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    INTERNATIONAL CORPORATE BANKING | MACRO SHIFTS

    Payments evolution in the UAE and Middle East: Rising to real-time

    31 Aug 2023

    With a geography straddling the East and West, the Middle East and Gulf regions have built strong links into both emerging and developed economies. Experiencing the benefits of a wide mix of global best practice, the region has become an interesting space for innovation in the advancement of domestic and regional payment systems.

    31 Aug 2023

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    A global move to real-time

    Immediacy, security and resilience have driven evolution within the international payments ecosystem. Not surprising, then, how real-time (instant fulfilment) payment schemes have evolved across the globe – from the Americas, United Kingdom, Europe, Africa, Asia and Australia.

    Real-time payment systems, though, are not new – Japan introduced the first of its kind in 1973 – but the global acceleration towards instant payment delivery has truly taken hold in the last 15 years.

    The Middle East has been no exception on that journey, with immediate payment systems being introduced across UAE, Saudi Arabia and Bahrain, – as part of the nations’ broader strategy to drive digital adoption and enhance existing payments infrastructures.

    Corporate Treasury and Finance professionals in the region have outlined the need for improvements to payment systems – including greater predictability, integrated connectivity and standardisation – so treasury objectives of visibility, control, automation and optimisation can continue to be developed and enhanced.

    Improving pan-regional cross-border payments

    As an industry of networks, the evolution of payment systems requires a great degree of collaboration across the public and private sectors, supervisory authorities, commercial banks and other market participants. Within the Gulf Co-operation Council (GCC) countries and the wider Middle East there has been significant collaboration between Central Banks and supranational entities (such as the Arab Monetary Fund) to lay the foundation for the implementation of regional payment systems aimed at further integrating the GCC and intra-regional Arab economies. 

    Such is the importance assigned to payment systems, that the Kingdom of Saudi Arabia had made improvements in cross-border payments a priority of its G20 presidency during its tenure between 2019-2020. Accordingly, the Financial Stability Board (FSB) had created a roadmap for improving cross-border payments, which received G20 endorsement in November 2020. 

    The Leaders’ Declaration of the G20 Riyad Summit asked the FSB, in coordination with other international organisations and standard-setting bodies, to monitor the progress, review the roadmap and report annually on its objective to enhance cross-border payments by ensuring inclusivity, transparency and efficiency. This roadmap focuses on areas such as public-private partnerships, co-ordination across different supervisory bodies, payments infrastructure and data quality, which all form an integral part of the rails that make up payments architecture. 

    While the evolution in payment systems continues at pace across the globe, core objectives are becoming evident: to interconnect countries and regions, to adopt best practices, to set standards and to meet consumer expectations. The Middle East regions are no exception, with a focus on real-time capability, resilience and standardisation driving advancements in their payment landscape.
    David Shinkins, Managing Director, Global Head of Cash Management Sales at Barclays

    Currently, payment systems in the GCC and Middle East are fragmented and lack standardisation. Bilaterally agreed correspondent banking frameworks provide the legacy rails upon which a significantly high volume and value of payment flows rely – for example, within the Gulf Cooperation Council countries alone, annual payment flows are in excess of USD 2 trillion made via approximately 2.3 million transactions^. 

    This has necessitated financial regulators, supervisory bodies and regional supranational entities to formulate the design and lead the roadmap for the delivery of pan-regional payment systems to streamline intra-regional payment flows. 

    1. GCC RTGS (Gulf Co-operation Council Real Time Gross Settlement System or Afaq Payment System)

    Led by the six Central Banks of the GCC (Saudi Arabia, UAE, Bahrain, Kuwait, Oman and Qatar) 

    What will it do? This system will provide an overarching regional payment system connecting together the individual domestic RTGS payment systems of each of the six GCC countries. This would enable an efficient delivery of intra-GCC payments in the fiat currencies of the six countries. For example, a Saudi Riyal payment originated in the UAE and destined for a beneficiary in Saudi Arabia would transpire over the domestic UAE and Saudi Arabian payment systems, rather than rely on bilateral correspondent banking frameworks. The Afaq payment system is already live in Saudi Arabia, Kuwait and Bahrain with other countries to join the payment system over time.

