What digital payment regulation means for the UAE
The UAE Central Bank is introducing a new initiative in line with global movement on digital payments
There is an ever-growing move in the global markets towards digital, and exploring the non-traditional areas for payments within banking industries and government entities alike.
The need to move to digital is a worldwide phenomenom that is picking up speed. This is especially true in terms of unconventional means for everyday payment activities in order to address ever-changing customer needs, improve efficiency and better adapt to technology disruptions.
PSD2 — the second Payment Services Directive designed by the countries of the European Union — has evolved under this spectrum where payment service providers (PSPs) and FinTechs can provide a payment instrument to customers simply by connecting to the banks. The customer can initiate a payment or inquire about their financial situation through a simple application on his or her mobile or tablet. This initiative opens and allows competition to improve efficiency and provide service quality to the end customer.
With the new regulation of the UAE Central Bank, we see a move towards regulating and legalising the emergence of PSPs to provide digital payments in the emirates. With the introduction and spread of digital money means in the UAE, the Central Bank is facilitating a robust adoption of digital payments across the country in a secure manner. This makes it more acceptable by the public and more controlled by accommodating digital payments while ensuring the highest levels of consumer protection and financial stability.
The regulation in brief
The Central Bank regulation addresses four categories of PSPs
• Retail PSP
• Micropayment PSP
• Government PSP
• Non-issuing PSP
The types of services that can be offered through the identified PSPs
• Cash-in services; enabling cash to be placed in a payment account
• Cash-out services; enabling cash withdrawals from a payment account
• Retail credit / debit digital payment transactions
• Government credit / debit digital payment transactions
• Peer-to-peer digital payment transactions
• Money remittances
What will be the impact?
The introduction of this regulation will be advantageous to different stakeholders in the market including the consumers, merchants, and PSP vendors.
A direct impact of the use of digital money and stored value will be a reduction in the dependency on traditional cards and cash based methods to complete e-commerce transactions. This is enhanced by the ease of execution, which is a major factor in this fast paced market.
Customers also demand more transparency on payment execution, including charge validation and acceptance before executing a payment. PSPs can provide value add here, making these types of payments more widely accepted due to the regulation provided through licensing.
Allowing the PSP to offer payments through a wide range of services via different channels will also drive a reduction in costs due to increased competition in the payments market.
For retail merchants and corporates, PSPs will provide alternatives to payment systems such as e-wallets and electronic payment accounts, creating bank-agnostic access to payments. This should result in lower payment processing costs.
What’s more, services will be formed based on relationships with specific PSPs for the mutual benefit of both parties, keeping the client at the centre of this ecosystem and the banks in the background as facilitators.
The initiative will also improve accessibility to payment services to unbanked customers and build on a digital wallet offering to service the latter, increasing the customer base.
For PSP vendors, there are clear opportunities in the UAE market to benefit from this regulation and leverage on the same to acquire customer trust through innovative approaches.
Some of the benefits that can be observed are:
• Market entry facilitation. Since the government will regulate PSPs, consumers can be more and more confident in using this service
• Regulated competition standards in terms of charging and limits, where the initiative clearly defines the type of fees and captures all the limits possible
• Open up markets for giants like Apple Pay, AndroidPay and PayPal, which currently do not support the UAE’s dirham currency.
How will traditional banking be affected?
With the implementation of such an initiative, and the allowance of PSPs to provide the instruments for payments, there is a clear impact on traditional banking.
Loss of fees from traditional card-based transactions: Entry FinTech companies are expected to squeeze the margins further in business such as payments, money transfer and remittance. This will provide merchants with an immediate incentive to advocate the use of a PSP service over a traditional card payment, especially as lenience and fast transactions can be performed through the use of mobiles and applications.
As already mentioned, the regulation also provides strong incentives for consumers to move away from card based e-commerce transactions due to transparency, proper control, and the support of the Central Bank.
Loss of customer ‘ownership’ and insight: With the opening-up of access to payment initiation via PSPs, banks are at risk of losing direct relationships with the customer and becoming a utility-type service used by new service providers. Customers can exercise their ability to use multiple digital banking products provided by different financial and non-financial institutions therefore creating an ‘atomisation’ of banking services.
No credit cards or debit cards in scope: The new regulation clearly distinguishes between transactions originated from credit and debit cards, keeping out those wallets dependent on these means of payment. This exclusion will clearly impact initiatives that are already in the market. For example, Emirates NBD’s digital wallet enables transactions using NFC (near field communication) in smart phones, but the underlying transaction is still routed via the VISA card network.
What should banks do?
Banks need to address digital movement and ensure they embrace the new wave of PSPs in the market. There are many reasons for them to start collaborating with PSPs and FinTech players, including:
• Engaging digitally savvy customers where they can enrich their offering on specific target customers, leveraging on partnerships with PSPs.
• Expanding into some previously unprofitable customer segments by servicing non-core customer segments.
• Opening up new distribution opportunities, leveraging on alternative channels to offer core banking products.
• Improving operating model efficiency related to the adoption of innovative solutions to increase efficiency.
More UAE banks are establishing partnerships with FinTech start-ups, which can drive digital payment innovation with an agile mind-set. This regulation will form the backbone of this partnership. Among these partnerships are:
DIFC Hive — the FinTech accelerator: A joint FinTech programme with the DIFC and Accenture which channels Dubai’s ambitions to be a leader in the global FinTech industry.
Abu Dhabi Islamic Bank (ADIB) has partnered with Fidor Bank to launch the region’s first ‘community-based digital bank’.
Emirates NBD has launched a new innovation lab with a wide-ranging brief, from the cultivation of user-friendly, client-facing design and services through to back office re-engineering. The bank also holds an open bank project for FinTech Hackathon.
Emirates Islamic bank ran an ‘appathon’ — or app development competition — to allow students and professionals the chance to create the next banking app.
Conclusion
The new regulation is still at an early stage in the UAE, and collaboration between payment players and banks is essential for this initiative to provide a seamless and efficient service to citizens.
There is a growing need for digital money and stored value adoption, which is driving innovation, quality of service, and efficiency. FinTech is generating opportunities for banks, investors and start-up companies around the world. However, this also creates risk for central banks and financial institutions.
While the need exists for PSP to leverage on the means of digital money and deliver effective, easy transactions, the main purpose and scope of these services is the ability to address the four most important selection criteria: Quality of service, public interest, viable value proposition for all parties and security and control.
There is also the added element of giants such as Alibaba, Apple Pay, PayPal, Android Play and others potentially entering the market. If this is the case, there will likely be a huge impact on the UAE’s emerging PSPs.
Oliver Reppel is managing director for financial services Middle East, and Naim Alame is financial services manager at Accenture.
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