Digital payment services in the UAE: A new e-Payment Regulation

The UAE continues to embrace technology innovation in line with its government's 'Smart Dubai' initiative to transform Dubai into the world's smartest city. With Emirates NBD having recently launched the UAE's first 'digital only' bank, digital payment systems have become a key area of focus.

A new e-Payment Regulation

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

Under the e-Payment Regulation, four categories of PSPs are eligible to provide digital payment services within the UAE: Retail, Micropayments, Government and Non-Issuing. All PSPs are subject to specific licensing, registration and payment authorization requirements 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 authorization process.

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. 

Scope of the e-Payment Regulation

The e-Payment Regulation applies specifically to non-cash facilities, whether in electronic or magnetic form, that are purchased and used to pay for goods and services ('Stored Value Facilities'). The Stored Value Facilities are 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 e-Payment Regulation, such as payment in cash without any involvement from an intermediary and payments using a credit card/debit card or paper cheques.

Oversight and enforcement

The Central Bank will oversee the implementation of the e-Payment Regulation and be responsible for enforcing it. Any party providing digital payment services in the UAE without the appropriate PSP license or authorization under the e-Payment Regulation will be subject to administrative penalties (the details of which are yet to be determined by way of subsequent regulation). However, PSPs already providing digital payment services in the UAE have a one-year grace period to comply with the e-Payment Regulation or cease business in the UAE.

What's to come?

This is a prime example of fintech allowing non-banks to tap into payment systems (dubbed "disruptive technologies"). It 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.

The potential impact on the nation's economy is also significant. The UAE recorded a 0.23 per cent increase in GDP due to increased card usage between 2011 and 2015. An increased e-payment usage created the equivalent to an average of 14,170 jobs in the UAE per year during that same 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 predicts a huge shift from cash to mobile payments with mobile payments expected to account for a 35% market share within five years. Already more than 25 service providers in the UAE with around 250 online services offer ePay for their customers. In 2016, the UAE's national telecoms operator, Etisalat, announced the launch of its mobile phone-based commerce service — Etisalat Wallet.

With the emergence of a range of innovative alternatives to traditional banks seeking to cater for new demands that are not currently met by the existing players, the progress of fintech in the UAE bears watching.

Contributor: JJ Shaw