GCC countries have been building strong foundations for transforming the financial sector by embracing a forward-looking digitization strategy. The region is ably supporting this digital bandwagon by creating a supportive regulatory environment so that it is well-positioned to tap into this sizable, multifaceted, and largely unbanked or underserved market.
The banking sector in the GCC is one of the fastest-developing banking markets in the world. As per industry research, retail banking revenues in the United Arab Emirates are expected to grow at a CAGR of 6.4 percent between 2021 and 2026, a sharp rise from 0.1 percent from 2016 to 2021. GCC economies—UAE, Saudi, Kuwait, Bahrain, and Qatar—are all set to witness an 8.8 percent CAGR by 2026.
Globally, we are witnessing a renaissance in the Banking, Financial Services and Insurance (BFSI) sector to make the services customer-centric, personalized, digitalized, and accessible. Digitalization is at the core of this transformation, driving impactful changes in retail and commercial banking, asset and wealth management, cards and payments, insurance and claims. As per new research, the MENA digital economy hit a new high, surpassing $100 billion in 2022. New industries, including finance, eB2B, and SaaS, emerged in 2022. Digital banks also made their debut in the Gulf area the same year. Tech-savvy consumers and fast-developing technology hubs are powering a massive digital transition in the Middle East banking industry.
A strong digitalization push by regional banks has stimulated demand for digital banking solutions, which are aimed at strengthening client relationships and nurturing bespoke approaches to product development. Middle Eastern banking institutes are emphasizing co-creating and building innovative business models to deliver revolutionary solutions to their customer base and facilitate a hassle-free and seamless digital banking experience.
Read: Fintech and digital banking: GCC countries reserve their seats
Middle Eastern market scaling growth
The Middle East is known for its early adopter status in technology and automation. Additionally, there is a great deal of interest from the finance sector in embracing digitalization. Cloud computing is already in the advanced stages of adoption, and soon the space will be captured by Metaverse once the financial institutions recognize its mighty potential.
The regulatory environment in the region is conducive to developing digital financial services in many ways. For instance, as part of Saudi Vision 2030, the Council of Economic and Development Affairs (CEDA) launched the Financial Sector Development Program (FSDP) in 2017. Several governments across the GCC have started to accept applications for ‘digital banking licenses’ including the UAE, Saudi Arabia, and Bahrain. For instance, Mashreq introduced Neo NXT, a digital banking offering for Generation NXT. This offering envisages promoting financial responsibility amongst the next generation by endowing them with a bank account, a debit card, and access to the Mashreq Neo App.
Abu Dhabi Islamic Bank (ADIB) is the first bank in the UAE to develop and deploy a government-linked facial recognition system, accessing the Ministry of the Interior’s central database for more secure account openings. Notably, the bank’s 2025 innovation strategy envisions further expanding its UAE retail base and leveraging data analytics and AI to advance its digital transformation.
Recently, Emirates NBD launched ‘Digital Asset Lab’, a platform enabling and accelerating digital asset and financial services innovation in the UAE that envisions co-creation and experimentation with the industry to develop innovative ideas in financial services using digital assets. Likewise, most countries in the region have encouraged regulatory initiatives such as innovation labs and regulatory sandboxes to explore and expand digital banking initiatives and stimulate a more flexible regulatory environment to accelerate fintech advancement.
For many companies, the Metaverse remains an unexplored territory, but the scenario is fast changing. For banks that ensure that their core IT is modular and digitally ready to interact in the metaverse, immense opportunities are set to unfold, as it’s not just about the advisory process taking place in the virtual world; the concrete transactions and the upselling and cross-selling of new products can also be executed in the metaverse.
Metaverse presents a plethora of opportunities to the banks – reducing the branch footprint, leveraging AR/VR to deliver hyper-personalized experiences, and eliminating intermediaries to understand the customer better leading to better cross-sell and up-sell and leverage the channel to deliver Financial Education. Experience of work implemented suggests three layered approaches for Metaverse starting with basic Digital Banking services, followed by Lifestyle services including shopping backed by financial services like Buy Now Pay Later (BNPL), integrated Home Loan services from identifying property to taking possession, and finally financial advisory services integrated into AI tools to deliver Robo Advisory and Financial Wellness.
To facilitate growth in the metaverse, the UAE government recently approved a digital economy strategy that seeks to double contributions by this sector to its GDP from 10 to 20 percent over the next 10 years. A recent industry study projects Metaverse to transform banking in the GCC. The use of the metaverse in banking will result in the emergence of fully digital bank branches, reducing or even eliminating the need for physical ones. In fact, the start has already been made, with a Kuwait-based bank recently becoming the latest corporation from the Middle East and North Africa to enter the metaverse. The bank now holds two sites in the metaverse, one on Decentraland and another on Sandbox.
A solid bedrock of growth
A consumer survey highlights that 58 percent of Middle Eastern consumers prefer digital payment methods, with just 10 percentpreferring cash. This evidence highlights the underlying growth potential of digital banking in the Middle East, as consumers are opting for compelling digital-only offers for financial products and services. In another survey conducted in Saudi Arabia and the UAE, about half of the respondents said they would open an account with a purely digital bank, and an additional 30-50 percent said they might consider it.
With all these phenomenal offerings, the Middle East is advancing ahead in the race to digitalize financial services in sync with the region’s national goals. In this fast-paced digitalization journey and the need to leverage new technologies to stay competitive – locally and globally, governments will need to play an active role in fostering innovation through sound regulation to protect customers’ privacy and confidential data and creating a level playing field for fintech and neo banks to compete with larger financial institutions through measures like Open Banking and incentivizing Financial Inclusion. In a crux, opportunities are rife in the region for fintech and neobanks.
For instance, Tech Mahindra has extensive experience working with established financial institutions, fintech companies, and challenger banks worldwide. This experience underscores the significance of banks adopting a dedicated governance mechanism and co-innovate with fintechs and partners to achieve digital transformation. There is a downside to this: Fintechs are prone to going out of business and will need constant monitoring. Banks find it more convenient to collaborate with trusted system integrators who assist them in operating within a structured framework. This allows banks to concentrate on devising new ways to engage their customers.
Working with fintechs requires investment in a ready and healthy digital ecosystem across various facets of banking and financial services. And lastly, system integrators have come to the realization that digital innovation in delivering end-to-end solutions to neo-banks extends beyond just banking customers. It requires a comprehensive understanding of all stakeholders involved, including branch staff, the contact center, and the underlying technology infrastructure. This understanding must also be in compliance with changing regulations to address key performance indicators such as cost-to-income ratio, profitability, and sustainability.
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