Despite optimal conditions for a digital shake-up of the banking sector, a genuine challenger has yet to emerge in the Gulf region.
Fintech has become an important component of the economic strategies of Middle Eastern governments in the past five years, as a means of delivering increasingly efficient financial services while boosting domestic innovation and investment. The six states of the Gulf Co-operation Council (GCC) — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — have all developed or are developing high-level strategies for fostering fintech ecosystems, combining progressive regulations with generous sandbox and accelerator programmes.
In spite of such an approach, the Arabian Gulf has yet to see the launch of a genuine challenger bank akin to the UK’s Monzo or Nubank of Brazil, with ‘digital-only’ banking limited to the offerings of the region’s established banks.
Such an absence of new entrants is in some ways surprising, given both the region’s embrace of fintech innovation and the fertile conditions for digital-only lenders, including high smartphone ownership, robust legal and digital infrastructures, and young and digitally-savvy populations.
New horizons
Change is on the way, however, with central banks across the region increasingly open to licensing new players on a digital-only basis. Such new entrants are likely to face several challenges, beyond those faced by challenger banks in other markets.
Saudi Arabia, the largest economy in the Middle East, has been the most proactive of the six GCC states in terms of its regulatory approach to challenger banks. In February, the Saudi Arabian Monetary Authority (SAMA) published new guidelines for digital-only banking, cumulative to the regulator’s banking licensing guidelines and minimum criteria for other banks.
The regulator said that it would “assess the adequacy of capital of applicants on a case-by-case basis considering the scale, nature and complexity of the operations as proposed,” leaving the door open for smaller new entrants.
“The issuance of the guidelines is in line with Saudi Arabia’s concerted efforts to build out a regulatory framework for, and promote the growth of, an innovation-based financial technology ecosystem,” said Salman Al-Sudairi, the managing partner of the Riyadh office of Latham & Watkins, in a note in April.
“The guidelines establish a licensing avenue of start-up fintech-based banks that witness growth in other markets.”
SAMA’s guidelines on digital-only banking are the latest in a series of measures introduced by the regulator to incorporate fintechs into the heart of the kingdom’s financial services. The guidelines were issued just weeks after SAMA began licensing payment institutions and digital wallet providers after successful trial periods.
Building a digital banking sector
Digital-only banks in particular have been on SAMA’s radar for more than a year now. The regulator’s deputy governor for supervision, Fahad Alshatri, said in September 2019 that the regulator was considering licensing a digital-only bank this year, declining to name the institution in question. SAMA also did not respond to requests for comment on the status of the licensing of digital-only banks.
While SAMA is, so far, the only regional central bank to issue such guidelines, others are set to follow suit in the near future. Khalid Hamad Al-Hamad, the Central Bank of Bahrain’s executive director of banking supervision, told The Banker that the bank was “working on developing digital-only bank regulation,” giving no further details.
The governor of the Central Bank of Kuwait, Mohammad Al-Hashel told The Banker in February that the bank was open to new, digital-only entrants. “We’re working with the existing banks [on their digital services] and we’re open also to [new] applicants, if they have a model that is resilient, reliable and safe, as well as efficient and innovative,” he said.
Ahead of the publication of formal guidelines, the Central Bank of Kuwait had intended to convert the local banking licence of Ahli United Bank (AUB) into a digital-only licence, as part of the latter’s acquisition by Kuwait Finance House (KFH). “One of the conditions on KFH is to maintain their licence of AUB in Kuwait… so we still have competition among the Islamic banks and, at the same time, we want to change it to a digital bank,” said Mr Al-Hashel.
While KFH and AUB boards agreed to the combining of the two entities in September 2019, the two lenders have agreed to delay the completion of the deal until at least December 2020, due to the impact of the Covid-19 crisis, noting that technical studies undertaken in the run up to the agreement may need to be revised.
All aboard
With the prospect of a new wave of potentially disruptive lenders on the horizon, the region’s incumbent banks have acted swiftly to limit their impact. In addition to improving their own banking apps, several regional lenders have gone a step further in launching “standalone” digital banks, adopting a strategy used with some success elsewhere by the likes of Santander with Openbank and CaixaBank’s imaginBank. “Why allow another player to come in and disrupt us when we can disrupt ourselves?” says Suvo Sarkar, senior executive vice-president for retail banking and wealth management at Emirates NBD, the UAE’s second largest bank by assets.
In spite of the lack of regulations permitting digital-only banks in the UAE at time of writing, such offerings are an appealing prospect for the country’s incumbent lenders, given favourable conditions on the ground. “If you look at the UAE, and Dubai, firstly, there’s a very high level of both internet penetration as well as smartphones, with about 98% penetration,” says Sridhar Iyer, head of Neo, the digital-only offering of Dubai-based Mashreq, which launched in late-2017.
“Secondly, we have a high expat population whose banking requirements — especially in terms of funds transfer and remittances to their family and friends in their home countries — is again done a lot better through a digital bank, which is faster and is more secure than non-digital methods. And finally, here in the UAE there is an eKYC (electronic know your customer) infrastructure that is best in class across the world.”
