MENA’s Online Payments Puzzle

A lot of consumers in our region would like to spend money online. So what’s holding them back?

By Khaldoon Tabaza

How to implement online payment systems that most people are willing and able to use remains a big hindrance to the growth of electronic commerce in our part of the world. In many cases, it’s made both investors and founders wary about venturing into digital businesses, and prevented many consumers from enjoying their benefits.

Studies have shown that roughly half of the people living in MENA have some form of payment card. The amount increases significantly if you apply it to the core online markets of the Gulf, and even more if you only consider the segment of Internet users. Credit card holders in the region are happy to use cards as a payment method since yearly payment cards transaction per capita stands at $54 in Saudi Arabia, making it higher than many emerging markets such as Brazil, Turkey, Russia, and even Germany. Furthermore, MENA’s cumulative annual growth rate in card transactions is forecasted to be 15 percent between 2011 and 2016, which makes it the highest worldwide, and on par with Asia Pacific.

With such encouraging indicators, why is it that only 20 percent of e-commerce transactions in MENA are carried out with cards while the rest is happening through cash on delivery? The answer lies in the challenges and difficulties of receiving and making payments via cards online.

On the receiving side, website owners (i.e. online merchants) face difficulties while engaging with payment service providers. In developed and emerging markets, a merchant can set up an account with a service provider in a matter of hours, and the entire process is completed online. Conversely, the process can take months on average in MENA, since payment gateways are usually obligated to collect online merchants’ documents in-person, clear them with the “acquiring bank,” before the merchant can start receiving payments. Payment service providers and merchants need to have local setup and local acquiring banks in every country, which isn’t only complex and time consuming, but also very expensive. The alternative is to use internationally available payment service providers who have found ways around this, but only in return for high fees that make the merchant business unsustainable, not to mention foreign exchange and remittance fees that also need to be factored in.

The good news is that this is changing. Bold entrepreneurs are moving in to build a new generation of payment service providers from scratch, with the MENA region in mind. An example is the newly launched Telr, founded by ex-PayPal executives who saw a great opportunity in providing local payment services in local currencies, local languages, and with a wide network of acquiring banks. Most importantly, Telr uses an in-house payment gateway technology through their merger with Dubai-grown company, Innovate Payments. The latter was founded a few years ago by a group of former World Pay developers who recognized the opportunity in emerging markets. Telr is refreshing in an otherwise frustrating market.

As for the user side, we must rethink the excuse that trust in online payments is the key reason behind the lag in online payment adoption, since 100 percent of payments on international websites like Amazon are done using credit cards, and these websites still make up more than 80 percent of e-commerce transactions in MENA. The challenges here aren’t centered on the user, but the issuing banks of credit cards. Most banks are discouraging clients from using their cards online by excluding online payments by default, and requiring additional procedures and barriers to enable them, such as setting up an activation code, not to mention offering stand-alone online payment cards with their own charges.

Credit cards aren’t the only payment method for online purchases, as innovation in the payment industry never ceases to rest. Mobile wallets, telecom operator billing, online banking-based payments, and new hybrids such as pay before delivery are only a few of the popular payment methods in emerging markets. While some of those may come to the region at some point, many startups in these sectors are being restricted by financial regulations that have failed to keep up with the pace of technology development. Nevertheless, companies such as HyperPay have shown great innovation by being able to aggregate multiple alternative payment methods under one platform, enabling payment methods as well as merchants to scale quickly and reduce the cost and hassle of building individual relationships.

Building a MENA e-commerce industry doesn’t only involve finding new business models, but also building the infrastructure the online economy needs. This includes payments as well as other areas like logistics that all present huge opportunities for founders and investors who are brave and savvy enough to move ahead to create solutions.