27 April 2017

The United Arab Emirates is embracing technology innovation with a vengeance. The government's Smart Dubai initiative to transform Dubai into the world's smartest city, and Emirates NBD's launch of the UAE's first 'digital only' bank, has seen digital payment systems become a key area of focus.

On 1 January 2017, the UAE Central Bank issued the Regulatory Framework For Stored Values and Electronic Payment Systems ('the e-Payment Regulation'), with the main aim of facilitating the adoption of safe, secure, 'user-centric' digital payments in the UAE and regulating the digital payments infrastructure and other financial technologies (fintech).

The Central Bank has now given wide powers of oversight, monitoring and enforcement against payment service providers ('PSPs') as a means of implementing the provisions of the regulation, safeguarding the public interest by protecting the general payment systems and general economy as well as retail customers.  

There are four categories of PSPs eligible to provide digital payment services (including electronic, mobile or magnetic channels, but excluding credit and debit card payments) within the UAE. All PSPs, whether retail, government or otherwise, are subject to specific licensing, registration and payment authorisation requirements from a compliance perspective and need to apply to the Central Bank for the relevant license. Licensed commercial banks are exempt from this rule, and are instead subject to a fast-tracked authorisation process.

The e-Payment Regulation applies specifically to non-cash facilities, whether in electronic or magnetic form, that are purchased and used by an individual or legal person to pay for goods and services ("Stored Value Facilities") used for transactions such as cash-in and cash-out services, retail credit/debit digital payment transactions and government credit/debit digital payment transactions.

A number of payment transactions are specifically out-of-scope of the regulation, such as payment in cash without any involvement from an intermediary or using a credit card/debit card or paper cheques. It is also worth noting that the e-Payment Regulation expressly prohibits the use of virtual currencies, but how this prohibition will be implemented in practice remains to be seen. 

Any party providing digital payment services in the UAE without the appropriate PSP license or authorisation under the e-Payment Regulation will be subject to administrative penalties (the details of which are pending by way of subsequent regulation). However, PSPs already providing digital payment services have a one-year grace period to comply with the regulations or cease business in the UAE.

This prime example of fintech, dubbed "disruptive technologies," that allow non-banks to tap into payment systems, will inevitably bring new players to the payment portals and to the lending sphere, with telecom companies and others potentially posing an immediate threat to banks and financial institutions in respect of certain services they offer.

However, the potential impact on the nation's economy is significant. The UAE recorded a 0.23 percent increase in GDP due to increased card usage during the five-year period (2011-2015), and increased e-payment usage created the equivalent to an average of 14,170 jobs in the UAE per year during that period.

Digital banks are just the beginning: the UAE Government's “The Mobile Wallet” financial project has identified over 90 services provided by government departments as requiring digital payment and expects a 35 percent market share within five years; more than 25 service providers in the UAE with around 250 online services offer ePay for their customers; the UAE's national telecoms operator, Etisalat, announced the launch of its mobile phone-based commerce service Etisalat Wallet in 2016.

With a range of innovative alternatives to the traditional banks being offered in order to cater to demands that are not currently serviced by the banks, the progress of fintech bears watching.

Authors: Jayshree Gupta (partner, UAE Corporate Practice), JJ Shaw (associate, UAE Corporate Practice)

Any opinions expressed here are the author’s own.