Cashless economy: How adoption of digital payments is on the rise

No longer the domain of the tech savvy and financially literate, digital payments are permeating every facet of society, unlocking new opportunities for small- and medium-enterprises (SMEs) and entrepreneurs to expand their markets in previously unimaginable ways.

Covid-19 has played a major role in accelerating the adoption of digital payments in the Middle East, as lockdowns and movement restrictions encouraged consumers to switch to cashless payment alternatives.

Despite this, the level of adoption continues to vary across the region. For instance, in the UAE, digital payments accounted for approximately 23 per cent of total transactions in 2020, whilst in Saudi Arabia, the Gulf Cooperation Council’s (GCC) biggest economy and one of the most populous, digital payment participation was only 18 per cent.

The discrepancy highlights the scale of opportunity that currently exists in the region, particularly when compared to the US or some European countries where digital payments participation is over 80 per cent. Indeed, Saudi Arabia’s leadership has recognised this untapped potential and has made the accelerated adoption of digital payments a key priority in the Saudi Arabia’s Vision 2030.

The UAE leads the region 
Historically, the UAE has led the region in digital payments. With a supportive government and regulatory framework, the Dubai government has established a Cashless Dubai Working Group to create an action plan to shift all payment transactions in Dubai to secure and easy-to-use cashless platforms across all sectors.

More recently, Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, announced that the UAE Cabinet had adopted an agreement to link the payment systems of the GCC, a move that will further integrate the region and play a key role in expanding the already significant multilateral trade within the region.

We ourselves have seen the tremendous rate of digital payment adoption across the UAE. According to consultants McKinsey & Co., the
number of consumer digital payments transactions in the UAE grew at an annual rate of more than 9 per cent between 2014 and 2019, compared with Europe’s average annual growth of 4 per cent to 5 per cent. We have seen even faster growth, with a 44 per cent increase in digital payment volumes from SMEs during 2022.

The positive impact of this adoption is clear. Digital payments have and continue to enhance efficiency across the public and private sector by providing the population easy access to reliable, safe and affordable payments systems that are convenient to use and promote financial inclusion.

SMEs adoption vital to achieving a cashless economy 
The UAE’s business friendly regime with easy licensing and a supportive regulatory framework has attracted entrepreneurs from all around the world to set up businesses in the country.

As a result, SMEs account for 95 per cent of all businesses in the UAE, representing a major stakeholder group in the move to a cashless economy. Driven by increasing consumer demand and greater understanding of the benefits of going digital, digital payment adoption in the UAE isn’t limited to large enterprises.

A global survey recently conducted by payments firm Visa, highlighted that 71 per cent of SMEs surveyed in the UAE, against 59 per cent globally, indicated being either cashless or planning to become cashless by 2024. This is backed up by our own data that shows SME transactions now represent 25 per cent of our total transactions in the UAE.

E-commerce represents a significant avenue through which the adoption of digital payments can expand growth opportunities and unlock new markets for SMEs.

Our data revealed a 44 per cent increase in combined online and offline digital payment volumes for SMEs during 2022. If we were to just consider online payments, the figure would be closer to 75 per cent. This highlights an acceleration in the adoption of online payments by SMEs as they realise and capitalise on the growth opportunities that online channels provide.

Unlocking potential in Saudi Arabia 
Recognising the economic benefits of digital payments, the Saudi government is targeting digital payment participation of 70 per cent as part of Vision 2030, up from levels of approximately 18 per cent in 2020.

Strong progress has already been made towards reaching these goals, with McKinsey & Co., noting that Saudi Arabia saw astronomical growth in card payments of over 70 per cent between February 2019 and January 2020. Not to be outdone, digital point-of-sale (POS) transactions in the kingdom doubled in the year to January 2021.

Benefits of digital payments 
The transition to a cashless society brings a myriad of other benefits including increased convenience for consumers through the  acceptance of multiple payment methods including mobile wallets. Beyond the sheer convenience factor, which became all the more obvious during the Covid-19 pandemic when access to physical cash was partially restricted due to health and safety concerns, having an alternative to carrying physical cash also has a significant impact on personal security and safety.

Likewise, going digital has the potential to bring substantial cost savings for merchants and businesses alike by reducing the complexity of their cash management procedures as well as reducing risk of misappropriation.

Digital payments form the foundation of the global financial system. Increasing access unlocks a plethora of benefits that come from being connected to the system. Merchants gain access to new forms of funding to grow their business and finance their working capital requirements.

Consumers also gain access to innovative services such as buy-now-pay-later platforms, enabling them to manage finances by spreading out the payments of goods and services.

Businesses adopting digital payments also gain an edge through access to live real time data. This allows them to identify emerging patterns and trends and equips merchants to use data driven insights to drive strategic planning and decision-making.

On a larger scale, the wealth of data created from digital payments enables governments to create more reliable economic forecasts, allowing for more effective policy setting. A cashless society, that just a few years ago seemed like an ambitious dream, is fast becoming a reality.

Nandan Mer is the group CEO of Network International