Payments modernization is a critical focus for banks and financial institutions globally, driven by the need for faster, more efficient, and secure payment systems, fueled further by the need to meet dynamic customer expectations and competitive product propositions. In the Middle East, known for its dynamic economic landscape, changing customer habits with a fluid population base, and directions from the regulatory authorities towards digitalization, the modernization of payment systems presents both challenges and opportunities.

Current state of payments infrastructure in the Middle East

The Middle East’s payments infrastructure varies significantly across the region, due to its unique geographical and social set-up. Countries like the UAE, Bahrain, and Saudi Arabia lead with substantial investments in real-time payment systems and digital banking initiatives with other countries playing catch up such as the recent launch of new instant payment in Kuwait (WAMD) and Qatar (Farwan), yet the countries face hurdles such lack of interoperability, cloud availability & adoption, and reliance on outdated systems. The global trend shows a decline in ISO 20022 readiness, with only 35% of North American banks and 19% in Europe confident about compliance. This highlights the challenge the Middle East faces in aligning with global standards.  Globally, 75% of banks can launch new payment solutions within three months, demonstrating the industry’s agility and resilience. This is crucial for modernization considering rapid changes in payments domain in recent years. The Middle East also needs to accelerate its efforts to modernize its payment infrastructure to meet global standards and address these challenges effectively. This is again crucial for the Middle East since each country in the region has its own payment ecosystem, built over years resulting in complex systems to manage, and in addition, they need to comply with regional and international cross-border payments including alternative payments offerings. Though legacy payments systems and complex infrastructure might slow the transition, the financial institutions in the region have gained the right momentum toward building a modern payment ecosystem aligned with global trends and regional demands.

Key drivers of payments modernization

Several factors drive payments modernization in the Middle East:

• Regulatory and industry changes: Adoption of global standards like ISO 20022 is critical. Despite lower readiness in some regions, the Middle East is aligning with these standards to enhance cross-border payment efficiency. Furthermore, the regulators in the region are continuously driving innovation and pushing for newer technologies backed by exceptional leadership.
• Customer demand: The demand for instant, seamless transactions is growing, especially among the tech-savvy younger generation and diverse population mix coming from countries with strong real-time payments. Hence, customer expectations are high, and they are looking for similar and even better payment services, interoperability across payment types, and ease of making payments.
• Cross-border payments: The region’s strategic location and large expat population necessitate efficient cross-border payment systems. With 90% of global respondents planning to expand real-time cross-border payment networks within the next year, the Middle East must enhance its infrastructure to facilitate smoother international transactions.
• Migration to ISO 20022: In the Middle East most of the national payment infrastructures are based on SWIFT MT formats. With regulators adopting ISO20022 for regional payments, it becomes imperative to move to new ISO 20022-compliant payment systems.

Technological innovations and deployment strategies

Technological advancements are central to the payment’s modernization efforts in the Middle East:

• APIs and open banking: Open banking initiatives and API integration are key to fostering innovation and enhancing customer experience. The Big Survey 2024 report highlights the global confidence in using open banking and APIs, which the Middle East can leverage to build a more competitive financial ecosystem.
• Cloud-based solutions: The adoption of cloud-based solutions, including public, private, hybrid, and multi-cloud environments, is on the rise. This flexibility is crucial for Middle Eastern banks to tailor their solutions while ensuring security and compliance.
• Payments as a Service (PaaS): The preference for PaaS models allows banks to leverage third-party infrastructure, reducing costs and speeding up deployment. Increasingly, PaaS (Payments as a Service) is emerging as a preference supported by the gradual easing of cloud adoption & data residency clauses and investment by cloud service provided towards data center readiness within the country. This model becomes particularly relevant for the Middle East, where banks are increasingly looking to outsource functionalities to enhance efficiency.

Real-time payments: a key focus area

Real-time payments are becoming a central focus for financial institutions worldwide, including in the Middle East. The Middle East is the fastest-growing real-time payments market globally. In 2023, the region experienced year-on-year growth of 33.6% with 855 million real-time payment transactions, projected to grow to 3 billion by 2028, representing a compound annual growth rate (CAGR) of 28.8%.

The deployment infrastructure of payment solutions is more versatile than ever, with solutions spread across public, private, hybrid, and multi-cloud environments. This flexibility allows banks to quickly adapt and implement real-time payment systems. For the Middle East, this agility is crucial to meet the rising demand for instant payments. By integrating real-time payment systems, banks in the Middle East can significantly enhance the efficiency and speed of transactions, addressing a primary customer pain point.

Future outlook and strategic recommendations

The future of payments modernization in the Middle East is promising, with several trends and strategic recommendations emerging:

• Partnerships with fintech companies: Financial institutions should form partnerships with fintech firms, specializing in payments, to leverage innovative solutions.
• Investment in cybersecurity: Robust cybersecurity measures are crucial to protect against increasing digital threats. The report mentions the heightened fraud landscape and the need for system risk mitigation, which is a key driver for payments modernization.
• Customer-centric solutions: Enhancing user experience through customer-centric payment solutions is vital for staying competitive. The report highlights that efficiency and speed of cross-border payments are major pain points for customers globally, including in the Middle East. By focusing on these areas, banks can improve customer satisfaction and loyalty.
• Collaboration: Achieving modernization goals will require collaboration between banks, regulators, technology providers, and other financial institutions. The report shows that banks are increasingly relying on partnerships to enhance their capabilities, with nearly half of the respondents planning to replace one or more systems within the next six months.
• Converging technologies: Payment modernization should not be looked at in isolation but with other emerging technologies together. Open Banking, AI & ML, Cloud Adoption, and real-time analytics are critical components of the Middle East digitalization program. Clubbing this with payments modernization can foster an ecosystem that can deliver benefits across customer satisfaction, profitable product proposition, operation efficiency, and service excellence.

By embracing these strategies and leveraging the latest technological advancements, the Middle East can overcome its challenges and fully realize the benefits of a modernized payment system, driving economic growth and financial inclusion across the region.

For more on payments modernization, read The Big Survey 2024, an annual survey of over 300 senior bankers across the globe.