The UAE boasts some of the highest internet, credit card and e-commerce penetration rates in the MENA region, making it ideal for online shopping. However, payment systems in the country are not yet at the same level of sophistication as more developed international retail markets. While credit transfers are increasingly used for salary and high-value payments, approximately 50% of UAE residents have bank accounts, meaning that cash is still the dominant medium for retail transactions, according to online services company Pacnet.

Ideal Market 

The UAE has 5m credit card users, giving it the second-highest per capita rate of credit card usage in the GCC at 89%, according to data collected by Payfort, a third-party payment gateway in the UAE. However, credit and debit card transactions account for a relatively small share of retail transactions, and 24% of credit card transactions were prepaid. The UAE’s e-commerce penetration rate of 67% is much higher than most MENA countries – the rate is 30% in Kuwait, 25% in Saudi Arabia and 7% in Egypt, which are the three largest e-commerce markets in the region according to Payfort figures – but 75% of online retail transactions were cash-on-delivery, according to Omar Soudodi, the managing director of Payfort.

Part of the reason for slow growth of online credit card transactions and more sophisticated wireless cash transfer systems is a lack of capacity among UAE merchants. A merchant must have a bank account in order to begin processing payments online and a payment processing service or payment gateway. Currently, only three banks in the UAE are authorised by the Central Bank of the UAE (CBU) to process credit card transactions: Emirates National Bank of Dubai (Emirates NBD), Mashreq Bank and National Bank of Abu Dhabi.

In December 2010 Dubai-based private equity firm Abraaj Capital bought a 49% stake in Emirates NBD’s credit-card processing unit, Network International, for $545m, according to Bloomberg. At the time of the acquisition, Network International served about 70 banks and financial institutions in the MENA region, and 17,000 individual merchants and managed one of the most extensive ATM networks in the GCC.

“Banks choosing to build their own payment solutions benefit from a lower monthly rate but a much larger initial investment as opposed to outsourcing this facet of their business,” said Bhairav Trivedi, Network International’s CEO. “What’s more, outsourcing has economies of scale in that you gain the experience of 50 but pay for one service.”

Finding Solutions

 Many banks in the UAE use 3-D Secure to allow customers to make online payments, said Soudodi, but redirecting customers to their bank’s website and asking them security questions is “not the ideal shopping experience” and consequently leads to a higher rate of abandoned purchases than other online payment solutions. Demand from merchants for third-party payment solutions has grown markedly in the past few years, though significant barriers have kept the volume of merchants who process online payments relatively low compared to more developed e-commerce markets. Most significant among these appears to be the cost and difficulty of obtaining a merchant account with a licensed provider. All of the acquiring banks charge one-time or annual set-up fees, which vary based on the volume of transactions, the profile of the seller and other factors.

Currently, the only way for merchants to process online payments without a separate merchant account with a bank is through international gateways like PayPal or Skrill. However, most international payment gateways, including PayPal, do not accept payments from credit cards issued in the UAE, meaning consumers have to establish a PayPal account that processes payments in US dollars, adding an additional layer of conversion fees that merchants must add on to the price of their inventory. However, PayPal announced that it was establishing a branch in the UAE in the first half of 2013 and would soon accept UAE credit card.

Each online credit card transaction is processed by a payment gateway, which offers merchants the option of either transferring buyers to a hosted payment page or customising their own by commissioning the services of a third-party payment gateway. Lately, many merchants appear to be taking the latter route by contracting the services of third-party gateways in addition to or on top of the bundles offered by merchant banks, according to Trivedi.

“Outsourcing payment services is an effective way to gain more information on your customers’ spending habits,” Trivedi told OBG. “While their anonymity is still guaranteed, you can have a broader view of where else your customers are making purchases and adjust your offers accordingly.”

Providing Alternatives

Another hindrance to the growth of wireless payment solutions is the fact that only a few banks offer customers the option of direct debit transfers, Soudodi said.

“I think the introduction of an automatic clearing house system is the most important milestone for the development of e-commerce in the UAE, because we are still a cash society. I would say it would boost the volume of online transactions by 20% in the short term and 50% over the next five years,” he told OBG.

In October 2013 the CBU began the long-awaited limited roll-out of direct debit. Both merchants and banks will still require payment solutions that can handle a direct debit process, but all 23 banks in the UAE will be required to allow customers to withdraw funds from their checking accounts in real time to pay bills electronically. The introduction of direct debit is likely to boost consumption levels in the UAE and drive economic growth, according to ratings agency Moody’s, which did a study on the impact of electronic payments on economic growth in February 2013. Between 2008 and 2012, card penetration added an average of 0.53% to consumption levels in the UAE, compared to an average of 1.4% for all emerging markets surveyed by Moody’s. During this period credit and debit cards contributed an average of 0.31% to the UAE’s GDP. According to Moody’s projections, a 1% increase in credit and debit card volumes between 2008 and 2012 would have boosted GDP in the UAE by 0.025%.

Direct debit will make everyday financial dealings in Dubai significantly easier for bank customers by enabling them to make “regular, automatic payments from their bank accounts towards fixed mortgages, card payments, and personal and car loans”, according to a statement from the CBU made to local paper The National in September 2013.

It is also expected to lead to the decriminalisation of bouncing cheques in the UAE. More than 29m cheques worth about Dh1.17trn ($318.5bn) were written in the UAE in 2012 and nearly 4% of these were either returned or bounced. The direct debit system will drastically reduce the volume of cheques written within a few months of its introduction, the CBU has said, and give banks the option to resolve payment disputes within five working days before involving law enforcement.