Understanding Online Payments in the UAE

It’s been a long time coming, and here is the oft promised continuation of my initial post on payments options in the UAE on my personal blog. Take a look if you want a bit of background information, the comments are a great read.

Online payments and their inner workings are unfortunately a very misunderstood area both locally as well as regionally. Payment services that are available across the region are generally similar, with slight variations in the quality and extent of services depending on your location and market.

There is a tremendous amount of conflicting information both online and offline with very few people and resources that are actually able to tell you in easy to understand terms what it would take to set yourself up for processing and accepting credit cards on your website.

To try to make things a bit easier, I’m going to define our current understanding of the online payments space in the UAE.

You need three basic components to process payments online:

1. Bank Account
2. Merchant Account
3. Payment Processor or Payment Gateway

Every payment provider out there either offers one or more of these services in conjunction.

Bank Account
This doesn’t really need defining, but for completeness, your money will eventually end up in your bank account from where you can move it, spend it, use it, get rich etc!

Merchant Account
While one or two interesting startup such as Square and Stripe (both US only) are trying to change this, you generally need a merchant account regardless of whether your processing credit cards online or offline. Most Merchant Account providers will provide the merchant with one account for offline and another account for online, while others may provide  a single account for both services.

A merchant account is provided by an acquiring bank. An acquiring bank is one that has permission to accept and process credit cards. The counter to an acquiring bank is an issuing bank. An issuing bank issues credit cards but may not necessarily be able to process them.

In the UAE only three banks have been authorised by the UAE Central Bank to process credit cards. These are Network International (a partially owned subsidiary of Emirates NBD with the remainder owned by private equity house Abraaj, as an aside an interesting investment story!), Mashreq Bank and National Bank of Abu Dhabi. Unfortunately this has created an oligopolistic situation resulting in higher than necessary fee structures due to a lack of real competition. From my research and rough calculations, Network International dominates both locally and regionally closely followed by Mashreq Bank locally with National Bank of Abu Dhabi a distant third.

Obtaining a merchant account can be a difficult process. The acquiring banks have very limited, if any information on their respective websites about any merchant services that they offer. It took a lot of digging around to find out who did what and who we needed to get in touch with. Transparency, clearly is for everyone else.

All of the acquiring banks charge setup fees. This can vary from being a one time fee to being something that is charged annually. This should be in the USD 1000 and upwards range. Acquiring banks make their money by levying a percentage per transaction fee on all transactions that a merchant processes with them. This fee gets split up between the acquirer, the network, and the majority goes to the card issuer. This explains why we’ve got so many credit card offerings out there!

Our research and experiences indicate that Network International’s fee structure starts at 3% while both Mashreq and National Bank of Abu Dhabi tend to be higher, starting in the 3.5% to 3.65% range. Your ability to negotiate and settle on a fee as a startup will initially be limited unless you have an existing banking relationship in place, are an existing offline processing customer or have really good connections i.e. wasta (that always helps out here!).

Payment Gateway
A payment gateway does the actual payment processing when a customer uses their credit card online. The service offering differs from provider to provider, but in general most payment gateways provide a variety of ways to allow a merchant to process credit cards and other payment methods.

Some typical services may include:

• Hosted Payment Page. This is usually the easiest way to get up and running, but with limited customisation. The page sits on the payment gateway’s server and shows up at the last step of your standard checkout process.
• API. This option will allow you to programmatically connect to the gateway and submit the customer’s credit card data for authorisation. This method usually provides the most flexibility in terms of customisation.

Unfortunately most merchants tend to ignore the potential PCI (the credit card industry’s rules and regulations) compliance burden that the various methods may bring about. Generally, a hosted payment page will have the least burden while a custom method such as connecting to an API will maximise the burden.

All the local acquiring banks bundle with a payment gateway to make things easier. This is nice since it allows you to get started pretty quickly. However the bundled offerings tend to vary in quality, generally have poor documentation (or very hard to decipher documentation) and have next to no fraud management tools. Once your business starts to take off, it’s probably a good idea to start looking for a third party payment gateway.

Third party gateways provide their services in addition to or on top of what the local acquiring banks bundle with. They may connect directly to the acquiring bank or may seamlessly connect through the acquiring bank’s bundled gateway. Third party gateways tend to charge set up fees and usually charge merchants a flat fee per transaction rather than a percentage. Their services can include everything from hosted payment pages, API access through multiple methods, payment tokenisation as well as fraud management.

Fire away in the comments if you have any questions that you’d like to ask.