the same.

"Second, the threat to the traditional acquiring paradigm: what’s going to happen as P2P becomes generic? It will remove the concept of a merchant and what will happen to the various protections?

Shah says, it will not happen in 2014.

"P2Ptransactions should be credit to credit or debit to debit, perhaps a visa to a visa transaction?"

Tyagi adds: "Visa has tried something like that. Not in the UAE as the Central Bank said it wouldn’t allow it because of issues with Know Your Customer (KYC) regulations.

"It might happen in the short to medium term if the banks work with regulators here."

UAE Exchange’s Shinu Baby agrees that KYC is a problem across products.

"UAE is concerned about 1bn Visa cards because maybe 90% of them are KYC but that leaves 10m which are not. Is Visa working on something that will limit exposure?"

Bialek insists: "Yes there is a scheme. UAE has not been the only place where there are limitations."

Blakey asks if there scope for some form of relationship pricing in the area.

Tyagi says: "Many banks might consider how this adds on as part of a holistic relationship with a customer, lots are moving towards relationship banking."

But Khan disagrees: "We wouldn’t look at subsidising the prepaid set for existing customers. We do subsidise our credit card population but we want a simple, easy pricing policy for prepaid and the low profits do not allow us to do otherwise."

Finally the discussion turns towards positioning prepaid as a Sharia product. Khosla summarises the opportunity: "Even debit cards have issues because you are not supposed to have an incentive to deposit money. Prepaid is definitely the most Islamic of products."

"However, Visa and Mastercard are still interpreted by many Muslim customers as non-Sharia. They associated Visa with large corporates and will reject a Visa card. So prepaid is Sharia-friendly but there is some resistance."

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