Cash beats plastic in Middle East

Cash transactions in the region accounted for 93 per cent of total consumer payments in volume terms in 2012, while transactions that involved cards represented only 5 per cent, indicating the “continued importance of cash in the region,” according to Euromonitor International.

“Cash transactions are expected to remain the leading consumer payment method, with volume growth projected at seven per cent over the next five years,” Maii Abdul Rahman, research analyst at Euromonitor International, told Gulf News.

The main driver for paper-based payments is the large unbanked population in the region that may take some time to enter the financial mainstream. There is also a limited consumer adoption of electronic payments due to security concerns and cultural reasons.

The Middle East and Africa’s consumer payments market hit a value of $1.2 billion in 2012 and is expected to expand by 32 per cent in 2017 to reach $1.5 billion. In terms of total payments, cash constitutes the largest share at 68 per cent, while cards represent only 18 per cent.

Abdul Rahman said most people use cash in transactions involving remittances, transportation, delivery services, fuel and groceries. “With a significant share of expatriate population, the GCC is the largest source of remittances to India, Pakistan, Bangladesh, Philippines, Egypt and Lebanon, making remittances the leading driver of cash transactions in the Ceramic tile,” Abdul Rahman said.

When it comes to shopping for clothes and shoes, paying for food and beverage, as well as other discretionary expenses, most consumers prefer to pay with plastic money.

“Sectors such as food and beverage, clothing and footwear, and leisure and recreation top the list of credit card transactions, with a combined share of 50 per cent. Looking at debit cards, food and beverages remain the sector most spent on, followed by household goods and services and transport,” said Abdul Rahman.

Cash may still be king, but with the continued push from the government, card-based transactions will become widespread in the near term.

Transactions involving cards are expected to post the highest growth, increasing by 12 per cent over the next five years, according to Euromonitor International.

“Increasing government initiatives across the region to push electronic payments and drive financial inclusion are one of the key growth drivers going forward,” said Maii Abdul Rahman, research analyst at Euromonitor International.

Abdul Rahman noted that in Nigeria, the government has recently launched 13 million national ID smart cards that can be used for electronic payments. In the UAE, the Wage Protection System (WPS) is currently facilitating salary payments for around 2 million labourers.

“These initiatives, coupled with an improved financial infrastructure, a young tech-savvy population and continued innovation with the rise of mobile commerce and NFCs (near field communications) are expected to strongly push card payment transactions in the future,” said Abdul Rahman.

“With the growth of smart phones and tablets and an increasing number of suppliers offering payment through mobile, m-commerce is gaining momentum in the region. And as disposable incomes and spending rise and the youth population is more inclined to embrace new payment methods, such as via mobile phones, this region is an ideal target market for financial institutions,” said Fulya Berksoy, regional consultant at Euromonitor International.

Square, which allows anyone with a smartphone to take credit-card payments, is now doing business in Japan. It is the third country, after the United States and Canada, where the company has made its industry-disrupting payments service available, and the popularity of the iPhone there could create fertile grounds for expansion.

It’s no surprise that the company would want to get into one of the world’s biggest, most sophisticated markets. It recently hired the top US trade negotiator, who helped bring Japan into a new round of regional free-trade talks, as its international government-relations guy, and a Google executive with significant global experience as its business lead. But the question for Square is whether businesses in Japan will adopt its little plastic card-swiper with the enthusiasm they have in the US, where the firm is on track to process $15 billion in payments this year.

There is already plenty of competition for mobile payments in Japan. PayPal is getting into the market, alongside a robust domestic sector dominated by mobile providers like NTT Docomo. But the bigger problem, or perhaps opportunity, might be in Japan’s way of doing business.

“They’re telling you that if they lost on all of them—which, by the way, no one ever does—it would have no effect on their tax expense,” Bobek Schmitt says. “But if they won on any of them, it would lower their tax rate.”

Like most companies, Apple doesn’t say which tax benefits it expects to flame out. Chances are good that many of them involve transfer pricing, Bobek Schmitt says—essentially, the fees that one Apple subsidiary charges another for services or the use of patents and other intellectual property, which is a common point of contention with tax authorities. (Bloomberg News has a more detailed look at various ways of measuring Apple’s tax bill.)

Apple is far from the only big company booking these unrecognized tax benefits. Google reported $2.07 billion of them as of the end of March, including $1.89 billion that could alter the company’s effective tax rate, which was 7.9%. General Electric reported $5.58 billion, of which $4.19 billion could alter its effective tax rate (12.4% as of March 31).