UAE residents drop credit cards to avoid debt trap

UAE residents are turning savvy with their finances as a result of the global economic crisis and are now spending more of their own money through debit cards rather than splurging on borrowed money, or via credit cards.

Banks in the UAE as well as card payment service providers such as Visa and MasterCard have confirmed it to Emirates 24|7.

“If you compare credit card spend so far this year, it has declined between 7 to 10 per cent between Q2 last year and Q2 this year in the UAE, whilst for debit cards, it has grown by between 12 and 15 per cent this year,” Navneet Dave, Head of Cards, National Bank of Abu Dhabi, told Emirates 24|7.

Although a gradual behavioural change was already underway in terms of UAE shoppers shifting to debit cards from credit cards, the rapid use of debit cards in the UAE has outpaced the credit card growth.

“In terms of the growth of the transactions value, debit cards have really outgrown in the UAE by a large margin,” said Alexander von Pock, Principal, Financial Institutions Group at AT Kearney Middle East.

In terms of the volume of money spent at point of sale (POS), however, credit cards still outpace the amount spent via debit cards.

“The number of debit cardholders has already crossed those of credit cards in the UAE across all banks. However, if we look at the volume of money spent at the POS by debit and credit cards both, the credit card still scores over debit cards,” Dave added.

Experts add that debit cards have advantages over credit cards in terms of stronger control over one’s finances as one can only use debit cards only if there’s money in the bank account.

Looking at the debit card spend at POS compared with debit card cash withdrawal at the ATM, almost 88 per cent of debit card usage is accounted by cash withdrawal compared to 12 per cent spend at the POS. However, there’s a huge potential for debit cards to move up the scale at the POS, Dave added.

“In case of the GCC, where as much as 90 per cent of transactions are cash-based, one can expect there is a good debit card market out here that can be enhanced,” echoed Brian Quarrie, Managing Director (Middle East), First Data, an electronic commerce and payment processing services firm.

Emirates NBD, the largest bank in the Middle East in terms of assets, estimates that the entire debit card spends across ATM and retail have increased by about 15 to 20 per cent this year in the UAE, whereas increase in credit card spends are lower.

According to R Sivaram, Senior Vice-President - Head of Cards, Retail Cards Business, Emirates NBD: “We have witnessed a consistent increase in usage (both at ATM and retail) although the predominant growth has been from ATM withdrawals.

This is in line with recent studies, which suggest that in the current economic scenario, customers tend to use debit cards more frequently as it helps them control building up debt.”

Card payment service providers also are recording higher usage of debit cards in the UAE.

 According to Visa’s quarterly results ending March 31, 2010, its debit card payment transaction in the UAE grew 8 per cent compared to same quarter last year, as against 19.4 per cent rise in the GCC.

On the other hand, its debit card transaction value grew by 9 per cent in the UAE in the same quarter, while credit card user base grew slower at 0.6 per cent in the GCC in the same quarter.

According to Eyad Al- Kourdi, Vice President & Country Manager, Southern Gulf - Oman, Qatar and UAE, MasterCard Worldwide: “Debit cards are payment cards that combine all the uses of a standard ATM card, like access to cash and banking transactions, with the added convenience of shopping at millions of merchant locations worldwide.

Given these benefits, we see the potential for debit card usage to become more popular in the UAE, and indeed, around the world.”

Credit card penetration per capita in the UAE between 2008 and 2009 was the highest in the GCC region, say experts. However, it has dropped considerably now as credit card issuance has receded and more and more users are switching to more convenient and credit-free e-payment solutions like debit cards.

“The total number of cards (debit and credit cards) has dropped by almost half between 2008 and 2009 in the UAE. In 2008, there were almost 9 million cards in the UAE, on a total population of around 5 million people.

Currently, around 60 to 70 per cent of the total card transaction value belongs to credit cards while 30 to 40 per cent is composed of debit cards in the UAE,” AT Kearney’s von Pock said.

Experts add that another reason fuelling the growth of debit card usage in the UAE lies in UAE banks restricting their credit growth including consumer credit.

Kamran Siddiqi, Visa General Manager, Middle East, said: “The growth of debit cards is not driven by financial crisis because the basic convenience and security features of debit cards will always be true. Nonetheless, in an era of tightened credit availability and lower risk appetite, debit cards become even more attractive.”

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