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Payments transformation in the Middle East and Turkey

Payments transformation in the Middle East and Turkey

Payments,
27 April 2021 | 17 min read

The rapid growth of digital payments around the world, in part driven by the COVID-19 pandemic, has created a lasting change in the way that we do business, from central bank to commercial, corporate treasurer and beyond. Stakeholders from across the community in the Middle East and Turkey shared their experiences at a recent SWIFT online event.

The global payments landscape has been undergoing unprecedented changes and digital innovation is radically reshaping the financial services industry. Over the past year, the impact of the COVID-19 pandemic has been a catalyst to further reinforce the shift to digital payments, as well as confirm the vital importance of safe and convenient payments, both domestically and globally. 

In the midst of this radical shift, SWIFT announced its new strategic direction and multi-year plan for instant, frictionless payments. Instant end-to-end account to account payments are the future for the industry, not only at a domestic level but importantly at a global scale. Most countries have developed some form of real-time payment systems, but they're all different and very much focused on the domestic level. To do this at the international level, there needs to be interoperability. That's where SWIFT's new strategy comes in, as Alain Raes explained at the recent online event 'Toward instant, frictionless payments: Focus on Middle East & Turkey'.

"One of the biggest frictions to instant end-to-end account to account payments actually comes from data and standards," Raes explained. "That's where SWIFT's new transaction management platform fits in to our forward looking strategy. The first version of the platform, which will arrive in November 2022, will be about ensuring that all players will be speaking the same standards language, ISO 20022. We're talking about rich data, but almost more importantly we are talking about people using the same data foundation, so that we can start removing frictions and enhance interoperability."

We're talking about rich data, but almost more importantly we are talking about people using the same data foundation, so that we can start removing frictions and enhance interoperability.

Alain Raes, Chief Business Development Officer, SWIFT

Interoperability has also been enabled by gpi instant, a new service that interconnects the SWIFT network and local real-time payment systems, through an integration with banks. 

"There will be an anchor bank or banks in a given country, which receive transactions and integrate with the local real-time market infrastructures, which reach out to all participants of the country," Raes said. "We are currently live in two countries with this - one is in UK with its Faster Payments system, where one bank is live and another is in India with ICICI Bank, which is also connecting the SWIFT network to the NPCI, the real-time payment platform of India. We believe this is one of the ways to go to ensuring full interoperability between all these real-time payment systems, and therefore ensuring timely end-to-end account to account payments."

The future of payments in the Middle East

The runaway pace of change in the world of payments is not just a challenge for SWIFT and commercial banks, but for all in the community that have contact with the payments world. This was reflected in a panel discussion that featured a central banker and a corporate treasurer, two such fellow stakeholders in the ever changing realm of payments.

Hafid Oubrik, Head of Payment Systems at the Central Bank of the UAE made the point that whenever you talk about innovation in payments, you also need to look at the key issue of security and safety that is built in alongside these benefits. 

"In terms of security, we see that the use of DLT and blockchain is one of the areas where payment systems will definitely move to in the future," Oubrik stated. "The SWIFT network has a role to play as well, in terms of gpi as a payments tracking system, as well as the standardisation through ISO 20022, which is very important standard and I'm sure it is going to help interoperability. I would also mention the work done under the G20 presidency of the Kingdom of Saudi Arabia last year, with a cross-border payment system roadmap. This is a very clear and very straightforward roadmap that countries need to start working on."

Oubrik also highlighted the delicate balance between customer demand, innovation and regulation: "Customers now are more demanding. They don't want to use the traditional payment instruments but rather they want to use their smartphone, they want to use their innovative technologies in order to push their payment or to receive their payment," he said. "This has motivated different institutions to look into new and innovative solutions. At the same time, regulators need to facilitate this by putting the regulations in place that support rather than hinder innovation. They need to be able to strike a balance between keeping an eye on consumer protection and, at the same time, enabling and facilitating the innovation happening in this industry."

