The future of payments in the Middle East

As cash transactions give way to digital, what changes can the region’s banks and payments providers expect to see in the next few years?

The payments landscape in the Middle East is heading for an inflection point. Despite the region’s digitally savvy population—with smartphone penetration reaching 80 to 90 percent in leading markets—the region has remained heavily dependent on cash. Only about a third of retail transactions are conducted electronically, thanks to factors such as underdeveloped digital-payments infrastructure and services, underbanked consumer and merchant segments, and a cultural bias toward cash. However, new government and regulatory initiatives, coupled with the entry of new local, regional, and global payment providers, are bringing rapid change. Moreover, the COVID-19 pandemic has triggered an acceleration of digital adoption and a flight from cash, as it has in other regions.

To explore the new payments landscape and consider what it means for the future, McKinsey asked payments practitioners operating in the Middle East about the key shifts they expect to see in the next five years. 1 The findings of this research shed light on industry pressures, potentially disruptive forces, changing payment preferences, and the prospects for banks, tech players, telecom companies, fintechs, and others in a rapidly evolving environment.

Digital adoption is accelerating

Even before the pandemic, digital payments were growing rapidly. The number of consumer digital payments transactions in the United Arab Emirates (UAE) grew at an annual rate of more than 9 percent between 2014 and 2019, compared with Europe’s average annual growth of 4 to 5 percent. Even more starkly, Saudi Arabia observed astronomical growth in card payments: over 70 percent between February 2019 and January 2020.

These impressive growth rates have been boosted further by the pandemic. Among the payments practitioners who took part in McKinsey’s survey, more than three-quarters (80 percent) estimated that noncash payments had risen by more than 10 percent across the region as a result of the pandemic, and 43 percent believed that the increase exceeded 20 percent. Data from some countries indicate even higher rates of growth: Saudi Arabia’s digital point-of-sale (POS) transactions doubled in the year to January 2021, for instance.

What’s more, payments practitioners expect the shift to digital to be permanent: in the survey, 90 percent predicted that at least half of new users will stick with digital payments rather than revert to cash later. In addition, more than half of survey respondents said strong growth in noncash payments will continue over the next five years, resulting in a cumulative increase in digital transactions of more than 50 percent above 2020 levels across the region.

Preferences for payment methods are changing

The flight from cash is evident not only in the growth of digital payments but in consumers’ expressed preferences. In a McKinsey consumer survey, 58 percent of Middle East consumers expressed a strong preference for digital payment methods, while only 10 percent strongly preferred cash.

When payments practitioners were asked about consumer payment preferences, 60 percent of those surveyed said they expected pass-through digital wallets (or “e-wallets”) to be the most influential digital payment method (Exhibit 1). Surprisingly, this vote of confidence in e-wallets is higher than in Asia, where the digital-wallet ecosystem is more mature: just 38 percent of Asian respondents to a similar McKinsey survey took the same view. 2

Middle East experts say digital wallets will be the most preferred mode of payments; expectations in Asia are more diverse.
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The two regions also differ in other respects. In the Middle East survey, 53 percent of respondents predicted that contactless cards and pass-through wallets based on contactless/near-field communication will dominate the market, compared with 30 percent of respondents in Asia (Exhibit 2). Conversely, only 27 percent of Middle East respondents see QR codes as the likely winner, as opposed to 54 percent in Asia. While in Asia, bank and nonbank experts seem united in their favorable view of QRs (more than 50 percent), respondents in the Middle East disagree, with less than 10 percent of bank experts favoring QR, versus 40 percent of nonbank experts.

Contactless cards are expected to lead payments methods in the Middle East, with QR codes dominant in Asia.
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While account-based wallets have high penetration in Asia and some European countries, parts of the Middle East are seeing strong growth in cards and card-based wallets. In Saudi Arabia, for example, POS contactless-card transactions have grown by 10 percent per month since the start of the pandemic, and payments via pass-through card-based wallets by 18 percent per month. 3 In time, nascent payment methods relying on QR may take a share of the Middle East market, but in countries where the necessary infrastructure is well developed, growth in cards is likely to continue as digital payments accelerate.

Nonbanks are poised to capture market share

The Middle East payments market has recently expanded to include fintechs, tech companies, and telecom companies alongside incumbent banks—a shift enabled by regulatory changes such as those introduced in Saudi Arabia in late 2019 and the UAE in 2021. When we asked survey respondents which institutions would have the greatest impact on the future of payments, about 40 percent ranked banks or bank-backed wallets number one; another 30 percent selected telecom-company-backed wallets, and 17 percent big-tech companies (Exhibit 3). By contrast, the type of player most often ranked number two was tech companies, at 30 percent, followed by banks (23 percent) and telecom-backed wallets (20 percent). If we take a deeper look at the responses, the majority of respondents who predicted banks and bank-backed wallets would win were from banks (62 percent of respondents). However, when respondents were forced to name their second choice, more than 50 percent of those from banks indicated that big-tech players were best positioned, which further emphasizes the threat of these players.

