If payment gateway PayPal’s estimates, which put e-commerce in the MENA region at $15 billion in 2015, prove accurate, future prospects of the regional online payments industry look rather rosy. Over the past year, a slew of reports has come out confirming that it’s set for exponential growth. According to the State of Payment in the Arab World 2014 report by regional payment solutions provider PayFort – which falls under Souq.com, the largest e-commerce platform in the region – e-commerce penetration currently stands at 45 percent, while the online buyer population averages three million people per country. Moreover, MasterCard’s Online Shopping Behavior Study, conducted across 11 countries in the MEA region on banked customers aged between 18 and 64 years, shows that 35 percent of the latter accesses the Internet to shop and that nearly 83 percent is satisfied with their online shopping experiences.

And although cash transactions are dominant, Ali Abbas, sales manager at market research company Euromonitor, says card payments posted double-digit CAGRs (compound annual growth rate) in Egypt, Saudi Arabia and Morocco between 2007 and 2012, mostly as a result of banked population growth, infrastructural improvement and financial literacy advancement.

Take, for instance, the KSA, which saw a sharp increase in ATMs and POS terminals over the past few years, while its leading banks, such as SAMBA Financial Group and First Gulf Bank, have been heavily promoting premium cards for high-end customers, according to Abbas. What’s more, with big retailers in the UAE, such as Geant and LuLu Hypermarkets, launching their online portals in 2013, “store-based retailers are expected to face price pressure” facing “lower price offerings online,” says Abbas.

In COD we trust

This progress is indicative of a more serious commitment to e-commerce, indeed, but it has been met with a general reluctance from regional merchants to develop trustworthy offerings and platforms, and from consumers to adopt cashless payments; partly because, Abbas explains, large unbanked populations, coupled with under- developed payment infrastructures – especially in Egypt and Morocco, have maintained a prevalent cash culture in the MENA region. “For example, a significant proportion of the Moroccan population still does not have bank accounts, while a majority of those that has one uses their cards to withdraw money from ATMs,” says Abbas, while Omar Soudodi, managing director at PayFort, adds that 48 percent of regional customers chooses not to use their credit cards online because of trust issues. And although “bank-to-bank payment in the KSA is significant versus other countries in the GCC,” claims Omar Kassim, founder and CEO at regional e-commerce platform JadoPado. com, “a lot of issuing banks [in the kingdom] try to block debit card usage online, because it offers direct access to a customer’s account. The way they mitigate their risk and the insurance they have against credit card fraud is different”. Elias Ghanem, previously managing director at PayPal MENA and currently CEO and co-founder at SME payment gateway Telr, adds that: Today, “there are [very few] banks in the UAE that allow debit card payment online” — global bank HSBC excluded.

Having previously served as general manager at Souq.com Egypt, Soudodi experienced first- hand regional merchants’ struggle in promoting online payments. “As a group, we wanted to solve the problem of online payment in the region. That’s why we started PayFort, our motto being ‘Powered by Trust’”; not much of it yet, it seems, as PayFort’s report shows that COD (cash on delivery) accounts, on average, for 80 percent of e-commerce transactions in the MENA region, where, contrastingly, the KSA posts the highest amount of credit and debit cards in circulation (12,300,000), followed by Egypt (7,600,000) and the UAE (5,900,000). Citing a lack in trust as the main barrier for online purchases, MasterCard’s report puts COD penetration of online transactions closer to 85 percent. “As more people realize what the costs of cash are and begin adopting electronic payments, there will be a consequent growth in the adoption of online payments,” says Raghu Malhotra, president MENA – international Markets at MasterCard.

Cashless whispers

While both COD and online card payments incur unwelcome costs, Soudodi says the fulfillment ratio – that of an order’s completion from the moment it’s placed until the moment it’s delivered – on credit card transactions is much higher than that on COD, where “the abandon ratio is 30 percent. Some of our e-commerce merchants that offer both options have higher rates on credit cards. Their customers are repeat customers”.

“Medium to long term, prepaid is the way to go. When customers pre-pay [for a product], they have mentally taken ownership of the product,” says Kassim. In this regard, very few dissatisfied consumers have been able to fork up cash from merchants in a return process on a COD transaction, while they’ve got an airy six-month period to dispute a credit card transaction. “It’s called a chargeback process. Unfortunately, credit card issuers don’t spend enough time educating their customers [on such rights],” explains Kassim, adding that PayPal has a strong dispute resolution, cutting off fraudulent merchants when need be. “COD is definitely the biggest challenge to the e-commerce ecosystem in the region. However, we have seen a steady decline in it as users’ trust in online shopping is growing,” says Laurent Wakim, regional director at PayPal MENA.

Indeed, it is not so much online shopping that consumers don’t trust as much as it is regional online merchants. Even though a notable 54 per- cent of banked consumers in MasterCard’s survey prefers local over foreign e-commerce portals, the former is yet to earn their trust as the latter continues to gain most of it. Ghanem says: “If e-commerce in the MENA region will reach $15 billion, 90 percent of that will be cross-border trading. There is not enough supply [of e-commerce platforms] here, because merchants struggle to find the right payment gateway solutions.” In fact, 71 percent of MasterCard’s survey respondents places critical importance on “convenient payment facilities when shopping online”.

