The Middle East & North Africa’s (Mena) online banking and payments infrastructure is undeveloped outside the GCC.

But the move to shift economies away from a dependance on oil and the increased spending in sectors including technology is expected to drive growth for services such as mobile payments and e-transactions.

By 2015, there will be more people with telephones than electricity in the Mena region, however, the lack of legislation to regulate e-commerce services is creating confusion and hindering developing of the industry.

While the global e-commerce sector is worth in excess of $7 trillion, the Mena region accounts for less than 1 per cent of this figure. According to research firm Euromonitor, the e-commerce market in Saudi Arabia, the UAE and Egypt is currently worth $1bn and is set to grow to $2bn by 2016.

At present, one in every three internet users in the Mena region makes online purchases at least once a month, according to online payment company Onecard. Of these, 54 per cent are female and 63 per cent are based in the Gulf.

GCC dominates e-commerce

The predominance of the GCC is no surprise, as it has better telecommunications infrastructure and a higher penetration of mobile and internet users compared with the rest of the Mena region. The higher gross domestic product (GDP) per capita also makes the use of such products and services more feasible.

Our existing customers intend to integrate more social features to appeal to their customer base

Dean Young, Sungard

With higher spending power and a larger number of bank and credit card users, the GCC is the most well prepared in the region for using mobile and electronic payments. Despite this, cash is still used in more than 90 per cent of financial transactions in the GCC, according to US consultancy McKinsey. Withdrawals from automated teller machines (ATMs) make up 90 per cent of card transactions.

Elsewhere, mobile-banking (m-banking) in many African countries, including those in North Africa, is gaining popularity due to poor retail banking services. Yet the laws and regulations governing financial transactions on mobile phones are limited in scope and unsophisticated.

With improved internet connectivity, the Arab world has witnessed one the highest increases in the number of users using social media sites, such as Facebook. More companies, including banks, are looking to build up their social media presence online.

The problem is … with text messages there is really no evidence after they have has been deleted

Takamasa Makita, Clyde & Co

“Our existing customers intend to integrate more social features to appeal to their customer base,” says Dean Young, vice-president of product management at the US financial services firm Sungard. “Innovation around payments and bill payments seems to be picking up rather quickly, our market research shows that people are more comfortable with the mobile channel for bill payments and it is becoming more common now.”

While local banks are building up a social presence, the wider implications could spell trouble. “A lot of people are excited and I think it is necessary to attract a certain percentage of the customer base, but some of the banks are very hesitant about security. What could go wrong outweighs the benefits. It will take another year or two to minimise the risks,” says Young.

Privacy laws would apply in this context. Outside the Dubai International Financial Centre and Dubai Healthcare City, the UAE does not have standardised privacy law. Where the data is stored could also be problematic. If it is kept in the cloud, the locations of the international servers on which it is stored will mean further jurisdiction needs to be considered. 

“In some cases, these services are very new, and when you have that it does take a while for people to understand them and implement them properly,” says Dino Wilkinson, senior associate at UK law firm Norton Rose.

Passing digital legislation

Among the Mena states, the UAE has made the most headway in developing laws to govern electronic transactions over the internet.

“There are no specific e-money laws in the region. Text-based services have taken off in markets, particularly in Africa, but they are all new and laws and regulations are catching up with what the technology can do,” says Wilkinson. “In some cases, it is a question of sitting down and bringing something new to the market and then seeing whether it will make an impact on current regulations.”

Takamasa Makita, senior associate at UK law firm Clyde & Co, says UAE law stipulates that a contract made over the internet is a valid contract and mobile payments can be regarded as an extension of that.

There has been talk of developing separate m-banking laws, but nothing has emerged. It will still take a few more years before new legislation takes shape.

Qatar plans to follow in the footsteps of the UAE by formulating more comprehensive regulations for the internet. It currently relies on telecoms and banking laws to regulate online transactions. Doha has invested heavily in the information technology (IT) and telecoms sectors, and is developing on an online payment scheme for government services, which is still in the infancy stage.

“There are some limitations from one country to another. There hasn’t been anything specific such as more guidelines from regulators and security. You might find some regulation about not exposing customer data,” says Wissam Khoury, managing director of the Middle East for Sungard.

Low priority for digital laws

Progress in other Mena countries is lagging behind the UAE and Qatar. The economic and political fallout of the Arab uprisings also means that for many countries, establishing digital and internet laws is unlikely to be at the top of their agendas in the near term.

Before the revolution that ousted President Hosni Mubarak in January 2011, Egypt’s Information Technology Industry Development Agency (Itida) was working on developing an IT ecosystem with the support of multinational internet companies such as Google, Dell and Yahoo. This plan included developing laws to regulate internet transactions and mobile banking. Itida’s plans are now likely to be a low priority as the country struggles to return to stability.

Mobile phone operators, on the other hand, are keen to introduce more value-added services to help fight competition and increase average revenue per user. M-banking is one of the latest offerings.

While phone operators are overseen by telecoms regulators, it is financial regulatory bodies that ought to be concerned about formulating laws to make mobile payments more secure. The UAE authorities have suggested that no financial information is to be stored offshore.

“This is potentially problematic; there is concern with personal data being stored in the cloud. There is no specific data law in the UAE and no data protection law in the federal code, but companies need to be aware of civil laws that may impact how they store data,” says Wilkinson.

“In terms of the internet and emails, the problem is always retention of records. If a transaction is done by email, you can go back to the company and the customer’s hard disk and obtain who said what,” says Makita.

“The problem is going to be with mobile payments because with text messages there is really no evidence after they have been deleted, so this is a potential problem.”

Even if telecoms operators introduce further mobile phone services, the scope and reach will depend on the various agreements between the different service providers, including the banks and the retailers.

The development of this sector is slow when compared with Europe and the US, where credit card transactions are allowed across almost all e-commerce websites and are not limited to specific banks or types of credit cards. The US-based online payments company Paypal enjoys a global presence, but its access to markets in the Middle East is still limited. Users in most Middle East countries cannot sign up to the service because it does not have agreements with local banks.

“There is always going to be a local element of protection and favouritism. If commercial banks get favour with the central bank it prevents competition,” says Makita.

The region needs a freer market with competition that is well regulated. This seems to be a hurdle across the Middle East. Potential solutions to the problem include Egypt-based Onecard, a type of top-up credit card to make online transactions.

Online presence for Middle East businesses

Despite the innovation that is taking place, the lack of readiness is one of the biggest barriers holding back local businesses from developing an e-commerce presence.

“E-commerce is still in its infancy here with only a handful of players. Businesses need to be online before e-commerce can flourish. Right now only 15 per cent of businesses in Saudi Arabia have an online presence,” says Ari Kesisoglu, Mena managing director for California-based Google.

The majority of small- to medium-sized enterprises want to create an online commercial presence, but many are reluctant to do so because of the difficulties entailed.

“Setting up an e-commerce website does not seem easy, as there are too many layers,” says Amir Anwar, founder of the local Dubai Audio.

“It should not be as complicated. I can go online and get things … shipped to here; why shouldn’t be as easy to get it locally? There is a lot of room for things to become more streamlined.”