The unexpected explosion of the digital economy and the subsequent surge in financial inclusion, particularly in low and middle-income countries, have been the silver lining of the COVID-19 pandemic. According to World Bank analysis, in the developing world, 40% of those who made a digital payment during the pandemic were first-time users. This rapid evolution has propelled the journey towards building cashless societies, with countries in the Gulf Cooperation Council (GCC) leading the charge.

Reports show that digital payments in the UAE grew by a compound annual growth rate (CAGR) of 9% between 2014 and 2019 – nearly double the European average of 4-5%. And according to financial analysts at Strategy&, the UAE is on course to join advanced nations like Finland, Sweden, and the United Kingdom to become fully cashless by 2030. So, what does this mean for the UAE and its GCC neighbors?

Cashless benefits

For millions of people across the Middle East and North Africa, the primary benefit of a cashless society is financial inclusion, which is a crucial enabler of personal independence, social mobility, and economic development. For citizens, financial inclusion means being able to participate in the digital economy, enjoy fast and affordable financial services and build a scalable business. For governments, it provides a platform for GDP growth, security, tax transparency, and international competitiveness.

Right across the region, governments are creating initiatives to accelerate the move toward a cashless society. The UAE government launched a new program called the Financial Infrastructure Transformation (FIT) program in February 2023 to accelerate the transformation of digital payments with a new domestic card scheme, an instant payments platform, a financial cloud, and supervisory technology.

Regionally, we have seen significant steps towards the development of a regional payment system, with the GCC Real Time Gross Settlement System (RTGS) that connects the individual domestic digital payment systems of each of the six GCC countries. This would mean, for example, that a UAE Dirham payment originating in Saudi Arabia and destined for the UAE would transpire over the domestic Saudi and UAE payment systems. This removes the reliance on bilateral correspondent banking frameworks, driving efficiencies, reducing costs, and creating regionwide standardization.

Banks and Fintechs

With well-educated demographics and a high level of mobile penetration, GCC countries are exceptionally well-placed to achieve these cashless objectives. Furthermore, their tech-savvy citizens are enthusiastic adopters of new digital payment solutions, which are being developed by leading banks and a network of fintech ecosystems designed to unleash cashless solutions.

Thanks to the emergence of a vibrant fintech sector in our region, major banks have the opportunity to collaborate with other financial institutions and technology companies to drive innovation in the payments industry and promote the adoption of cashless payment platforms. Many fintechs are very good at solving a narrow range of problems for clients but may not be able to scale easily beyond that.

When fintech firms partner with banks, they have the potential to create new business models that help both the fintech and partner banks. Mashreq, for example, partners with dozens of fintechs in the payments and lending space, with notable recent examples including a new partnership with the US-based payment and banking solutions provider, i2c.

The collaboration, which was announced in March 2023, will see Mashreq use i2c’s Software as a Service (SaaS) platform to offer digital payment experiences to its consumers, merchants, and fintech clients. The partnership makes it possible for Mashreq to accelerate its own cashless solutions by creating multiple digital solutions – such as custom payment programs, virtual and physical cards, multi-currency virtual wallets, and digital IBANs.

Central Bank Digital Currencies

Such pioneering solutions rely, of course, on the provision of an enabling regulatory framework. The good news is that most GCC countries are on the front foot – and the latest regulatory innovations relate to central bank digital currencies (CBDCs). The UAE unveiled its CBDC strategy in March 2023, detailing its intentions to roll out the first phase of the ‘digital Dirham’ over the next 12 to 15 months. The strategy is one of the nine initiatives within the FIT program and follows a series of successful CBDC initiatives, including Project ‘Aber’ with the Saudi Central Bank in 2020, which confirmed the possibility of using a digital currency issued by two central banks to settle cross borders payments.

Over time there is the potential for the development of a wholesale as well as a retail CBDC, which can enable the digitization of the entire trade finance process. In turn, this could lay the foundations for innovations such as ‘programmable money,’ for example – money that can be directed to a single purpose or for a limited period. It may also enable greater control over money supply by the central bank.

These outcomes mirror the stability of a wider cashless society – as explained in a new analysis from the International Monetary Fund (IMF). It shows that in developing and emerging economies, CBDCs have the potential to bank large unbanked populations and boost financial inclusion. Not only that but CBDCs could increase deposits, incentivize lending, reduce credit risk, accelerate SME development, and help households build credit profiles. Collectively, these dynamics have the potential to eliminate financial exclusion and help to ensure that cashless societies serve all citizens in a way that is inclusive, safe, and resilient.