They need to be able to strike a balance between keeping an eye on consumer protection and, at the same time, enabling and facilitating the innovation happening in this industry.

Hafid Oubrik, Head of Payment Systems, Central Bank of the UAE

For corporate treasurers, the interconnected nature of their business means that their counterparties are often looking for faster payments just as much as the treasurers themselves are.

"It is all about the ecosystem," noted Baris Gokalp, Global Head of Treasury at Şişecam. "My customer is someone's supplier, and I am also a customer - all the ecosystem is running after speed and reliability. As you run after that, you see that SWIFT is the only standard way which works worldwide. When we make a payment from treasury, with gpi we can show the receiver that the payment has been made, this is the gpi UETR that you can follow if you have gpi. Even if my customer doesn't have any knowledge of gpi, they will then go to their bank and ask about it. So knowledge and use of this tool is growing."

That most valuable commodity in the payments world, data, was a key theme throughout the event, and the importance of accurate and timely data was highlighted in this session. 

"A central bank, before designing a system or trying to guide the market towards a certain direction, for example, needs to have enough of the right data in order to make the decision," said Oubrik. "If we don't have enough reliable, standardised and complete data from the industry, this will definitely be an issue for any decisions taken. Of course, data is also very important from an AML [anti-money laundering] perspective. Ensuring that the data is correct is a key requirement to ensure that the ecosystem is well protected, and there is no illicit or suspicious transactions happening on that system."

Ensuring that the data is correct is a key requirement to ensure that the ecosystem is well protected, and there is no illicit or suspicious transactions happening on that system.

Hafid Oubrik, Head of Payment Systems, Central Bank of the UAE

"Standardisation is a very welcome topic for corporates," agreed Gokalp. "That's why we chose SWIFT for bank communication, otherwise each country or each bank has another set of standards for themselves which is very hard."

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MENA's evolving digital payments landscape

The pace of change across MENA was highlighted with perspectives from various countries in the region, including Kuwait and Egypt in a session looking at the future of payments in an ever-evolving digital landscape. 

Mohammed Al Bloushi, Head of Payments, Operations Group at National Bank of Kuwait, noted that the young age of the country's population was a driver for the digitisation of payments.

"60% of the population in Kuwait is below the age of 30," Al Bloushi said. "They're very tech savvy, they like to use their smartphones, they like to use their laptops. Convenience, reliability and speed are very important to them. With commercial banking, however, there is still a lag. At the Bank of Kuwait we are digitising some of our processes, particularly for corporates, but we still have a lot of corporate clients that rely on manual instructions. One of our biggest challenges here in Kuwait is to push our corporate clients towards using our digital channels."

60% of the population in Kuwait is below the age of 30. Convenience, reliability and speed are very important to them. With commercial banking, however, there is still a lag.

Mohammed Al Bloushi, Head of Payments, Operations Group, National Bank of Kuwait

Having the national infrastructure in place to support digital payments channels is important to underpin the move to a cashless society. Al Bloushi provided an update on how this is going in Kuwait:

"The Central Bank of Kuwait is leading a very ambitious National Payments System project, which was kicked off almost three years ago. Unfortunately, COVID-19 meant that the project was put onto the backburner for the time being, but eventually the idea is that move away from cash, to have a cashless environment where you can send a P2P payment depending on your mobile number, depending on your national ID or your email."

Another national payments plan is underway in Egypt, which includes an important thread on financial inclusion. 

"The Central Bank of Egypt started a financial inclusion five-year plan a couple of years ago, and a lot of progress has been made already," commented Mahmoud Fawzy, Head of Global Transaction Banking at CIB. "A lot of interoperable network schemes have been developed, with new cards and new mobile wallets, and more networks, local networks and an international network that have been included in the economy. There is a huge migration that is happening now from cash to a cashless society and a huge migration to digital solutions. There are now almost 15 million mobile wallet holders. Education and customer awareness around digital is increasing. COVID-19 has been a particular driver for customers to go digital."

