by Chandra Segaran, Regional Sector Head (Middle East), Consumer Brands and Retail, HSBC
While the Consumer Brands, Retail and Healthcare (CBRH) treasuries in some other regions are leveraging electronic methods for receivables management at a rapid pace, the situation in the Middle East is different. As Chandra Segaran, Regional Sector Head (Middle East), Consumer Brands and Retail at HSBC, explains, there are significant variations in the usage of payment types compared with other regions that make an alternative approach to receivables management necessary. Nevertheless, in the longer term, the Middle East looks set to join the trend towards the digitisation of receivables management.
Cheques and cash dominate
Cheques remain extremely popular in the Middle East mainly due to the level of risk mitigation, where it allows for criminal liability in some countries for not honouring them. From a cheque receiver’s perspective, this provides a welcome degree of certainty, hence the enduring popularity of cheques in the region’s B2B transactions compared with other parts of the world.
Another important factor in the persistent popularity of cheques in the Middle East is the relative cost of issuing cheques. Unlike elsewhere, in several countries in the region it costs less to issue a cheque than a standard electronic payments. Therefore, the strong cost incentive for customers to switch to electronic payments that applies in other regions does not apply in this region. A notable exception to this is Bahrain, where the new Electronic Fund Transfer System (EFTS) offers a highly cost-efficient near real-time service for electronic payments [1].
On the B2C side, a large percentage of the local population have relatively modest income and do not have credit cards (though salary cards are increasing in popularity in some places). As a result, these potential CBRH customers will typically pay using physical cash. This even applies in the e-commerce space, with some major online marketplaces still receiving cash for a very significant proportion of their sales.
Reconciliation efficiency
A key consideration is that receivables management through electronic payments may offer no direct working capital advantage over cheques. Cheques incur no clearing cost, many banks offer cheque books free of charge,
cheques can be cleared same day without any additional cost and cheques have a legal liability attached in the event they are not honoured. Therefore, they remain a preferred mode of payment from a corporate perspective. The opportunity to obtain same day value for cheques has also driven the popularity of scanner-based deposit capture techniques in the region. This approach allows cheques to be scanned and then sent electronically to the Image Cheque Clearing System of the Central Bank of United Arab Emirates for local clearing. This facilitates the cheques meeting the same day value cut off time, rather than incurring the delay and cost of physically couriering cheques to the bank.
In theory, this technique could also be leveraged to improve automated reconciliation rates, but in practice, deposit capture is primarily a matter of cash flow rather than reconciliation. The reason for this is that most corporates perform manual reconciliation rather doing this electronically. The relatively low cost of clerical labour for conducting this manual process also means that there is limited incentive to switch to more automated methods.
However, there have been some innovations recently, such as the introduction of direct debits, but the adoption rate has been modest. A key distinction is that rejected direct debits do not have the same criminal liability as bounced cheques, so there is less motivation for sellers to accept them as a means of customer payment. Therefore, the introduction of criminal legal liability for returned direct debits could substantially change the receivables landscape for CBRH treasuries.
In common with some other regions, the truncation of payee names on bank statements is an obstacle to electronic reconciliation. One way of remedying this situation is through the use of virtual accounts, whereby each payor is given an individual virtual account number to which they make their remittances. As a result the recipient will find it easier to reconcile incoming remittances at customer level.
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Innovation and change
The B2C space in the Middle East has seen innovation that could potentially be of value to CBRH treasuries, but caveats do apply. The concept of the mobile wallet has been adopted with enthusiasm in the region, but on a very fragmented basis. Numerous banks have launched their own mobile wallets, but these are specific to the issuing bank, they are not generic or portable. Therefore, there is no consolidation to a common standard of a single mobile wallet that can cover multiple banks and thereby a wide range of consumers. Achieving wider market coverage in the current circumstances would require a merchant to sign up with mobile wallets and hence also multiple banks, which is undesirable for both logistical and cost reasons.
However, this situation is starting to be addressed in countries such as Egypt, Bahrain, Oman and UAE, where the governments are trying to establish nodal centrally managed clearing and settlement systems for mobile wallet based transactions. For example, some governments in the region are actively supporting the concept of wallets. Dubai, under its Smart Dubai Gov (SDG) initiative, has stipulated that government departments can only accept payment by e-Dirham card.
Some Middle Eastern governments are also leading the way by already adopting solutions that are integral to efficient receivables management. For instance, Dubai Customs is using “Next Generation Virtual Accounts” (ngVA) to improve reconciliation rates by obtaining certainty on which specific remitter has sent a specific payment.
Conclusion
For both bank clients and regulators in the Middle East payment processes are evolving. In the short term, paper cannot be ignored, but in the medium term new electronic payment methods – such as mobile payments, direct debits and Electronic Bill Payment and Presentment – are emerging, as central banks in the region invest in them. So at first glance the predominance of cash and cheques in many MENA countries might seem to offer little opportunity for CBRH treasuries looking to streamline receivables management. In practice, the situation is far more nuanced, and these treasuries may wish to start planning for changes that might affect the whole process of their receivables management across the region. In so doing, the focus will need to switch to those banks capable of supporting these changes pan-regionally with global best practice.
