Economic Update

E-commerce in Saudi Arabia has received a boost following the launch of the Kingdom’s first foreign digital payments platform, a development that should support the growing number of online shoppers and contribute to government efforts to diversify the economy.

In late February Payfort – a Middle-East-based subsidiary of online retailing giant Amazon – announced that it was the first non-Saudi e-commerce company to obtain an operating licence in the country, building on the firm’s activities in Egypt, Jordan, Lebanon, Qatar and the UAE.

This followed the launch of the $1bn, Saudi-owned e-commerce platform at the end of last year, with both developments reflecting an increase in activity and competition in the sector.

Saudi Arabia is one of the fastest-growing markets in the Middle East for electronic payments, behind only the UAE in terms of size, according to Payfort research. Some $8.3bn in online transactions were recorded last year, representing annual growth of 27%, while the company forecasts activity to more than double to $22bn within four years.

This growth looks set to be supported by improved connectivity. The Kingdom’s internet penetration rate was 76% as of the second quarter of last year, well above the Middle East average of 59%, while the mobile penetration rate stood at 137%, according to a report released by the Saudi Communications and Information Technology Commission (CITC) in March.

A rise in credit card usage should also boost e-commerce expansion. While uptake is still low – Payfort data shows cash-on-delivery to be the preferred payment method of 46% of Saudis, compared to 29% for credit cards – it is expected to increase over the coming years.

E-commerce growth to support diversification plans

In addition to recent developments, investments in the e-commerce market are set to rise under the government’s Vision 2030 strategy and National Transformation Programme (NTP), which both aim to improve communications connectivity and data transmission throughout the country as part of the broader diversification drive.

Upgrading telecoms infrastructure and expanding broadband reach are key objectives of the NTP, further encouraging online payment development, while Vision 2030, the Kingdom’s overarching economic development strategy, sets out goals to improve Saudi Arabia’s ranking on the UN Conference on Trade and Development (UNCTAD) Business-to-Consumer E-commerce Index from 63 to 35 by 2020, and boost its position on the UNCTAD Business-to-Business (B2B) E-commerce Index from 34 to 25 by the same date.

Furthermore, the e-commerce sector should also benefit from government efforts to encourage greater private sector investment, according to Omar Soudodi, managing director of Payfort.

“Recent initiatives to further diversify the Saudi economy and grow hitherto undeveloped economic sectors, such as entertainment and tourism, are likely to help accelerate an already fast-growing digital payments market,” he said.

A survey released by US tech firm Avaya in November found that 34% of Saudis used digital platforms to make hotel reservations, the highest rate in the GCC, while 89% used apps for functions such as bill tracking and obtaining information on tourism sites.

Backing up these figures, the CITC found that 31% of Saudis used online payment methods when booking travel-related services such as flights, tour packages and accommodation, while another 14% used both online and face-to-face platforms to make purchases.

The expansion of online payments is also expected to be a driving force behind the development of the logistics sector, with higher demand for door-to-door delivery services creating new opportunities.

Online systems provide opportunities and challenges to SMEs

While also benefitting from national strategies, the e-commerce industry should play an important role in helping local firms – in particular small and medium-sized enterprises (SMEs) – to internationalise their activities and expand beyond domestic markets, according to Waleed Abalkhail, chairman of B2B e-commerce marketplace TradeKey.

“There is great potential in terms of exporting Saudi products, though to realise this potential both a shift in focus and mindset is needed,” he told OBG. “Converting non-exporters to exporters is essential for increasing the contribution of Saudi Arabia in the global economy, and will also give the local economy more power and strength as well.”

Despite these opportunities, some local SMEs may face challenges as e-commerce uptake grows.

The CITC has identified the slow rate of digitalisation among Saudi SMEs as a hurdle to their growth, with a failure to adopt online practices set to expose companies to challenges from competitors that benefit from the lower overheads associated with e-commerce.