There is a huge migration that is happening now from cash to a cashless society and a huge migration to digital solutions.

Mahmoud Fawzy, Head of Global Transaction Banking, CIB

In addition to the individual national programmes to digitise payments, the community also heard about a regional initiative that has joined the fray. Buna is a multilateral platform for cross-border payments owned by the Arab Monetary Fund that has gone live in the past year for the Arab world and beyond. 

"As domestic real-time payments have begun operating, customer demand has moved towards having similar experiences in cross-border payments," explained Faisal Hijjawi, Chief Business Development & Strategy Officer at Buna. "If I can send a domestic payment instantly at a very low cost in a very secure fashion, why can't I do the same when making a cross-border payment? Buna is a response to that, taking that domestic near real-time instant experience into the cross border realm. It is giving banks and the region a single gateway where they can - through one single account, one single connectivity, one single contractual relationship - reach hundreds of banks in the region and even beyond. This lets banks offer their customers a similar real-time secure and low cost experience that they are enjoying today at a domestic level."

As domestic real-time payments have begun operating, customer demand has moved towards having similar experiences in cross-border payments

Faisal Hijjawi, Chief Business Development & Strategy Officer, Buna

Several major correspondent banking players have onboarded with Buna. Hijjawi puts this down to their interest in offering similar value in terms of real-time and low cost experience to their own customers.

While there is rightly a mood of excitement about the future of payments, there are still existing challenges to overcome on this journey. Al Bloushi, for example, noted that his bank's corporate clients still like to rely on writing documents and letters, a practice that they are trying to digitize in order to streamline the payments process. In Egypt, one of the main challenges identified by Fawzy is around regulatory and compliance requests. Fawzy noted that in some instances “we have the technology assets that we can rely on, but we cannot activate them due to regulations still not being in place”.

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Orchestrating end-to-end transactions: The new SWIFT platform

Building on the information that Alain Raes had provided regarding SWIFT's new strategy, Tanja Haase, Customer Engagement Lead at SWIFT gave participants at the event a deep dive into what the new platform will look like. Again, the groundwork that gpi made on this journey was not forgotten.

"As the next logical step from gpi, we are going from tracking individual payments and linking them through a transaction reference, to a paradigm where we can look at this transaction in its entirety," Haase explained. "We are moving now as part of the new strategy into a world where we going to be able to have more visibility, more details, based on more and richer data, to have frictionless payments."

The foundation of the new platform is the ISO 20022 standard and the way this will support interoperability between the different formats being used, allowing SWIFT's customers to adopt those different formats at their own pace. This important component provides the platform with a central data model, which enables the sharing of detailed, structured information throughout the payment chain.

We are looking at how we can remove some of the processing breaks that happen in a payment, and how can we provide upfront transparency from the payment initiation ensuring that we have greater STP throughout the payment.

Tanja Haase, Customer Engagement Lead, SWIFT

"The next step that we are going to look into is to pre-validate, in order to remove friction," Haase said. "We are looking at how we can remove some of the processing breaks that happen in a payment, and how can we provide upfront transparency from the payment initiation ensuring that we have greater STP throughout the payment. The whole value of a platform comes from building things centrally and in a mutualised way. We will have the possibility to leverage integrated shared services, for compliance, for fraud detection, for case management... really allowing all customers to have central access to the platform, managing exceptions and investigations, and so on."

Ultimately, what this should facilitate is a better customer experience, more upfront predictability, and faster processing times because the friction has been removed upfront, letting the community benefit from shared services that they can then enhance for their own customer base.

"The first step for the platform is with Release 1 in November 2022," noted Haase. "This is where we're going to be starting to use ISO 20022 rich data, and start to leverage some of those new services that we are building right now. The idea is that we innovate as we go. We will have a foundation that banks can connect to and implement at their own pace, following their own roadmaps." 

