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    INTERNATIONAL CORPORATE BANKING | INNOVATION EDGE

    GCC: New payment system could drive treasury transformation

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    Parikshit Bhattacharya

    28 Mar 2024

    Payments between Gulf Cooperation Council (GCC) countries are about to undergo unprecedented change as the pan-regional Real Time Gross Settlement System (RTGS), known as AFAQ, gains momentum. Parikshit Bhattacharya, Head of Cash Management Middle East, looks at the opportunities for corporates to cut costs, boost efficiency and enhance cash and liquidity management in the GCC.

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    Parikshit Bhattacharya

    28 Mar 2024

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    Ever deeper integration

    The six countries of the GCC – Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Kuwait, Oman and Qatar – are rapidly innovating their economies as they diversify away from hydrocarbons. One notable feature of this evolution is a sharp rise in intra-regional flows: trade between GCC members grew from $58 billion in 2010 to over $143 billion in 2021, for instance.1

    Treasurers at multinationals and regional corporates have welcomed opportunities created by the GCC’s efforts to strengthen economic cooperation among member states and accelerate regional integration through various structural reforms, such as increasing labour mobility and allowing cross-border access to capital markets. But, until recently, one key barrier to greater economic integration remained: efficient payments.

    Despite the growing ties between GCC members – and volumes of more than $2 trillion from 2.3 million transactions2 – payments made by governments, companies or individuals are executed using correspondent banking arrangements, where a bank (or a chain of banks) facilitates the transfer of funds across borders. The use of bilateral correspondent banking frameworks results in a fragmented payments infrastructure, with a variety of standards and limited integration.

    How did AFAQ come about? 

    For a rapidly integrating regional bloc such as the GCC, the use of correspondent banking to process cross-border payments to their most important neighbours increasingly looked like a missed opportunity. In 2016, the GCC Supreme Council, comprised of the heads of state of each country, decided that a new robust pan-regional payment system could grow trade, capital and remittance flows and potentially unlock higher economic growth.

    The governments tasked their central banks with this mission and established the Gulf Payments Company (GPC), which is owned and funded by the GCC’s central banks, to build and develop a system to connect member states’ Real Time Gross Settlement System (RTGS) payment platforms. GPC payment services are provided using the brand Arabian Gulf System for Financial Automated Quick Payment Transfer (AFAQ which means horizon in Arabic).

    The cross-currency AFAQ service went live in December 2021 with Saudi Arabia and Bahrain; Kuwait joined in March 2022 and the UAE in December 2023. Oman and Qatar are expected to join in the future.  

    Driving rationalisation, standardisation and optimisation

    For the region’s corporate treasurers, AFAQ has the potential to deliver compelling benefits, including: 

    • Rationalisation: Most cross-border payments (and collections) can now be executed via a single domestic account, meaning that companies can rationalise their bank accounts, lowering fees. As all payments across the GCC will now be more akin to domestic payments, costs should fall.

       

    • Standardisation: Until now, treasury staff have accessed six different domestic payment systems, using different file formats and methods of connectivity. This is time consuming and cumbersome and increases the risk of error when making payments. With AFAQ, companies can streamline their payment processes, freeing up staff resources and reducing the risk of human error. AFAQ standardises payment cut-off and delivery times and aligns to domestic payment formats. It will also harmonise overseas delivery charges across the region. 

       

    • Optimisation: Treasurers can leverage AFAQ to improve cash management efficiency by establishing a regional hub for payables and collections. Liquidity management can also be streamlined as AFAQ will enhance visibility and control of cash, so funds can be easily moved as required. Afaq could also be used as a spur to broader digitisation and automation initiatives. 

    Momentum is growing 

    With four GCC countries now live with AFAQ, adoption is growing with around 30% of the GCC’s 200 commercial banks are already connected to AFAQ. 

    Corporates will need to update their payment processes, including within their enterprise resource planning (ERP) platform and treasury management system (TMS) to take account of the new pan-regional RTGS. However, there is strong support for Afaq among corporate treasurers across the region and payment volumes on the system are expected to grow in the coming months given the opportunities for treasury transformation.

    1 https://www.qu.edu.qa/static_file/qu/research/Gulf%20Studies/policy%20brief%206.pdf

    2 https://www.omanobserver.om/article/22300/1003/new-gcc-rtgs-system-for-cross-border-payments-to-go-live-by-feb-2020

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    About the expert

    Parikshit Bhattacharya

    Head of Cash Management Sales, Middle East

    Parikshit is Director and Head of Cash Management Sales Middle East at Barclays. Parikshit has over 17 years of transaction banking experience having developed and led several business, client, and product strategies across industry segments. Parikshit leads key payments and cash management industry engagements for Barclays in the UAE and is a member of the Senior Leadership Team of Barclays’ Middle East Corporate Bank division.

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