Crossed off

In spite of local offerings becoming stronger, cross-border e-commerce is experiencing 70-plus percent year-over-year growth, “driven partly by the limited choice currently available in the Middle East,” according to Wakim. PayPal figures suggest that the majority of online shop- ping is cross border, distributed between the US (35 percent), Asia (30 percent) and Europe (25 percent), while intra-regional transactions represent 10 percent of e-trade. “So as part of our efforts in the region, we are in close contact with the PayPal teams in other continents, as well as with our international merchants to incentivize them and educate them on the MENA opportunity,” adds Wakim. “Other challenges include a lack of online retailers, unreliable delivery and the credibility of websites,” says Malhotra.

Alone, air ticketing makes up 20 percent of e-commerce in the UAE, the KSA and Egypt, according to PayFort. Similarly, PayPal MENA primarily serves merchants that sell internationally outside of the MENA region, “typically in travel and tourism, craftsmanship, but also in services”; which, in theory, means that consumers are not resistant to using their payment cards online, but often lack the motive or trust to do so. Soudodi recalls a campaign Souq.com ran in Egypt in 2011, offering free shipping for online payments. “Our credit card transactions increased by 21 percent in one week. More customers were buying online and they were buying more frequently,” he says. “Your typical e-commerce customer today in the UAE is fairly well paid and well traveled, and could be an expat or a local. The ability and access to make online payments is there. The question is: how do you get the willingness to come in?” asks Kassim.

Tell want from need

“My argument has always been that. We get the short end of the stick be- cause we offer the COD service [whereas foreign e-commerce platforms don’t]. If you’re telling me that your only value proposition as an e-commerce business is that you allow customers to pay in cash, there’s something wrong with your busi- ness,” he adds. In fact, Kassim was so opposed to the notion of COD that, when JadoPado.com.com was first launched in 2011, he refused to offer the service for a couple of months. “That was a mistake because it was very early [for the market],” but also because JadoPado.com’s COD offering was largely facilitated by its sizeable fleet – thanks to Kassim’s established freight and shipment fam- ily business – which enabled it to “consolidate cash almost daily”. Earlier this year, however, the platform downsized its fleet function; having worked with FedEx for a while on its international operations, it now brought on the shipment provider for its regional business. Kassim reasons that “the fact that FedEx couldn’t carry cash was a good excuse to see if we could switch off COD”. And they did, in May 2014, much to the dismay and apprehension of a few customers; in the UAE, JadoPado.com’s online transaction split has been, traditionally, 60:40 in favor of credit cards versus COD. “It was a tough call, but year on year, January through to May, we grew versus last year. A number of customers converted. We did lose out on some others, but we recommended they get a credit card,” jokes Kassim.

“People use COD because it’s offered. Jado- Pado.com took a major bet and I salute Omar for that. They might have gotten a small hit for that initially,” Ghanem says, adding that bigger players such as Souq.com would not follow in JadoPado.com’s footsteps because “they have too much to lose”. Ideally, Kassim would like them to, but he understands that investor-funded businesses that are highly dependent on cash transactions cannot afford risk-taking decisions.

Still, there is a lot of money to be made from electronic transactions, and the likes of Visa, MasterCard and telco giants are heavily promoting them, because, ultimately, “cash is free. If you pay online, there are so many people in that chain that are making money and providing additional services,” says Kassim. In this regard, merchants should complete the chain by investing in building trust, rather than fleet functions for COD, as “freight and logistics giants have some of the infrastructure that merchants will never be able to replicate,” he adds.

To each their own

Still, MENA markets are not one and the same, and greatly vary in their readi- ness for online payments; in the KSA, which boasts incredibly high online usage numbers, the lack of access to decent online payment gateways has hindered merchant efforts to drop COD solutions, admits Kassim, while, contrarily, Euromonitor’s Abbas says that the UAE’s dependence on cash has shrunk – its cash transactions dropping by 2.1 percent between 2008 and 2013. “In the GCC, card penetration is high, ranging between 45 percent and 80 percent, whereas in the Levant, it stands at 15 percent [or less] – the highest being in Lebanon,” says Soudodi. Referring to JadoPado.com’s decision to drop COD, he says: “It’s a tough value proposition in other markets, where you could risk alienating a certain percentage of consumers. Keep in mind, JadoPado.com’s [main market being the UAE], you have more than 65 percent to 70 percent of consumers that pay online in the UAE, whereas, in Saudi Arabia and Kuwait, it’s at 30 percent.”

In Kuwait, a consortium of direct debit services called KNET, which processes nearly eight million transactions, centralizes bill payment for customers and integrates banks onto its platform, represents 80 percent of transactions, explains Soudodi, whereas “we don’t have a switch in the UAE yet. A switch is what we call ACH (automatic clearing house). Usually, every bank has an account with the central bank – a clearing house – but it’s not automated. When it is, which is the case for KNET, it centralizes transactions at almost no cost. When we get a switch in the UAE, the merchant won’t have to go through much trouble integrating with banks directly”.

Over the past few years, Soudodi has noticed a drastic change in Egypt, which has quickly adopted Fawri, a bill presentment service that operates in 44,000 locations in the country – all of which are connected through ATM networks. PayFort has now integrated Fawri, offering it to both merchants and customers. This is a far cry from Soudodi’s earlier days at Souq.com Egypt, where he and the company had to take customers through the process of online purchases: “They would call us to place the order, tell us that they don’t have a credit card – and, of course, we had plastered COD literally everywhere on the website. Sometimes, they would call shouting saying that they didn’t receive the product an hour after they have placed the order.”