MENA Payments Modernization: catching up and forging ahead

An opinion piece by Vijay Oddiraju, CEO and Co-Founder of Volante Technologies

Payments modernization has become a crucial component of the digital transformation trend sweeping the banking world – and there are rich rewards for the MENA region, which is not just catching up, but forging ahead.

It is easy to see why the banking industry in the region is so keen to transform this space. Payments revenue in the Middle East and Africa stood at USD$60 billion in 2020 and is forecast to reach USD$84 billion by 2025, according to recent research.

Yet those working in the financial services industry remain aware that there is still a long way for this market to grow. Only a third of retail transactions are conducted electronically in the Middle East according to a 2021 McKinsey report, due in large part to underdeveloped digital-payments infrastructure and services, along with other challenges such as underbanked consumer and merchant segments, and a cultural bias towards cash.

Fortunately, modernization as a way to address these challenges is already upon us, with the financial services industry in the MENA region accelerating its journey towards instant payments. Banks are aware that they need to develop faster and more sophisticated technology platforms to comply with regulations and meet customer demands.

The biggest banks in the region have to compete not only with each other in their market but also with global banks and financial institutions. Even in highly regulated environments there is that competition from above, below and the sides. That competition is always ready to take customers from them by providing faster, better-priced and more tailored services.

The days of a consumer or business customer maintaining long term banking relationships are coming to an end. Thanks to increased choice, loyalty must now be earned with better features such as real-time payments, faster onboarding for their corporate business or direct connectivity from the business’ treasury system to the bank.

On top of this there are regulatory pressures and a hierarchy with compliance requirements that come from central banks along with global bodies such as the Basel Committee and the IMF. Compliance is a cost uniquely imposed on banks and financial institutions, and not on fintechs.

Stiff competition home and abroad

Banks face a complex environment where they must move faster, be more competitive, and run processes more efficiently in order to deliver compelling and distinctive customer experiences.

There are two parts to achieving this. One is transforming the business to make it more agile and entrepreneurial, and the other is the fundamental challenge of transforming bank technology in order to support the needs of their business.

The vast majority of banks are living with legacy technology which has been in use for up to 30 years in some cases. Whether it’s a payments system, a lending system or a compliance system, if it was not designed correctly or was an older system that they just happened to implement  a couple of years ago, it is in effect a legacy system.

What used to happen previously was that a bank would go to market and buy a payments product, a lending product and put the products together. But in order to gain agility, they need to think not about assembling products but instead about assembling services.

The solution is to transform this into something much more agile and adaptable. Payments modernization is an essential component of digital transformation, and microservices are an important part of this. They offer the ability to take services either created by the bank or from one or more providers and orchestrate them into a fabric that is designed for the bank and really provides a unique set of services that nobody else has.

On a technical level that means buying platforms that are microservices based so that they no longer need to rely on legacy systems.

They must be API-enabled to offer the smoothest customer experience possible. API is the acronym for Application Programming Interface, which is a software intermediary that allows two applications to talk to each other.

A good non-banking example of the power of APIs is Uber. The experience of Uber connecting with the Google Maps API that tells the Uber app where the customer is and then takes a payment is all down to an orchestrated customer experience driven by APIs.

Going hand-in-hand with APIs is low-code. This is a software development approach that requires little to no coding to build applications because it uses a graphical interface instead. Low-code is the secret sauce of payments modernization, because it allows even banks with small IT teams to reap the benefits of payments modernization without being locked into any one vendor’s roadmap.

ISO 20022 transformation

In financial services, particularly payments, the lingua franca of information exchange is increasingly ISO 20022, and that is a fundamental requirement for modern payment processes.

Across MENA, and especially in the United Arab Emirates, ISO 20022 transformation is critical. All banks are looking to find a way to comply with the standard, and after trying a tactical approach they want to know what is sustainable, how they can have a centralized payments solution which can provide them with a business advantage yet also resolve the problem today.

Banks, understandably focused on what makes money for them, often see ISO 20022 as a necessary evil because they must comply with it, but some are now realizing that there are data-insight opportunities here, along with the ability to serve their customers better.

Instant payments

There are already clear signs of major progress towards payments modernization in MENA. CIB Egypt, the largest commercial bank in North Africa, became the first bank in the country to embark upon that payments transformation journey when we partnered with them in October 2021.

Saudi Arabia is leading the way in the region, as part of its Vision 2030, with an ambitious target in the financial sector development to achieve 70% non-cash transactions by 2030. Volante was responsible for reaching the important milestone of providing the first ever instant payments for both sending and receiving banks in the country, with an agile low-code approach.

The Central Bank of the UAE has also recently announced its National Payment Systems Strategy. The first significant milestone will be the National Instant Payment Platform which will allow real-time funds transfers 24 hours a day. For initiatives like this to succeed, as evidenced by similar programs in Saudi Arabia, the US, and Europe, central governments and financial institutions must collaborate with technology partners with global expertise in payments modernization, particularly instant payments. Another key factor is accommodating the widest range of deployment options, from on-premise to private cloud and PaaS (Payment as a service), to optimize onboarding and compliance and speed delivery of new instant payments customer services.

Cloud is the future

There is now a race towards becoming real time 24/7. Legacy systems were designed around bankers’ working hours, which made little sense at the time and even less sense in 2022. This meant that they were switched off at night and money was not moved at weekend.

This is set to change across MENA. The future is to take payments into the cloud. That is how we can pull all these elements together and achieve efficiency and scalability.

One strategy some institutions have taken is just to take an older system and put it in the cloud, so it thinks it is running on a hardware system. But that does not work because it does not meet any of the other criteria: it is not real time, not microservices enabled, and it still does not handle ISO 20022.

Banks in the Middle East are at varying points in their journey towards acceptance of cloud, partly because there are reasonable regulatory constraints on where data can live and where customer assets can live – unlike in Europe and the US where regulators have approved much of this already.

But cloud, powered by low-code, is the trend for the future. What banks in the MENA region need to focus on now is making sure they are ready with the right features: microservices enabled, highly configurable, real time and API enabled.

If they get that right they will naturally build an infrastructure which can be elegantly migrated to the cloud over time depending upon requirements, providing at last a globally competitive customer experience.