The UAE is arguably one of the most advanced payment markets in the Middle East and is home to many expatriate workers using all forms of electronic payments. Recent efforts by regulators to migrate cash and other forms of paper payments to electronic payments are having an effect, as Victoria Conroy reports.
The United Arab Emirates (UAE) was established in 1971 and is composed of seven emirates: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Qiwain, Ras Al-Khaima and Fujeirah.
Although the UAE is considered an oil-rich gulf state, the emirate of Dubai has used the wealth generated by oil to build an economy dependant on tourism and construction, fed by an inflow of expatriate workers who have flocked to the UAE over the last 15 years.
In July, the population of the UAE was estimated to be 4.9m, but the local population of 1.5m is dwarfed by the 3.4m expatriate migrant workers, attracted to the region by high tax-free salaries.
According to the CIA World Factbook, 73.9% of the population in the 15-64 age group is non-national, with a median age of 30.2 years, and per capita income of $40,000 as of 2009, one of the highest rates in the world.
Following the recent global economic crisis, the UAE suffered a severe downturn in its economy, leading to unprecedented job losses and a sharp fall in the value of real estate in the region, which in turn trickled down to consumer expenditure. However, according to the International Monetary Fund, the UAE economy as a whole will grow by 2.4% in 2010, although Dubai itself is expected to see a growth rate of just 0.5%.
The popularity of cash and cards
Cash is the dominant payment method in the UAE, representing 80% of personal consumption expenditure. Figures from the UAE central bank show money supply, consisting of currency in circulation plus monetary deposits, increased from AED208.1bn in 2008 ($56.6bn) to AED223.5bn in 2009, a rise of 7.4%.
However, payment cards are enjoying increasing popularity. In the past decade, card numbers and billed volumes have grown by a compound annual growth rate [CAGR] of 40%, and this growth has been driven by a rapidly expanding customer base and high inflation.
According to statistics from the UAE central bank, in 2005, there were 2.4m payment cards in circulation. By 2009, this figure had grown to 8.4m, helped by the migration from proprietary ATM cards to internationally scheme-branded debit cards. The number of ATMs in the UAE reached 3,599 at the end of December 2009.
Growth in debit card numbers has not yet turned into higher spending per card. Looking at debit card spend at the POS compared with debit card cash withdrawal at the ATM, almost 88% of debit card usage in the UAE is accounted for by cash withdrawal compared to 12% spend at the POS.
However, there is a huge potential for debit cards to move up the scale at the POS, helped by bank promotion and increased consumer awareness of the benefits of payment cards.
The global economic crisis has also spurred usage of debit instead of credit cards. In August, it was reported credit card spend in the second quarter of 2010 was 7 to 10% lower than in the year-ago period, whereas debit card spend grew by between 12 and 15%.
Although a gradual behavioural change was already underway in terms of UAE shoppers shifting to debit cards from credit cards, the rapid use of debit cards in the UAE has outpaced credit card growth.
In terms of growth in transaction value, debit cards have outgrown credit cards by a large margin. But in terms of the value of money spent at the POS, credit cards still outpace the amount spent via debit cards, even though the number of debit cardholders has already surpassed the number of credit cardholders.
Currently, around 60 to 70% of the total card transaction value belongs to credit cards while 30 to 40% is composed of debit cards in the UAE.
According to Visa’s quarterly results ending 31 March 2010, its debit card payment transaction in the UAE grew 8% compared to the same quarter last year and compared to a 19.4% rise in the Gulf Cooperation Council (GCC) region.
On the other hand, debit card transaction value grew by 9% in the UAE in the same quarter, while the credit card user base in the GCC grew slower at 0.6%.
According to industry experts, credit card holding per capita in the UAE between 2008 and 2009 was the highest in the GCC region but this has dropped considerably as credit card issuance has fallen in tandem with the growing popularity of debit cards. The total number of cards (debit and credit cards) has dropped by almost half between 2008 and 2009 in the UAE.
In July 2010, Visa reported a growth of 19.4% in the number of payment transactions across the GCC in the first quarter of 2010. The increase in transaction growth followed a successful year for Visa in terms of extending its debit business in the region.
