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The evolution of digital banking
Digital banking in the Middle East region is primed for growth driven by a surge in demand for online and mobile alternatives as well as non-traditional entrants that are shaking up the financial services sector. Banking has traditionally been a conservative industry that enjoyed relatively high barriers to entry due to regulations that restrained access for non-bank competitors but new innovative technologies such as the cloud, artificial intelligence (AI) and machine learning (ML) have significantly lowered entry barriers. dedicated FinTech office in 2020, paving the way for new native digital banks.
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The outbreak of the pandemic more than two years ago brought about more than a decade worth of changes in the way banks do business in just a few months. KPMG said that with 80% of revenue growth predicted to come from digital offerings and operations over the next three years, financial services providers should continue transforming their operating models and investing in key enablers such as integrated cloud platforms, agile ways of working, intelligent automation, AI, blockchain and advanced data and analytics.
Millions of bank customers in the Middle East have now embraced fully integrated mobile banking experiences, using smartphones, tablets and wearables to do everything from e-commerce products and services to opening new accounts and making payments.
PwC said that digital banks have been able to differentiate themselves from traditional banks by providing personalised products to customers along with superior customer service.
Meanwhile, financial regulators in the region are creating unique opportunities for both traditional banks and new entrants thanks to increased license allocations and developing set standards for a new generation of banking. Though the UAE has more than 50 commercial banks operating in the country, the Gulf state’s central bank established a
Digital native banks
Digital banking is swiftly changing the field of play where incumbents are facing increasing competition from neobanks and challenger banks who are billing on customer experience as their point of sale. The ongoing transformation in the Middle East financial services market is partly being driven by tech-savvy customers and regulatory initiatives such as regulatory
sandbox and open banking—which are creating an enabling environment. “The UAE has a strong regulatory foundation for the launch and operations of digital-only banks,” said KPMG.
YAP, the UAE’s first independent digital bank opened its doors for business in August 2021. The digital banking platform, which secured a $41 million investment in July and targeted to raise another $20 million to finance its growth plans, is expanding its regional footprint by launching in Saudi Arabia, where it will operate in partnership with Bank AlJazira. YAP is considering a soft launch in the kingdom in October with plans to go fully live in Q1 2023.
Earlier this year, the Central Bank of the UAE (CBUAE) gave in-principle approval for ADQ-backed Wio to launch operations. ADQ and Alpha Dhabi will own a combined 65% stake in the country’s new digital bank, UAE’s telecoms giant e& holds a 25% shareholding and First Abu Dhabi Bank owns the remaining 10%.
Zand Bank, the Gulf state’s first Shariahcompliant neobank is expected to open its doors for business soon after its shareholders acquired the majority of shares in Dubai Bank from Emirates NBD. The bank, which counts Franklin Templeton, Aditya Birla Group and co-founder and CEO Olivier Crespin among its investors, received a banking license from the CBUAE earlier in July. Zand will provide retail and corporate services in the UAE.
“Challenger banks cater to retail and SME customers who are generally underserved by traditional banks and leverage mobile-first technology to differentiate themselves by introducing innovative new products and providing superior customer service,” said PwC.
Saudi Arabia’s cabinet approved the licensing of a third digital bank, D360 Bank, with a capital of $440 million in February. Last year, the Gulf state’s finance ministry licensed two other digital banks STC Bank and Saudi Digital Bank. Meanwhile, Egypt’s Misr Digital Innovation is waiting for the country’s regulatory framework that will govern digital banks.
Global consulting firm Simon-Kucher & Partners said that if other markets are a good indicator of what will happen next, then the MENA region can expect more neobank competitors to appear very soon. Neobanks in the Middle East are competing with units of traditional banks including UAE’s Emirates NBD, Bahrain’s Bank ABC and the National Bank of Kuwait (NBK) as Gulf states broaden access to financial services. Dubai Islamic Bank unveiled its digital offering rabbit, last December—a digital app that is aimed at
tech-savvy customers. It offers a current account, globally accepted debit card, payments and money transfer services.
