Open to Growth

Open banking is shifting the financial services industry toward hyper-relevant, platform-based distribution while offering banks a window to expand their ecosystems and extend their reach

The Middle East banking sector is at a pivotal moment. Faced with changing consumer expectations, emerging technologies, and new business models, financial institutions will need to start putting strategies in place now to help them prepare for an AI-powered bank of the future.

Technology disruption and evolving consumer demands are laying the basis for a new S-curve for banking business models while the challenging operating environment and competition from digital attackers are accelerating these trends.

McKinsey said that to meet customers’ evolving expectations and beat competitive threats in the

AI-powered digital era, banks must offer propositions and experiences that are intelligent, personalised and blend banking capabilities with relevant products and services beyond banking.

Building upon this momentum, the advancement in financial technologies offers banks the potential to boost revenues at lower costs by engaging and serving customers in radically new ways using new business models.

Digitalisation in the GCC banking sector is a prime example of how financial institutions are leveraging customer data, analytics and segmentation to improve their products and services as well as build a ‘bank of the future’.

Open banking is shifting the financial services industry toward hyperrelevant, platform-based distribution while offering banks a window to expand their ecosystems and extend their reach. “The business transformation towards a platform-based open banking ecosystem will provide the opportunity to define a courageous ambition that goes beyond incremental change and deliver breakthrough value,” said Deloitte.

Banking customers are accustomed to the service standards set by technology companies and have come to expect the same degree of speed, simplicity, consistency and convenience from financial-services providers.

The relationship between banks and their customers has transformed significantly over the years and for banks to maintain a competitive edge and create new revenue streams, integrating core personalisation elements across the range of touchpoints will be critical to delivering a superior experience.

Banking as a Service

Financial institutions in the Middle East are exploring new avenues through which to provide value and thrive in an ever-shifting business environment. One growing business model is banking as a service (BaaS)—which involves a non-bank organisation integrating with banks through APIs to provide financial services for more integrated customer experiences.

BaaS underpins and broadly unifies open banking, embedded finance, modular banking and banking as a platform. It offers a radically different approach to financial services—one that deconstructs the traditional banking model and places its building blocks in the hands of a wider range of stakeholders.

The innovative technology allows banks to monetise their banking stacks such as data, capabilities and infrastructure by seamlessly integrating financial services and products into other kinds of customer activities, typically on non-financial digital platforms. Embracing BaaS can help incumbent banks unlock new business opportunities and add value for end users and corporate customers.

“To meet the rising demand for embedded finance, financial institutions are increasingly offering BaaS—bundled offerings, often white-labelled or cobranded services, that nonbanks can use to serve their customers,” said McKinsey.

BaaS has grown in prominence over the years driven by the advances in

– PwC technology that have made embedded banking possible among other several factors but the soaring demand is being driven by customers’ evolving preferences.

Today’s banking customers are increasingly demanding integrated, multiproduct experiences—what McKinsey referred to as ‘ecosystems’— to meet their needs. By integrating relevant financial services into a brand’s existing offerings, banks can create the seamless experience today’s customers want.

Globally, banks are currently operating in a highly competitive and challenging environment and as a result profitability in the sector has struggled to reach prepandemic levels. To remain competitive and offer returns to investors in this difficult climate, platform-based banking offers financial institutions a significant opportunity to create new forms of customer value and open new avenues for growth.

Through open banking, banks can carve out a fresh role as the centerpiece or participant in a digital ecosystem, connecting service providers, fintechs and customers with monetisation opportunities as the common point of connection.

The emergence of the platform business model is a significant feature of the AI-bank of the future with embedded finance, instant real-time payments and BaaS possessing enormous benefits that can manage the transition to this customer-centric approach.

Banks that recognise the value of emerging technologies to augment customer experience are moving steadily toward a platform operating model while leveling command-and-control structures to speed decision making delivering solutions that customers value.

Open Banking in the GCC GCC banks are taking a more sophisticated approach to their use of APIs to maximise the value they derive from these digital workhorses. Incumbents are increasingly leveraging APIs internally to reduce costs and complexity associated with IT integration while freeing up change capacity by as much as 30%.

PwC said that open banking has the potential to reshape the financial services landscape and several financial centers in the emerging markets, the GCC region included, are making considerable moves in this space.

Open banking requires a robust, agile and scalable IT architecture to enable API integrations with multiple entities.

Its implementation promises to create a new data-sharing infrastructure, which will form the basis of a much richer range of services and products across the whole of financial services.

Saudi Central Bank (SAMA) introduced an ‘Open Banking Lab’ last December as part of the Gulf state’s broader strategies to speed up the development of open banking. The ‘Lab’ constitutes a ‘technical testing environment’ to enable established banks and fintech companies the opportunity to ‘develop, test and certify’ open banking services to ensure compatibility with the framework.

The kingdom is implementing a marketdriven strategy and its approach is inclined towards a more formal regulatory framework. SAMA issued a roadmap for open banking rollout in 2021 and published an open banking framework last November.

Bahrain is implementing a Europeanstyle regulation-driven approach and the UAE has adopted an Americanstyle market-driven approach under the guidance of the Abu Dhabi Global Market and Dubai Financial Services Authority.

APIs are at the core of banks’ Open Architecture and play a significant role in our digital strategy. Abu Dhabi Islamic Bank (ADIB) launched its first API developer portal last June allowing fintech developers to use the Shariahcompliant lender’s APIs. Dubai’s Emirates NBD also launched a ready-to-use API developer portal ‘Emirates NBD API Souq’, to provide fintechs, developers and corporate clients an all-in-one ecosystem to build innovative financial solutions.

The GCC region is one example of an emerging global open-banking microcosm and PwC projected that the innovation has the potential to reshape the financial services landscape and several financial centers in the emerging markets are making considerable moves in this space.

Digital payments

Financial services providers initially adopted APIs in 2018 to comply with regulations such as Europe’s Payment Services Directive 2 (PSD2) which seeks to make real-time payment solutions more secure while propelling innovation as part of a shift to ‘open banking.’

Consumers’ increasing desire for frictionless, more seamless and intuitive value-added banking experiences is driving incumbents to develop open and collaborative financial ecosystems amid a surge in digital attackers and neobanks.

Open banking allows incumbents to deliver end consumers payment solutions giving online retailers such as Amazon, noon and Careem a convenient way to make direct fund transfers for online transactions. The process mandates banks to provide open APIs to allow software at third-party companies to access payment account information and payment initiation from another.

Mastercard said that there are two fundamental trends shaping the API ecosystem around the world at the moment, one being acceleration in the speed and availability of payments as well as the democratisation of access to data.

Payments trends such as the ongoing displacement of cash and new payment options including the request to pay, digital currencies and buy now, pay later services (BNPL) are all creating exciting opportunities for those able to seize them.

Banks are eager to seize the seemingly limitless potential of new and disruptive technologies and open banking makes data, algorithms, transactions, business processes and functionality available to other players in the banking ecosystem. Given the inevitability and opportunity of open banking, the big question facing most banking executives in the region is what business strategies they are putting in place to seize emerging business models.