Middle East Banks Look to Add Value to the Payment Chain

The Middle East payments industry is developing rapidly as customers increasingly use credit and debit cards to pay for their goods and services instead of using cash. An example of this growth is given in the research carried out by the Saudi Arabian Monetary Agency: the number of card transactions per month has increased from just over 8 million in April 2007 to 10.6 million in April 2008.¹ The number of point of sale (POS) terminals in Saudi Arabia has also increased by over 13% during the same time period, from 55,630 terminals to 64,4061. This growth is reflected in other countries within the region as well: the number of POS terminals in the United Arab Emirates (UAE) has grown by over 3000 during the past year.²

Banks and retailers in the region are increasingly looking at ways to build on this growth and continue to increase the use of cards. This includes developing customer confidence in using cards and helping retailers by offering enhanced and innovative services that can be quickly and easily integrated into existing store systems and back office infrastructures.

In the Middle East, banks typically take responsibility for providing the payments infrastructure for their retailers – including both the terminal hardware and the network connectivity back to the bank. The bank will acquire the payment on behalf of the retailer and then settle the funds appropriately. Bank should be seizing opportunities presented by new technology so as to increase the volume of payment transactions that are generated and increase loyalty to their merchant acquisition service.

Electronic Point of Sale Terminals

One of the biggest areas of growth for both the retailer and the acquiring bank is using integrated electronic point of sale (EPOS) terminals. Previously, each bank would provide the retailer with its own PIN entry device connected to a standalone dial-up card payment terminal. When a customer presented their card, the cashier would ring up the purchase on the cash register, then re-key in the total cost of the goods or services being purchased into the card payment terminal. After this, the cashier would hand the terminal over to the customer for them to enter their PIN or check their signature as applicable. The device would then dial-up the bank to authorise the transaction and produce a second paper receipt for the cardholder to keep. This all took valuable time and queues would build up in-store.

Using an integrated EPOS terminal cuts this process down considerably, producing financial savings and offering many operational improvements. From a hardware perspective, only a PIN pad needs to be supplied, reducing the number of devices on the counter and the cost of hardware supply. Fast IP-based communication lines can be used, which reduce transaction times and eliminate per transaction communication costs. Receipts can be printed on the EPOS printer, which again makes for one less device, less paper rolls to stock and the option to print promotional messages and logos on each voucher. Fraud and errors are also reduced because of the single entry or transaction amounts. An integrated EPOS system also makes it easier to introduce new value-added services such as mobile phone top-up or loyalty transactions. For the consumer, this additional speed of processing payments makes paying by card just as convenient as cash.

Banks in the Middle East are also looking at supporting new technologies and channels at the POS, such as contactless cards and near field communications-enabled mobile phones. They are continuing to seize the advantages offered by new technologies and being innovators. For the retailer, contactless can potentially speed up processing small transaction sizes and improve customer loyalty through improving service. However, it is likely that early adoption will come from specific vertical niches, such as public transport services, quick service restaurants, coffee bars, news outlets and convenience stores, in the short term.

Increasing Pre-paid Card Take-up

Aside from contactless cards, the other big opportunity to expand the use of cards is with stored value. While retailers may look to offer gift cards to their customers, banks also see the potential to introduce pre-paid cards. These may either be targeted at consumers with low credit profiles, or who travel frequently. Pre-paid cards can also be used in other ways to provide value to businesses while also increasing transaction volumes. An example of this is salary cards – with a large unbanked population in the Middle East, businesses can still be reliant on paying staff in cash rather than electronically into a bank account. As we know this process can be cumbersome to manage for the organisation, while it also has significant security considerations whenever payments are made.

By replacing cash with salary cards, the business can top-up employee accounts electronically and the employee can access their money by means of a card. The organisation can provide support functions to staff, including directing them to shops where the card is accepted, providing overseas money transfer services or an onsite ATM for withdrawing cash if that is what is required. Because the process is based on cards, the account can be more secure – the employee’s funds can be protected in the event of a card being lost or stolen, while using an ATM means that less security resources will be required. This approach particularly suits organisations that have a large migrant workforce to support, as it reduces costs while also making employees feel more valued.

The second area where the Middle East payments market is rapidly changing is around security – banks and retailers in the region are either going through EMV compliance programmes, or have recently completed their roll-out. The rise of EMV acceptance started in venues where large volumes of international transactions were taken and card payments were most popular – Dubai Duty Free, as an example, was an early adopter, becoming EMV compliant in November 2006. Regionally, EMV take-up has continued to grow both from an acceptance and card issuance perspective, as banks look to encourage cardholders that a chip card is more secure and convenient than cash.

Alongside EMV, there is now a growing awareness of the impact that the Payment Card Industry Data Security Standard (PCIDSS) can have on any businesses that accepts or processes card payments. The banks and processors in the Middle East region will have greater responsibility for ensuring that their infrastructures are secure and that cardholder data remains protected at all times. The risk of damage to an organisation’s brand and customer reputation from a security breach is making PCI compliance a higher priority.

As part of this, the forthcoming Payment Application Data Security Standard (PADSS) will make this process a lot easier for these organisations. PADSS applies to software supplier, such as Postilion, who provide commercially available payment processing applications and requires them to make sure that their applications meet the specific requirements of PCIDSS around applications. PADSS replaces the previous Payment Application Best Practise (PABP) standard developed by Visa. PADSS expands on PABP and encompasses all the card schemes, rather than just one.

Shifting some of the responsibility from the bank or processor to the software supplier ensures that best security practice is built in at product design stage. For the bank or processor looking at payment systems, compliance with PADSS should be a pre-requisite, as it has the potential to remove a large volume of their current compliance overheads.

Perhaps more so in the Middle East region than in other parts of the world, banks have the ability to quickly introduce new card types, transactions and delivery channels. This means that the region can benefit from faster delivery of new services in the future, as these organisations look to grow the usage of plastic and the volume of card payments. By integrating new technologies and approaches into their payment strategies, banks in the Middle East are positioned to deliver a better quality of service to both their customers and their retail clients.