Bahrain’s Bank ABC launched ‘ila Bank’ in 2019 – an AI-powered and data analytics digital-exclusive bank. ila Bank is expected to launch its services in Jordan this year before it expands into Egypt, and it also started offering credit cards and loans to Bahraini customers in March. Meanwhile, NBK launched Kuwait’s first digital bank, Weyay, last November and it will provide retail banking services.
– Simon-Kucher & Partners
400 Neobanks globally serving 1Billion clients
Source: Simon-Kucher & Partners
Unlocking value
The emergence of new technologies is offering the financial services sector a window to be more innovative and efficient in service delivery. A study by SimonKucher & Partners showed that there are now around 400 neobanks around the world serving close to one billion clients.
Digital-native banks which are commonly known as neobanks, digital attackers or challenger banks first emerged after the 2007-2009 financial crisis. The business model has proven that economies of scale are currently the single most important critical success factor.
“Digital channels are where customers conduct most of their basic financial transactions and should be at the center of every bank’s distribution strategy,” said IBM.
Open banking
The core technology for a digital-first enterprise must be fast, scalable, flexible, reliable and secure. McKinsey said that the three main components that will enable a digital-native bank to meet these requirements include a hybridcloud architecture, a centralised data management hub and the use of APIs.
By leveraging Application Programming Interfaces (API), a set of communication protocols used to develop computer applications, open banking platforms authorise retail and enterprise clients to access consumers’ financial data in realtime and share account information and transaction history with external parties such as vendors, suppliers, business partners and other banks.
Open banking is playing a significant role in the rise of the open data economy as it makes payments easier and more transparent while loosening incumbent banks’ tight control of customer data and their near-monopoly over financial services.
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.
The Gulf region is one example of an emerging global open-banking microcosm. Bahrain is implementing a European-style regulation-driven approach and the UAE has adopted an American-style marketdriven approach under the guidance of the Abu Dhabi Global Market and Dubai International Finance Centre.
Saudi Arabia is also implementing a market-driven strategy, but the kingdom’s approach is inclined towards a more formal regulatory framework though its regulations don’t follow Bahrain in requiring the opening up of APIs—which facilitate data sharing, or in mandating security standards.
The Middle East region’s financial service sector is unarguably mature when it comes to regulators’ preparedness for open banking compared to other emerging markets though there are some teething problems such as the need to modernise the regulatory landscape.
Digital payments
Challenger banks typically use a different business model than incumbent banking institutions. These digital-exclusive banks receive most of their revenue from interchange—fees paid by merchants when customers make purchases using their debit cards.
Digital payments are gaining popularity as cash usage wanes around the world. Though debit/credit card payments still dominate in several countries across the Middle East region, digital products such as payment apps, digital wallets, buy now pay later (BNPL) and account-to-account payments are gaining traction.
The pandemic undoubtedly accelerated a string of existing trends in both consumer and business behaviors while introducing new developments that saw the use of digital payment methods surpassing the use of cash and debit cards.
“Driven by changes in digital technology, consumer demand and competitive forces, the way people make payments is evolving faster than any other area of financial services,” said EY.
Consumers’ increasing desire for frictionless, more seamless and intuitive value-added banking experiences amid a surge in fintech firms and ‘challenger banks’—who are seeking to capitalise on these developments—are driving incumbents to develop open, collaborative financial ecosystems.
Digital banking platforms can monetise payments by charging customers for payments and paymentrelated features or enter revenuesharing agreements with service providers. Stripe identified five primary ways to monetise payments and payment-related features including charging customers a fee to access payments, marking up each transaction, introducing fees for advanced payment features as well as adding a fee in cases where customers use other payment gateways and charging for advanced, customised reporting.
There are now hundreds of neobanks offering hundreds of valueadded services to banking customers out there. Accenture said that as the payments market is evolving, customer experience is becoming the prime competitive differentiator. The wave of new entrants, game-changing technologies and customers moving to digital services and platforms represents challenges and opportunities. As the use of digital banks accelerates in the GCC, the region has become the hub of banking innovation for digital business models. The Middle East is quickly catching up with Southeast Asia and Europe when it comes to licensing and operating digital banks. It remains to be seen whether the distinction between incumbents and digital-native banks will still exist in the next five years or they will be just known as banks.
– PwC
– PwC
