The UAE, Bahrain and Saudi Arabia see emerging technology such as blockchain, cryptocurrencies, fintech and mobile payments as key to developing smart digital economies. Robin Arnfield writes.
In 2014, the UAE government launched the Smart Dubai initiative in order to transform Dubai, the UAE’s largest city, into the world’s smartest city.
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By GlobalDataDigital payment systems and e-government are a key area of focus in the UAE, with Dubai committed to becoming the ‘first blockchain city’ for digital payments and document delivery.
Sahana Arun Kumar, MD at Amarante Consulting, which specialises in digital finance for emerging markets, says the UAE is really pushing e-commerce, digital ID and cryptocurrencies. “However, the region has been cash-based historically,” she tells EPI.
The UAE’s large youth demographic and 173% mobile penetration rate are key drivers for mobile payments, and position the UAE at the forefront of the Gulf region’s digital transformation. However, despite 92% of the UAE population using the internet and almost 65% using mobile broadband internet, 80% of UAE retail spending is cash-based, and credit card penetration remains low.
Initiatives
Dubai has announced several digital payments initiatives recently. In May 2019, Dubai’s Department of Finance, in collaboration with Smart Dubai and tech firm emaratech, launched a digital wallet for paying government and nongovernment service fees.
The Noqodi digital wallet enables individual and corporate customers to pay fees through Dubai Pay, the government developed digital payments platform, instead of using cheques and bank transfers.
Customers can add funds to Noqodi accounts from accounts at local banks such as Mashreq Bank, Emirates NBD, Emirates Islamic Bank, and Abu Dhabi Commercial Bank, as well as via a number of foreign exchange houses.
In 2017, emCredit, Dubai’s official credit bureau, which operates as a subsidiary of the Dubai Government’s Department of Economic Development, created the country’s first official blockchain-based cryptocurrency, emCash, in partnership with UK-based Object Tech Group.
emCash is a stable, encrypted version of the UAE dirham, and will enable UAE residents to pay for government and non-government services in real time, without going through intermediaries and settlement systems, using emPay mobile wallets.
Pundi X
In October 2018, Singapore-based fintech Pundi X announced a partnership with emCredit to enable blockchain-based payments at the POS and remotely for retail purchases, utility bills, government services and school fees. The initiative includes UAEbased Ebooc Fintech and Loyalty Labs as a partner, and will utilise Pundi X’s XPOS blockchain-based wireless POS terminals, along with Ebooc’s NexGen blockchain software and loyalty solution.
In August 2018, Pundi X signed an agreement with Ebooc to develop digital payment gateway services for governments, financial institutions and major corporates in the Gulf and Middle East, as well as blockchain-based customer loyalty programmes and NFC-enabled contactless payment options.
Pundi X and Ebooc said their technology has the potential to transform VAT collection for governments in the Gulf and Middle East, as blockchain technology allows for instant computation and collection of the recently introduced VAT in the region.
XPOS terminals enable merchants to accept, buy and sell cryptocurrencies at the POS. The devices are open-platform and cryptocurrency-neutral, allowing transactions in native tokens as well as cryptocurrencies such as Bitcoin, Binance Coin (BNB) and Ethereum. Merchants also have the option to receive settlement in fiat money.
Integrated with its XPOS terminals, Pundi X offers its XWallet cryptocurrency digital wallet and associated XPass cards, which are available in virtual and contactless physical forms. According to Pundi X, XPOS terminals enable stores to accept payments in blockchain-based currencies, while XPass contactless cards can be tapped at an XPOS terminal to top up the associated digital currency wallet or make an instant payment to a merchant.
“Our XPOS roll-out in Dubai will be run in conjunction with our local distributors, Ebooc Fintech and Loyalty Labs, for deployment via emCredit,” a Pundi X spokesperson tells EPI.
“The devices will be used for a range of functions available in government shopfronts connected to emCredit, ranging from paying for utilities, school fees and bills. Ebooc, which is our official distribution partner in the region, is looking at potential merchant expansion and offerings. Our XPOS terminals have been shipped to merchants in countries across Asia, Latin America and Europe.”
In April 2019, Pundi X and South African digital asset exchange DoshEx announced a strategic partnership to deploy XPOS terminals and Xpass cards at selected retail locations in South Africa. Initially, DoshEx and Pundi X will roll out 5,000 Xpass cards for local early adopters.
“The South African XPOS devices will be enabled with Bitcoin, Ethereum, BNB and [Pundi X token] NPXS for the time being, with the plan to list more cryptocurrencies as adoption and use increases,” DoshEx CEO Alex de Bruyn tells EPI.
“We do have plans to incorporate a digital version of the rand over time. Cryptocurrencies in South Africa aren’t recognised as legal tender, and for the time being don’t need regulatory approval for use and exchange.”
The Pundi X spokesperson says the purpose of using the blockchain and cryptocurrencies for payments is to facilitate financial inclusion. “We’re making our XPOS smart POS device competitive to other terminals in the market,” she says. “The retail price is $300 with no monthly charges.”
In April 2019, the UAE Telecommunications Regulatory Authority (TRA) issued the Telecom Equipment Registration Certificate required for Pundi X to roll out XPOS terminals across the UAE. “The next phase after our device certification will be the integration process,” says the Pundi X spokesperson. “Both Ebooc and Pundi X will need some time to complete this.”
