Digital-only banks in the Gulf Co-operation Council are experiencing a boom. 

The year 2021 is set to be remembered as a watershed one for retail banking in the Middle East, with the anticipated launch of the region’s first purely digital banks. As many as five new entrants are set to launch services before the end of the year in Saudi Arabia and the UAE, with all but one set to gain licences as genuine greenfield entrants.

The licensing of digital-only players in the Middle East is in many ways an obvious play for the region’s central banks, falling in line with key digital innovation targets set out in national development strategies, such as Saudi Arabia’s Vision 2030 and Smart Dubai in the UAE. Yet, while government priorities and demographics favour a wave of disruptive new entrants, such companies may struggle in the face of stiff competition from increasingly savvy incumbent lenders, alongside ongoing regulatory challenges.

Long time coming

Central banks across the region have long expressed an openness to new digital-only entrants, even as regulations permitting such banks failed to materialise for many years.

The Central Bank of Kuwait is set to convert the local banking licence of Ahli United Bank into a digital-only licence, as part of the latter’s acquisition by Kuwait Finance House. Yet the deal has yet to be completed, having been pushed back by the Covid-19 pandemic.

Momentum behind digital-only banking began building in early 2020, when the Saudi Central Bank (SAMA) published new guidelines for digital-only banking, cumulative to the regulator’s banking licensing guidelines and minimum criteria for other banks.

In the Gulf Co-operation Council, rules regarding data domicile and data security are quite strict

Mohammad Khan, Boston Consulting Group

Yet the first public launch declaration came from the UAE: ADQ — an Abu Dhabi state-owned holding company for assets including Abu Dhabi Airports and the Abu Dhabi Securities Exchange — announced plans in October 2020 to launch a digital-only bank, using a legacy banking license freed up by the merger of National Bank of Abu Dhabi and First National Bank in 2017.

The announcement of the creation of the first two digital banks in the UAE — Zand and Al Maryah Community Bank — came six months later, both of which will enter the market using a completely new banking licence. Zand’s announcement was particularly noteworthy, with Mohamed Alabbar — chairman of Dubai-based real estate firm Emaar Properties and one of the country’s most prominent businessmen — taking on the role as the new bank’s chairman.

In June of this year, SAMA announced the award of Saudi Arabia’s first two digital-only banking licences. Significantly, one of the licences was awarded to STC Pay, the successful payments arm of mobile operator STC; the other going to a consortium led by local investment conglomerate Abdul Rahman bin Saad Al-Rashed and Sons (Artar).

Fertile conditions

Saudi Arabia and the UAE are in many ways fertile ground for new digital-only banks, given their young populations, with around two-thirds of Saudis and Emirati inhabitants under the age of 35. Smartphone penetration in both countries stands at 97%, compared with a European average of 95%, according to Deloitte.

“The underlying fundamentals in the UAE are very positive for new digital entrants, as there is a sizeable share of sophisticated consumers, and the country in general is young and highly digitally engaged,” says Mohammad Khan, a partner at Boston Consulting Group in Dubai. “Research we’ve conducted this year indicates that 60% of retail banking customers are dissatisfied with their current bank, and that 75% are open to switching to a fully digital bank.”

While UAE incumbent lenders have honed their digital offerings in recent years — in many cases launching standalone digital offerings — their counterparts in Saudi Arabia have thus far been less proactive, with soaring income from the country’s mortgage market in many ways blunting the need for digital innovation.

“The digital experience offered by Saudi retail banks is, on the whole, still miles behind the curve compared with leading regional and international fintechs,” says Henry Egan, director of consulting firm 11:FS. “From a technology point of view, the incumbents have struggled so far to produce a genuinely compelling, mobile-only digital experience that can quickly offer new products and features.”