There will be multi channel and multi format support in the platform, allowing the community to use existing channels to leverage APIs, to use the formats that their back office is most equipped for at any given point in time. 

We want to ensure that the rich data that is being used by some of the participants in a transaction is actually being captured, maintained and passed on to the last bank in the chain and to the ultimate beneficiary.

Tanja Haase, Customer Engagement Lead, SWIFT

"We will also introduce what we call a transaction copy" Haase added. "We want to ensure that the rich data that is being used by some of the participants in a transaction is actually being captured, maintained and passed on to the last bank in the chain and to the ultimate beneficiary. We have the concept of transaction tracking place, so we're going to enhance that further to have a transaction copy."

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Understanding the right technology for digital transformation

The various new and emerging technologies that are underpinning the digital payments revolution were under the spotlight in the final panel discussion of the event.

"The trends are clearly towards real-time services and automation," noted Abdulaziz Al Dahmash, Head of Digital Banking & Payments at SABB. "Real-time services include APIs, RPA, AI, blockchain and micro services architecture. Rich data is more of a challenge, although it is relatively easy to capture this at the channel, and ISO 20022 is certainly a help with this."

Being able to act on insights from rich data is one of the key 'value adds' in the new payments landscape for banks, and it was noted that deploying AI to interrogate rich data offers advantages.

"Artificial intelligence has huge potential in the payment space because, for example, in retail this speaks to the behavioural biometrics of demographics of the customer, it can be leveraged for data monetization, it could be availed to SMEs and merchants for data insights for better marketing, or biometric based AI scenarios for online onboarding, like facial recognition, or using that for transaction fraud detection, for example," explained Yasar Yilmaz, Head of Financial Services - Middle East, Africa & Turkey at Microsoft. Yilmaz also highlighted the important role that cloud technology is playing in this world. 

Cloud acts as an underlying control plane for many scattered applications in the payments space.

Yasar Yilmaz, Head of Financial Services - Middle East, Africa & Turkey, Microsoft

"Cloud acts as an underlying control plane for many scattered applications in the payments space," Yilmaz said. “It simplifies architecture and reduces cost of ownership. If you make your payment services more granular, plucking something out and putting in something new is much easier from an innovation time to market perspective."

Al Dahmash agreed on the importance of AI in the world of payments. "The combination of open APIs along with artificial intelligence will result in the ability to provide a differentiated customer experience," Al Dahmash said. "At SABB, we have made progress with these technologies. I also think the standardisation of the messages through ISO 20022 will help to enrich the customer through meaningful instant information."

The combination of open APIs along with artificial intelligence will result in the ability to provide a differentiated customer experience.

Abdulaziz Al Dahmash, Head of Digital Banking & Payments, SABB

The subject of cost came up, because innovation rarely comes for free, but the panel had ideas about how the cost of technology could be approached in a way that doesn't break the bank.

"Cost is definitely a big problem for everybody who wants to do anything in this particular space, and no new technology comes easy," commented Barid Neogi, Head of Operations at Emirates NBD. "You've got to have a comprehensive digital strategy, which takes care of technology, operations, and the business. Once you have that top down view, invest in technology to make sure that you get into the latest technology stacks. That has to be a strategic decision. From a cost perspective, that's the way we can easily manage."

The final opportunity and challenge to be discussed was the role of open banking in opening up the financial world to challengers for the business of banks. For example, with cloud and advanced technologies being far more easily available through the 'pay as you go' model, payments companies are starting to penetrate into the traditional banking services domain. 

With change in the payments world already here, banks urgently need to keep up to speed with the latest technological innovations, not only to stay relevant but also to grow. SWIFT's new strategy and platform are designed to support financial institutions in this brave new world, and collaboration within the SWIFT community can ensure that all are prepared for the global real-time payments experience ahead.

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