The payment solutions provider formed a number of key debit partnerships with leading GCC-based banks in 2009, which aimed to improve the card payment experience for cardholders by providing increased debit card capabilities and convenience.
Visa’s successful debit signings for 2009 included deals with ADIB, Emirates NBD, HSBC and Dubai Islamic Bank. According to Visa, these deals reflect increased consumer demand for debit products.
In relation to credit cards, the demographic characteristics of the UAE have had a major impact on the range of banking and payment services on offer. Because of the high per capita GDP (estimated to be $40,000 in 2009), local banks have had to get up to speed quickly on the features and benefits that expat cardholders have come to expect as standard on their payment cards, with a rich array of lifestyle benefits and services attached.
Also, because of the UAE’s reputation as a tourist destination, international travel to and from the UAE is frequent, resulting in many credit cards offering including travel benefits as a standard feature. Despite the recent economic slump, the UAE credit card market is estimated to be one of the most profitable in the Middle East and North Africa region, driven largely by high levels of spend and roll-over balances.
In such a vastly competitive credit card market, local and foreign card issuers have upped the bar in terms of the features and benefits they offer on credit cards and are also becoming increasingly creative and innovative when it comes to marketing and promotional campaigns.
It is not uncommon in the UAE for card issuers to run competitions giving cardholders the chance to become instantmaires through prize draws, while those issuers with travel-orientated propositions regularly give away air miles in addition to the air miles accumulated through everyday credit card spending.
At the same time, issuers are also fine-tuning their pricing structures and value propositions to appeal to targeted consumer segments. Segmentation among such a wealthy cardholder base is a crucial element of acquisition and retention strategies for UAE issuers.
It is often the case that standard credit cards in the UAE have many of the features and benefits more commonly found on gold or even platinum cards in Europe and the US.
Payment and settlement systems
The UAE central bank plays a leading role in the establishment, development, operation and oversight of payment systems in the UAE. The central bank owns and operates the UAE’s main payment systems. UAE Funds Transfer System (UAEFTS) is the central bank’ s real-time gross settlement system. Membership of the scheme comprises 53 commercial banks, 21 government ministries, five money exchanges and two non-banking financial institutions.
The system was developed in-house and first went live in August 2001. Originally designed to replace a manual tested telex process, in March 2009 the system was enhanced to process batched files of low-value transactions. Every business day the system processes up to 8,000 transactions worth AED10bn.
The ICCS (Image Cheque Clearing System) was introduced in July 2008 and features cheque truncation and settlement taking place on the same day the cheque is cleared. ICCS processes 97,000 items each day worth about AED3.8bn.
Launched in 1996, a UAESWITCH scheme now comprises 45 member banks and over 3,200 ATMs. UAESWITCH allows cardholders to obtain service at ATMs throughout the Middle East Gulf region. Use of the network has grown over the years so that monthly transaction volumes comprise over 1m balance enquiries and 4m cash withdrawals worth AED6bn.
One notable implementation occurred in September 2009, with the introduction of a Wages Protection System in order to meet the objectives of the Ministry of Labour in enabling the timely payment of employees’ wages. All banks and money exchanges registered with central bank can act as agents to this system.
In April 2009, the central bank established the Payment Systems Oversight Unit to supervise payment systems in general and to ensure their compliance with the core principles for systemically important payment systems issued by the Bank for International Settlements.
The year 2009 also saw expansion in the number of bank branches in the UAE. While the number of locally-incorporated banks remained unchanged at 24 during 2009, the number of their branches increased to 674 in 2009 from 614 in 2008 and the number of their electronic/customer service units increased to 26 from 19 respectively.
The number of branches of GCC banks remained at 6 at the end of 2009. Whereas the number of foreign banks remained unchanged at 22, their branches decreased from to 82 to 81 at the end of 2009 and the number of their electronic/customer service units increased to 42 in 2009 from 35 in 2008.
The importance of eGovernment
The communication infrastructure of the UAE is a vital component in furthering the growth of its economy and the adoption of electronic payments. According to the CIA World Factbook, as of 2009, there were over 9.4m mobile phones in use, ranking the UAE 65th in the world and just under 3m internet users, ranking the UAE 60th in the world.