Competitive strategies

Speaking at an industry event in Dubai in June, Olivier Crespin, CEO of Zand and former group head of digital at DBS in Singapore, said that the new bank would target both retail and corporate customers, offering deposit rates of around 2%, according to a report by CNBC. The bank, which has already begun onboarding ‘friends and family’ on both the retail and the corporate side, did not respond to questions about when it would begin rolling out services to the mass market.

Al Maryah Community Bank announced in June that it had made its banking products and services available to customers.

Suvo Sarkar1

Suvo Sarker, Emirates NBD

“The unique feature we bring to the table is the concept of co-creation, whereby we will assess customer anticipation through our artificial intelligence, and we will work towards making it a reality,” Mohammed Wassim, CEO of Al Maryah Community Bank, said in a statement.

The bank’s wholesale banking chief business officer Humaid Al Attar said in the same statement that the bank “will also reach out to the unattended and small businesses who find it difficult to access finance, and bring along the communities into mainstream banking through the digital platform”.

Al Maryah Community Bank’s Android app had been downloaded just over 1000 times as of mid-August. The bank could not be reached for comment on how many customers it had signed up to date.

ADQ and Artar have not disclosed the launch dates for their banking services.

While international digital-only banks, such as South Korea’s KakaoBank and the UK’s Revolut, have made headlines in recent months with soaring valuations, the recent woes of European pioneers such as Monzo and N26 highlight some of the difficulties facing new entrants, let alone established players launching their own digital offerings.

Although customers in Saudi Arabia and the UAE may be more predisposed to digital banking than in other markets, the competitive pressures facing the new entrants remain formidable. Even following recent consolidation in both countries, markets remain fiercely competitive, with 31 licensed commercial banks in Saudi Arabia and 48 in the UAE, according to the latest central banks’ data.

Faced with such pressure, the new banks need to offer “an authentic brand and purpose ... from day one”, says Mr Egan at 11:FS. “Particularly for a younger generation — which is key in the UAE and Saudi because of their demographics — they want something to stand behind, as a lifestyle enabler rather than a bank.”

Advantage STC Pay

Of the five new digital-only entrants announced thus far, STC Pay — set to operate under the name ‘STC Bank’ — is by far the most familiar name to regional customers. Launched in 2018, the company has grown to become one of the largest payment companies in the Middle East and north Africa, with a customer base of more than six million.

Already one of the most popular mechanisms for peer-to-peer payments in Saudi Arabia, STC Pay is looking to enter the UAE, Kuwait and Bahrain, according to a report from Reuters. In November, Western Union acquired a 14% stake in the firm for $200m, giving it an overall valuation of $1.3bn.

“STC Pay has got a number of unique advantages which mean you can’t discount them as a new entrant,” said Tristan Brandt, chief digital officer at Saudi British Bank. “They’ve already got direct access to a massive number of customers, having built a simple and usable payments solution. As has been the case with other fintechs elsewhere, they’re now in a strong position to augment this with other banking services.”

Despite such innate advantages, replicating the company’s payments success is far from a foregone conclusion when it comes to being able to offer mainstream banking services and generate a profit. “What we’ve seen in other markets is that making the transition from being a fintech focused on payments to a fully-fledged bank is not an easy one to make,” Mr Khan says. “It’s a remarkably complex undertaking to make that shift.”

Samir Satchu, a Dubai-based fintech advisor and former head of government relations at ride-sharing company Careem, the Middle East’s first tech unicorn, agrees. “It’s very difficult to make money as a smaller digital-only bank if you’re coming to the table with a straightforward consumer offering,” he says. “In order to survive, the new banks will have to either target a specific niche, such as the small and medium-sized enterprise sector, or be able to rapidly achieve scale across several different markets. However, the Gulf is not like the EU, where it’s much easier to get licensed in one market and then enter several others in a short space of time. There’s no single regulatory approach in the region.”

The disparity in regulatory regimes is apparent in the different licensing approaches taken by central banks in Saudi Arabia and the UAE. While the award of digital-only banking licences to STC Bank and Artar was announced on SAMA’s website in June, in line with licensing guidelines set out in early 2020, the licensing regime for the new UAE banks remains shrouded in uncertainty.