Just under half of survey respondents think banks will win in consumer digital payments.
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As these findings indicate, payments practitioners in the Middle East regard tech and telecom companies as strong contenders in payments, suggesting they are a threat to incumbent banks. These companies’ broad reach and technological prowess give them a strong foundation for competing in a field where the ability to rapidly develop, tailor, and refine customer propositions confers advantage. By way of example, Saudi Arabia’s STC Pay capitalized on its dominant position in telecoms, with more than 55 percent of mobile subscribers being STC customers, to scale to 4.5 million active customers by November 2020, less than a year after exiting the regulatory sandbox. 4 By digitizing international remittances through its partnership with Western Union, the company has managed to address key customer pain points and win a share of the market.

When survey respondents were asked which partners merchants were likely to work with to establish an e-commerce presence, the top choices were marketplaces and specialist fintechs, with each at 40 percent (Exhibit 4). Banks, local acquirers, and e-wallets trailed far behind, at 7 percent apiece. Interestingly, even banks themselves do not believe they are best suited to win in this arena: more than half of respondents from banks believed e-commerce marketplaces would win, while only 10 percent of those respondents believed the banks themselves were best positioned. This reflects a belief that merchants, particularly small and medium-size enterprises (SMEs), seek solutions that go beyond pure payments. Besides accepting digital payments, marketplaces can help merchants quickly set up their online sales, for instance. However, the high costs of marketplaces—up to 35 percent of revenue—may drive a longer-term shift to fintech solutions that enable merchants to set up and manage their own online presence.

E-commerce marketplaces and specialist fintechs are seen as the best partners for merchants seeking to sell online.
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SME payments and online acquiring are likely to be important battlefields, given the promising growth prospects of online merchant sales in the region. Forty-three percent of survey respondents expect more than half of all small and medium-size merchants to start selling online in the next five years.

However, changes in the environment may be needed to fuel wider adoption of digital payments by merchants. A third of survey respondents (33 percent) said lower merchant discount rates (MDRs) would be the most effective factor in supporting the move to digital payments. In the UAE, for instance, the average MDR of 1.6 percent is high by comparison with those in Europe, where regulations are in place. 5 However, these fees also drive customer adoption of digital payments by funding more generous customer rewards than in other regions, with some credit cards offering as much as 5 percent cash back.

Other industry-level initiatives to support digital payments might include introducing tiered MDRs based on sales volumes and launching alternative payment-processing platforms. Looking beyond pricing, more than a fifth (23 percent) of respondents pointed to the need for financing for merchants, while 20 percent identified ease of use and support, with merchant onboarding as a key factor. In addition, value-added services (such as inventory and cash management) and faster settlement each scored 10 percent of the sample.

Open banking is looming large

Open banking or “open financial data”—a regulatory reform that requires banks to share customers’ financial data (with their consent) with other banks or authorized financial services providers—is under way in several Middle Eastern countries. Bahrain issued open-banking rules in 2018, followed by a framework with guidelines on data sharing and governance in late 2020. Saudi Arabia recently announced its plan to launch open banking in early 2022.

These reforms are expected to have broad ramifications for the payments business. When respondents to the survey were asked what government- or regulator-driven action would be most effective in steering customers to digital payments, 27 percent nominated regulatory approval for open banking, followed by giving customers incentives to shift from cash to digital payments at 20 percent. The next most frequently identified factors were allowing fully digital know-your-customer processes and adopting cash-free transactions between citizens and government—each selected by 17 percent of the sample.

Open banking stands out from the other reforms identified, because it not only enables payments to be digitized but also creates circumstances in which banks can be disintermediated by other players. In fact, 80 percent of survey respondents expected open banking to drive the decoupling of savings account balances and payments capabilities in the future. Under this scenario, consumers would be free to move to payment services providers that offer a great customer experience instead of continuing to rely on banks with less user-friendly payments offerings.

Payment fees continue to come under pressure

In recent years, payment fees have tended to be either flat (like MDRs) or declining (remittance fees). Two-thirds of payments practitioners surveyed say they expect to see declines over the next five years. Thirty-seven percent of respondents predict the expected decline in fees will be up to 10 percent, 13 percent expect a decline of 10 to 20 percent, and 17 percent expect a decline of more than 20 percent.

Globally, MDRs cover a wide range, from 21 basis points in Germany to more than 200 basis points in Mexico and Japan. A decline of 20 percent in the UAE’s MDR, as predicted by some experts, would reduce it to approximately 130 basis points—near the middle of the global range. If rising competition or regulatory changes exert further pressure on fees, as seen in other markets, then banks, payments providers, and networks will need to look for other ways to create value from payments in future.