Emirates NBD launched Liv, its standalone online digital bank, in the UAE in 2017. Liv’s customer base stood at over 400,000 as of mid-July, with the service also launched in Saudi Arabia earlier this year. “Our target segments are young professional entrepreneurs, students, homemakers and freelancers,” says Jayesh Patel, head of Liv. “If you look at our transaction volume, we are heavily skewed towards digital merchants and e-commerce, which has increased during Covid-19.”
Targeting millennials
Liv’s focus on younger customers is understandable, given the Middle East’s young population, with two-thirds of the wider population aged under 35. More than 80% of Liv’s customer base is in the millennial age-range, with less than 10% of customers holding accounts with Emirates NBD itself, says Mr Patel.
Yet millennials are by no means the only users of the new online-only offerings from banks in the region, according to Neo’s Mr Iyer. “If a customer is smartphone savvy and internet savvy, he or she can be our customer, irrespective of their age,” he says. “We’ve seen customers much older than millennials who are very engaged. And we’ve seen some millennials who are not engaged this way.” Mr Iyer declined to share user numbers for Neo, but said that customer growth rates had risen significantly since the start of the Covid-19 outbreak, with the online-only bank opening new accounts at three to four times the rate of the main bank.
Customers aged between 18 and 28 account for just 15% of the overall customer base of Bahrain’s Ila, an online-only banking proposition launched by Bank ABC in November 2019, according to Sael Al Waary, Bank ABC’s deputy group chief executive officer. “Our largest customer segment is professionals between the age of 30 and 45,” he told The Banker. “It’s these people who really need and value the added convenience and disruption, say, for example, being able to pay their bills while they’re in the car.” Mr Al Waary said that Ila’s customer base was growing by approximately 38% month-on-month, well ahead of initial projections, with deposits growing between 20%–26% per month.
Learning from digital banks
In addition to pure retailing solutions, incumbent banks are increasingly targeting the region’s small and medium-sized enterprise segment. Emirates NBD and Mashreq in September 2020 unveiled E20 and NeoBiz, two new standalone digital banks targeting business customers.
While digital-only offerings enable incumbent banks to adopt best digital practices that can be used in their mainstream retail business, the prospect of a complete convergence between the two is an unlikely prospect, according to Emirates NBD’s Mr Sarkar. “Liv is a platform where we can experiment and then transfer best practice [to the main bank],” he says. “Based on Liv’s account opening process, we launched a digital account opening process for the main bank, which means you can now open an Emirates NBD on your mobile without ever entering a branch.
He adds, “Having said that, we do maintain a separate identity for Liv in terms of marketing, which is more playful and colourful, and a bit more on the edge than the main bank would like to be.”
In spite of such early successes with digital-only offerings, which also includes Commercial Bank of Dubai’s Now, the prospect for further launches by regional incumbents in the short term remains uncertain, as the impact of Covid-19 begins to impinge on banks’ balance sheets. Such pressures come, ironically, at a time when digital transactions across the region are surging as a result of restrictions on face-to-face transactions, in common with similar trends around the world.
“In some ways, the crisis is accelerating the opportunities [for digital-only offerings], but banks should be asking whether the time is right to make such a risk-based investment,” says a senior digital executive at a major regional bank, who asked not to be identified. “The main priority during Covid-19 is to be much more cost centric. Do banks really want to be adding more cost and compliance layers at a time when they’re trying to reduce those across other areas of their business?”
Such challenges are likely to prove even greater for genuine challengers planning to enter heavily banked markets, such as the UAE and Saudi Arabia. “Coming in as a new entrant into markets like these, where banks are very profitable and something of a closed group, is going to be a very tough ask,” the executive says. “The business case for a totally new entrant to come in and disrupt things is not immediately apparent in this region. There’s no glaring market gap in terms of underserved or underbanked populations.”
Digital hurdles
The surge in digital banking worldwide has, in theory, created opportunities for challenger banks worldwide, with lockdowns and restrictions on international travel hitting margins. However, Monzo, one of the UK’s most prominent challenger banks, saw its valuation plunge by 40% during its most recent fundraising drive in June, with competitors such as Revolut also struggling.
The executive noted that payment institutions and electronic money institutions are likely to be the earliest candidates for digital-only banking licences in Saudi Arabia. To date, SAMA has licensed six such entities, many of which have gained significant traction in the market by offering services including mobile payments and international remittances. Of the six licensed entities, STC Pay is perhaps the likeliest candidate to offer fully-fledged banking services. The mobile wallet provider, a subsidiary of local telco STC, has experienced explosive growth since its launch in late 2018, with more than four million customers.
After becoming the kingdom’s first licensed mobile wallet provider in January, STC Pay announced a partnership agreement in March with US-based banking platform provider Moven to expand its digital wallet offerings “to offer day-to-day banking capabilities”. In July the company signed an agreement with Visa to offer the payment giant’s cards to its customers.
“Based on the above, STC Pay seems to be preparing to make the transition from a digital secure wallet service to a digital-only bank in the near future,” says Srushti Ghisad, a Dubai-based senior analyst with Omdia.
An STC Pay spokesman declined to comment on the company’s banking plans.