In May 2019, Pundi X announced that its XPOS terminals had received Conformité Européenne (CE) certification in the EU, along with approval from the FCC in the US and South Korea’s KC.
In a news release, Ebooc said that, following the TRA certification, it will begin porting NexGen software onto XPOS to enable residents to make blockchain-based POS payments across several sectors in Dubai such as retail, consumer services and government.
“People will be able to pay utility bills, school fees, and their daily needs through state-of-the art blockchain POS equipment, using multiple digital currencies and assets,” said Abdalla Al Shamsi, Ebooc’s co-founder, in a statement.
“In Dubai, Pundi X and Ebooc will be deploying XPOS terminals and Xpass cards to make blockchain-based payment available to everyone in the city.”
The Latency Issue
Independent payments industry analyst Francesco Burelli tells EPI that the big challenge for blockchain payments is latency.
“Depending on the protocol, you have different types of algorithm that are very difficult and cumbersome to compute, as you pile more and more transactions on top of the blockchain,” Burelli explains.
“Smartphones are very powerful, but they have limitations in terms of memory. So, if you have to use the cloud for transactions, you need to have sufficient bandwidth for validating smartphones as thin clients interacting with your payment application in the cloud. How many transactions can you pile up before you reach full capacity and your blockchain processing engine slows down?”
Cross-border currency
In January 2019, the Saudi Arabian Monetary Authority (SAMA) and the UAE Central Bank announced that they are developing a joint digital currency, Aber.
The central banks said in a statement that one objective of launching the Aber project is for financial settlements between the two countries through blockchain and distributed ledger technologies. Initially, they are testing the digital currency with a limited number of banks in Saudi Arabia and the UAE.
Use of the Aber system as an additional reserve system for domestic central payments settlement in the event of any disruption will also be assessed. Economic and legal requirements for future uses will be evaluated once the technical issues are addressed, the central banks said.
Real-time payments
In April 2019, SAMA launched an ISO 20022-based real-time payments system in Saudi Arabia using technology developed by Vocalink, which partnered with central bank subsidiary Saudi Payments.
The platform will support instant account-to- account payments between financial institutions, businesses and consumers. Consumers will be able to transfer funds to each other via their smartphones, without needing to know the recipient’s bank account details.
The real-time system will also support e-invoicing, billing, real-time payment acknowledgements and bulk payments with the payments platform.
Deployment of the real-time payments system is part of Saudi Payments’ commitment to play a key role in transforming Saudi Arabia into a cashless society, says Saudi Payments MD Ziad Bin Bandar Al-Yousef.
According to GlobalData research, cash is the preferred method for consumer payments in Saudi Arabia, accounting for over 90% of the country’s total transaction volume.
While high-value transactions are shifting to electronic platforms, most low-value transactions are cash-based. Although use of payment cards – primarily debit – is gradually rising, they are mostly used to withdraw cash rather than make payments. SAMA has taken a number of initiatives to encourage electronic payments, including establishing the Mada network, which connect all the country’s ATMs and POS terminals to a central payment switch, routing transactions between merchants and card issuers.
In November 2016, SAMA launched the Mada Atheer contactless payment service, allowing cardholders to make low-value contactless payments at POS terminals. Last year, both Visa and Mastercard worked with SAMA to launch the Android-based Mada Pay mobile wallet in Saudi Arabia, which enables users to make payments at NFC-enabled POS terminals.
Bahrain
Bahrain wants to develop an advanced financial services ecosystem that will attract foreign fintechs to the tiny country, and use it as a base for expansion across the Gulf region.
In December 2018, the Central Bank of Bahrain (CBB) introduced a regulatory framework for Open Banking; the deadline for Bahraini banks to comply is 30 June 2019.
In 2017, the CBB launched an incubator style sandbox licensing programme, which includes cryptocurrency exchange platforms and companies using blockchain. Around 35 companies are reported to be participating in the regulatory sandbox.
In February 2019, the CBB invited companies wishing to test financial products, services or business models in more than one jurisdiction to register with the Bahrain regulatory sandbox. The initiative is part of the Global Financial Innovation Network, a cross-border regulatory sandbox for firms testing cross-border financial services. In February 2019, the CBB issued final rules on activities relevant to cryptocurrencies and crypto-asset services, covering areas such as licensing, governance, minimum capital, anti-money laundering and counter-terrorist finance, and cybersecurity.
“We will continue to enhance our regulatory framework in order to keep pace with the innovations taking place in the major financial centres around the globe,” says Khalid Hamad, the central bank’s executive director of banking supervision.
“The CBB’s introduction of the rules relating to crypto-assets is in line with its goal to develop comprehensive rules for the fintech ecosystem supporting Bahrain’s position as a leading financial hub in the Middle East and North Africa region.”
For companies licensed by the CBB as crypto-asset exchanges, the regulatory framework contains rules relevant to order matching, pre- and post-trade transparency, measures to avoid market manipulation and market abuse, and conflicts of interest.
The CBB rules specify a need for enhanced due diligence when onboarding new clients, and requirements that no encrypted safe custody accounts or wallets are maintained that cannot be retrieved.