Mr Crespin said in July that the company’s launch was “subject to final administrative and licensing requirements”. The following month, Al Maryah Community Bank announced that it had received final approvals from the Central Bank of the UAE. However, neither of the lenders, nor ADQ’s new bank, are listed as licensed institutions on the central bank’s website, as of mid-August.

A spokesperson for the Central Bank of the UAE told The Banker that Al Maryah Community Bank is licensed by the central bank. Zand and ADQ have received in-principle approval but are not yet fully licensed.

Restrictions over data handling and the use of the cloud may also hamper both incumbents and new entrants.

“Globally, the standard for digital banks and their partners is to be cloud-native, whereas in the Gulf Co-operation Council, rules regarding data domicile and data security are quite strict,” Mr Khan notes. “The local data security requirements will have to be carefully managed by new entrants if they are to play in this region successfully.”

Incumbents fight back

Following the rise of digital-only banks around the world, established banks in the Middle East have made significant strides in recent years to overhaul their digital strategies, in a bid to not only counter the threat of future digital-only entrants, but also to streamline operating costs, as customers turn away from branch-based banking in favour of smartphone-based alternatives.

Mashreqbank, one of the UAE’s oldest banks, has trimmed its nationwide branch network from 34 in 2019 to just 10 this year. “There’s a complete shift in our strategy to focus on digital channels,” Ahmed Abdelaal, CEO of Mashreqbank told Bloomberg in July. Digital, he continued, now accounts for the majority of the bank’s new business: “We still have some clients who rely on brick and mortar, but our numbers show these are diminishing by the minute.”In the Gulf Co-operation Council, rules regarding data domicile and data security are quite strict

The bank is one of several UAE lenders to have opened “digital-only” offerings, with consumer-facing Neo and business-focused NeoBiz using different brands.

Overall account balances continue to ramp up fast, increasing by over a third, year-on-year, while debit card spend is up by 75%

Suvo Sarker, Emirates NBD

Liv, launched by Emirates NBD, has been a particularly successful example of a digital-only offering from an incumbent bank targeting millennials. Launched in 2017, Liv has signed up nearly half a million subscribers in the UAE, 85% of which are in the millennial age bracket.

“Despite [pandemic]-related challenges which saw a temporary slowdown in new subscriptions, customer acquisitions are back to pre-Covid levels and continue to gather momentum steadily,” says Suvo Sarkar, senior executive vice-president of retail banking and wealth management at Emirates NBD. “Overall account balances continue to ramp up fast, increasing by over a third, year-on-year, while debit card spend is up by 75%.”

Beyond its simple banking services, Liv introduced its Liv Prime subscription in March 2021, offering benefits including two-for-one cinema tickets, free deliveries on Deliveroo and a free Deezer Premium music subscription for a monthly or annual subscription fee.

“For lots of digital banks, the offering is just a digital version of what went before,” says Mr Egan. “What’s really interesting about Liv is that it’s now an offering that goes beyond banking and is positioned more as a lifestyle app. It’s going into new areas, bundling services and generating extra revenue for [Emirates NBD] in a low-interest environment.” 

Liv expanded into Saudi Arabia in early 2020, and has signed up around 75,000 customers, with around 6000 customers onboarded per month, according to Mr Sarkar.

While traditional Saudi lenders have been slow to use the digital spinoff model, this is set to change. Banque Saudi Fransi (BSF), the country’s sixth largest lender, has disclosed plans for its own digital-only bank, provisionally titled ‘Project AVA’. In a report published earlier this year, BSF’s chief strategy and digital officer, Mike Cunningham, described the project as an initiative “by Saudis, for Saudis”, that will not merely replicate the offerings of digital-only banks elsewhere. The bank did not respond to questions about Project AVA’s launch date.


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