A connected cross-border ecosystem is emerging

Cross-border payments are important in the Middle East, with two of the world’s three largest remittance corridors located in the UAE and Saudi Arabia. They handled $78 billion in payments in 2020, 6 equating to 7 percent of the GDP of the two nations combined. Two-thirds of survey respondents (67 percent) said bilateral arrangements between countries for real-time settlement and the scaling up of digital money-transfer operators will be key drivers in cross-border transactions over the next five years. Three major initiatives have already been launched: Project Aber, a common digital currency between Saudi Arabia and the UAE; the Buna payment platform supporting multicurrency payments among members of the Arab Monetary Fund; and the AFAQ system connecting the real-time gross settlement (RTGS) systems of the six countries in the Gulf Cooperation Council (GCC).

Other drivers of cross-border transactions that survey respondents identified as important are the creation of regional hubs or trade agreements (57 percent), the offering of cross-border solutions by regional ecosystem players (43 percent), and the adoption of cryptocurrency (10 percent).

Consolidation can be expected

The majority of payments practitioners who took part in the survey predicted some degree of industry consolidation in the next five years. For two-thirds of the sample, integration across the value chain—such as the purchase of merchant acquirers by networks—was the most likely prospect, while 30 percent of respondents predicted consolidation within specific parts of the value chain.

M&A has been a driving force in payments globally for the past decade, and the Middle East could be the next frontier for consolidation among regional providers. One likely area could be payment gateways, as global players seeking a foothold in the market target regional players with local solutions. Such global players may also seek to capture growth opportunities in the Middle East and use it as a stepping-stone to Africa, as already seen in Network International’s acquisition of African e-commerce platform DPO Group.

All players have opportunities for growth

The survey findings outlined have different implications for different participants in the payments industry.

Opportunities for banks

Although banks continue to lead the industry today, 60 percent of survey respondents predicted that nonbank payments providers will win in the future. According to respondents, the most important way to remain relevant in an evolving market, identified by 83 percent, is to digitize customer journeys (Exhibit 5). Following closely, at 73 percent of respondents, is to acquire or invest in fintechs. Other actions banks could consider include launching new products such as e-wallets and building an ecosystem (recommended by 47 percent of respondents), partnering with large ecosystem players or conglomerates (also 47 percent), and carving out the payments business to form a separate entity that can act like a fintech and compete more nimbly (37 percent). In the UAE, First Abu Dhabi Bank has already followed the latter strategy by separating out Magnati as a stand-alone payments business. 7

To win, banks could digitize customer journeys and acquire or invest in fintechs.
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With transaction fees under pressure, another imperative for banks is to reduce costs and find new ways to create value from payments. One option is for a bank to use advanced analytics to mine the information it possess to provide value-added services such as cross-selling and lending, as Square does for merchants in the United States, for example.

As the era of open banking draws near, banks need to quickly formulate their strategy or risk being disintermediated. Banks in Europe and elsewhere have proven that banks can remain net winners in an open-banking ecosystem even as fintechs and other attackers proliferate, as seen in initiatives such as ING’s personal savings app Yolt and Goldman Sachs’s partnership with Apple to launch Apple Card. Success will depend on nurturing an innovative mindset and skills that go beyond banking, as well as on forming effective partnerships with fintechs to harness and scale cutting-edge technologies.

To capture emerging opportunities in the growing merchant digital-payments business, incumbent banks and attackers alike will need to determine which merchant segments to target with specific propositions. Then they must design a thoughtful strategy to reach the targeted segments.

Opportunities for fintechs, telecom companies, and others

For fintechs, telecom companies, and other attackers, more opportunities are opening up for them to capture market share as regulatory changes allow new players to enter the payments business. Whether by introducing payment-services licenses or issuing open-banking regulations, the region’s regulators and governments are looking to attackers to help them achieve ambitious digitization goals, such as Saudi Arabia’s target for 70 percent digital payments by 2030.

The main challenge for attackers will be building trust in their services and designing solutions to address specific pain points in target use cases—peer-to-peer, merchant, or B2B payments—all of which have their own characteristics and needs. Large merchants may seek solutions to accept a wide array of payment wallets and schemes from international travelers, for instance, while small merchants simply seek basic services to accept in-store digital payments. More fundamentally, merchant needs center on moving online and obtaining support from adjacent tools to manage and grow their business. For any payments provider, winning will depend on developing the right value proposition and customer experience to meet the need of each target segment.

Finally, pure payments players must form business models that create value beyond payments transactions alone. Regulations for payments entities restrict players’ activities to payments-related activities, which prevents them from capitalizing on potentially more lucrative financial services revenue streams such as lending. Thus, players will be forced to form strategies and partnerships allowing them to create additional value.


The Middle East is on the cusp of a payments revolution. Its digitization targets are aspirational but within reach. Digital payments will be central to the new normal. The question now is who will win the competition to take customers there.

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