    What are the benefits? The GCC RTGS would create standardisation, drive efficiency, bring predictability and reduce costs, as erstwhile cross-border payments would be delivered using domestic payment system architecture. This would bring the experience of a pan-regional cross-border payment closer to that of a domestic payment.

    2. Arab Regional Payment System (known as BUNA)

    Led by the Arab Monetary Fund

    What will it do? The system aims to create a central routing agent to provide a standardised payment experience across the Arab countries. With a common set of operating rules and a standardised SWIFT platform, BUNA would bring together the markets of the GCC, Middle East and North Africa for all intra-regional payments, covering not just the fiat currencies of the Arab countries but also key principally-traded currencies such as the United States Dollar and Euro.

    What are the benefits? Already ‘live’ with 100 participants covering six currencies across the United Arab Emirates Dirhams, Egyptian Pound, United States Dollar, Euro, Jordanian Dinar and Saudi Arabian Riyal, BUNA is looking to augment currencies, countries and commercial bank participation over the near-to-medium term with the aim of providing efficiency and standardisation to intra-regional cross-border payments. In the near future, BUNA aims to further enhance the platform by introducing instant and real-time delivery of pan regional cross-border payments and provide the rails to support other financial market infrastructures.

    These pan-regional payment systems provide an opportunity for corporate treasurers to optimise regional treasury centre models by concentrating receivables and payables across the geographies. Regional payment ecosystems can also help further evolve regional liquidity management practices through cross-border cash concentration, pooling and overlay solutions as corporate treasurers begin to consider their wider cash management structures in the region.

    Global initiatives, such as SWIFT gpi, that bring transparency, visibility and predictability to cross-border payments would further improve payment user experience as regulators in the region look to embed UETR (Unique End-to-end Transaction Reference) within domestic payment systems, allowing an end-to-end tracking of overseas-originated payments that settle over the domestic payment schemes.

    Evolving payment landscape in the UAE

    While improving cross-border payments remains a priority, there is continued focus to enhance domestic payment ecosystems. The UAE Central Bank, for instance, has laid out plans within it’s Financial Infrastructure Transformation (FIT) programme outlining the National Payments Systems Strategy that not only aims to introduce new payment features but also to enhance the existing payments architecture and ensure infrastructure is future-proof as the payments evolution continues. 

    This shift towards digitisation of a traditionally paper-reliant payments market has already made significant strides. In the UAE, cheque truncation (using image-based cheque clearing), Direct Debit, Wages Protection payroll system, 24x7 Immediate Payment System and Payment Gateway tools for online merchants (allowing e-commerce payments via bank accounts) are now fully established as core payment systems. An expanding FinTech ecosystem, traditional banks’ digital focus and an evolving market infrastructure for domestic and pan-regional payments will significantly transform the payments ecosystem within the region.  

    Specifically, a rising FinTech environment, both in Dubai and Abu Dhabi (supported by the Dubai Financial Services Authority and the Abu Dhabi Global Markets), has witnessed a surge in both home grown local companies as well as established internationally recognised payment service providers. Regulatory sandboxes and close proximity to the region’s sovereign wealth funds (as a source of capital to fuel growth) have further helped promote a thriving FinTech ecosystem with increasing digital payment solutions available for corporates and individuals.

    In addition, there has been increased focus around regulations for cross-border payments, stored-value facilities, retail and large value payment systems, management and preservation of data, cybersecurity and resilience. While regulated financial institutions have embedded the digital agenda and have a statutory obligation to ensure adequate controls, safety in money transmission and compliance to international and local standards, corporate treasurers too have been adopting best practices towards the implementation of technology platforms such as ERP and TMS systems, automation of bank account connectivity, data management and reconciliation.

    The evolution of payments ecosystem has also provided corporate treasuries a platform for enhancing accounts payables and receivables, regional liquidity management and bank account administration by bringing standardisation, predictability and automation to cash management practices. 

    With new regional payment schemes emerging and existing rails being enhanced, Corporate Treasurers have a great opportunity to optimise their domestic and regional cash management practices.
    Parikshit Bhattacharya, Head of Cash Management Sales Middle East at Barclays

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