Perhaps the most important development in the electronic payment space has been the implementation of eGovernment, most notably in the Dubai emirate.
An e-governance survey conducted in 2008 by the United Nations Department of Economic and Social Affairs placed the UAE fifth in terms of e-government transactional services, just behind developed countries such as Sweden, Denmark, Norway and the US. The country also achieved 12th position in the web measurement index which rated the online presence of national websites and selected ministries including health, education, welfare, labour and finance,
Figures published in August 2010 revealed the value of governmental electronic payments in Dubai rose by over 60% in the first half of 2010 compared to the year-ago period.
The ePay service allows both corporate and individual customers to conduct e-payments for government services via credit cards, e-AED and direct debit from customer accounts in participating banks. Around $300m was collected through ePay on behalf of the 22 Dubai government departments that take part in the scheme. The system collected 835,000 transactions, a 17% rise on the number carried out in the same period in 2009.
The number of direct debit transactions grew from 13,000 in the first half of 2009 to over 23,000 in the first half of 2010. The top three departments in terms of transactions were the Roads & Transport Authority, the Dubai Electricity & Water Authority and Dubai Customs.
To further promote eGovernment, the central bank and the Dubai eGovernment scheme signed a memorandum of understanding (MoU) in October 2010, aimed at opening new channels and providing more payment options for customers. The MoU is in line with Dubai eGovernment’s ongoing effort to provide government department customers with instant payment facilities of government fees without having to waste time and effort visiting banks or the concerned departments.
By connecting with the UAESWITCH, Dubai eGovernment will allow corporate or individual customers to settle government departments’ fees through Dubai eGovernment’s ePay portal using ATM cards or through prepaid cards.
These payment options will be added to the other options that are already available to customers. Dubai eGovernment is keen on leveraging its cooperation with UAE Central Bank to open new prospects for customers by expanding the number of banks using the ePay gateway from four at present to all the 46 banks using the UAESWITCH.
The promotion of e-AED services is also high on the agenda for regulators in the UAE. In February 2010, the Ministry of Finance and banking group NBAD launched the second generation e-AED system, comprised of e-AED Visa-branded ‘Blue’ prepaid cards.
The Blue Card has six different coloured card options under the name of ‘Al Haselah’ a word that means collector in the local dialect. The new cards are expected to raise public service standards, enhance efficiency, innovation and usage of government services.
An e-services portal was launched for the MoF in conjunction with the new electronic payment gateway for the second generation e-AED cards. The e-services portal launched the first service, linked to the electronic services portals of the Ministries of Environment and Water and Public Works, allowing payment to be made to the Ministry.
In the months to come, it is expected national ID cards will also be used to make electronic payments. According to the Emirates Identity Authority (EIDA), just over 1.8m Emiratis and residents have registered for National ID cards in the UAE so far.
The rise of e-commerce
E-commerce is also expected to play a vital role in bringing the UAE economy in step with the rest of the world and is expected to account for more than $36bn in value by the end of 2010.
Though the use of the internet in UAE is rather high, large numbers of companies do their business without using the internet. It is estimated by the Dubai Chamber of Commerce that around 30% of companies in the UAE use e-commerce as a way of conducting electronic payments, leaving enormous scope for further penetration in this area.
A recent survey on online shopping habits by MasterCard Worldwide revealed that in the fourth quarter of 2009, the UAE had the highest average online shopping spend in the Asia-Pacific, Middle East and Africa region, of $1,048, compared to a slightly higher figure of $1,193 a year ago.
The survey has also showed that online shoppers in the UAE made an average of four purchases in the fourth quarter of 2009, compared to 4.2 purchases in the fourth quarter of 2008.
Respondents in the UAE are becoming more comfortable with shopping on the internet, with 52% of respondents having stated that it is convenient to shop online in 2009, versus 47% in 2008.
In the UAE, the most popular items bought by online shoppers included airline tickets (43%), books and arts (34%), CDs, DVDs and VCDs (30%) and home appliances and electronic products (29%).
Airline tickets (38%) and books and arts (33%) were the two items that triggered the most impulsive shopping among UAE shoppers. The top reason for impulsive buying was discounts (69%) that online channels offer.