How GCC neobanks are shaping the next banking revolution

Banking has traditionally been a conservative industry that enjoyed relatively high barriers to entry due to regulations that restrained access for non-bank competitors.

The changes in the regulatory environment and innovative technologies such as open banking have changed the field of play for GCC incumbents as they face fierce competition from neobanks who are billing on user experience as their point of sale.

The GCC is primed for a wave of change in the banking sector, driven by the region’s young and digitally-savvy population and high rate of internet connectivity, as nearly two-thirds of the population is expected to use 5G-enabled smartphone devices by 2026.

“Adoption by millennials, small and medium enterprises (SMEs), and those having sporadic incomes and earnings, embracement of innovative technologies and rising consumerism are some of the catalysts for the success of neobanks,” said S&P Global.

Neobanks, also known as challenger banks, have reset the paradigm for the traditional banking industry in terms of customer experience, product innovation, and pricing.

With a projected market value of $3.45bn by 2026, according to global consultancy firm Boston Consulting Group (BCG), GCC neobanks will soon become a part of the mainstream financial services system. These players have emerged as true game-changers, revolutionising how banking customers in the region manage their money.

“The GCC region offers an excellent environment for turbocharged growth to digital-only banks. Not only is the region overwhelmingly mobile-friendly – with smartphone penetrations exceeding 95 per cent in many countries – it is also significantly mobile-first, with engagement on mobile apps 1.6 times higher than in Europe and North America,” says Pedro Sousa Cardoso, chief digital officer, Retail Banking and Wealth Management at Emirates NBD.

Cardoso highlights that many GCC countries are at the forefront of exploring advanced banking technologies.

However, the long-term success of the market hinges on neobanks’ ability to create an artificial intelligence-powered banking model that is customer-centric, operationally efficient and profitable at scale.

The bank of the future

The digital transformation in the GCC financial services market was already underway before the turn of the decade, but it was accelerated by the outbreak of the Covid-19 pandemic. The result was a seismic shift in the way that customers organise their finances.

“In the rapidly evolving GCC landscape, the emergence of digital-exclusive propositions presents exciting opportunities,” says Radu Topliceanu, head of Neo and Personal Banking at Mashreq.

Neobanks such as Wio Bank are starting to have a tremendous impact on consumer finance, the digital economy, and society at large. Founded in September 2022, Wio has three main business lines: digital banking apps, embedded finance, and banking-as-a-service solutions.

The bank unveiled Wio Personal, its retail banking offering, in August to complement its first banking application, Wio Business. Wio Business has partnered with several entities including the Abu Dhabi Global Market (ADGM) and HUB71 to support and provide startups, freelancers and SMEs with access to simplified, seamless and full digital banking services seamlessly.

“As the digital revolution continues to drive changes across economies, it is paramount for us to evolve new operating models that contribute to the growth of digital businesses in the UAE. We believe the next evolution of banking is a shift from traditional online banking and pure-play digital banks to that of platform banking and we are excited to launch Wio as the first platform bank in the region,” Jayesh Patel, CEO of Wio Bank said at the digital bank’s launch in September last year.

Dubai-based digital banking platform YAP raised $41m in a funding round that was led by Saudi Arabia-based Aljazira Capital in July 2022 to fuel its expansion into new markets and augment its product offerings.

The challenger bank offers consumer debit cards, virtual cards with Apple Pay and Samsung Pay spending analytics, money transfers, bill payments, and real-time notifications of purchases. It has amassed more than 150,000 customers across three markets.

“The growth of these institutions is spurred by the need for on-demand and easier-to-access financial solutions demanded by a young and increasingly digitally savvy, often digitally native, demographic,” said BCG.

Al Maryah Community Bank is already a household name in the country’s financial service market. The Abu Dhabi-based neobank developed an innovative solution for its customers to subscribe to initial public offerings and invest in local stock markets through its mobile application.

Zand Bank, another digital-exclusive bank in the UAE, is expected to open its doors for business soon after receiving a banking licence from the central bank in July 2022.

Royal Strategic Partners-backed NAQD Community Bank is the latest neobank to join the UAE’s growing digital banking ecosystem after the challenger received preliminary approval from the Central Bank of the UAE.

“NAQD will provide its customers with a safe, seamless, and cutting-edge digital banking network supported by a reliable and advanced infrastructure as well as the progressive laws of the UAE’s digital economy,” Dr Hamad Al Ali, CEO of Royal Strategic Partners said in a statement after securing the banking licence earlier in March.

Neobanking in Saudi Arabia is yet to reach mainstream adoption but the market is already showing an appetite for alternative solutions that enable customers to access banking services without stepping into brick-and-mortar branches.

Saudi Central Bank (SAMA) began publishing licensing requirements for digital-only banks in 2020, in line with Vision 2030 and the financial sector development programme, and the country currently has three licensed challenger banks.

D360 Bank, a Shariah-compliant neobank backed by the Public Investment Fund and Derayah Financial Company, is targeting the underserved segments, focusing on addressing customer pain points and leveraging innovation and technology to make banking convenient, accessible and fair to all.

Speaking at the second edition of the Financial Sector Conference in March, Mohammed Ghonaim, acting CEO of D360 Bank, said, “With internal operations now live, D360 Bank is due to announce very soon when it will open its doors for public registration.”

stc Bank, which boasts eight million retail customers and more than 120,000 merchants within its network, is currently converting all its activities and functions from an e-wallet to a digital bank.

Saudi Digital Bank, which will run on cloud-native infrastructure and will focus on providing hyper-personalised financial services and products, will target both retail and small and medium-sized enterprise customers.

Based on these developments, GCC neobanks are gaining traction with consumers largely because of the superior products and personalised experiences they offer. However, as important as these offerings are within financial relationships, trust is a critical factor and incumbents are still operating from a position of strength on this front.

The balancing act

Banking executives in the GCC have recognised that digitalisation is essential to improve performance. However, transforming the business model and legacy system of a traditional bank is slow, costly and complex.

“As neobanks bridge the gap left by traditional banking infrastructure, they’ve significantly enhanced the user experience and promoted financial inclusion, prompting traditional banks to improve their offerings. This competition benefits customers, ultimately,” explains Abdulla Almoayed, founder and CEO of Tarabut Gateway.

Mainstream banks in the region are taking a greenfield approach, building entirely new digital-first subsidiaries that provide better customer experiences at lower costs. These digital offshoots are leveraging incumbents’ existing sizeable user bases to gain similar advantages while tapping into new customer segments.

Nomo, a digital bank backed by Kuwait’s Boubyan Bank Group, partnered with UAE’s Abu Dhabi Commercial Bank and Al Hilal Bank in April, giving UAE customers access to UK-based Shariah-compliant multicurrency current and savings bank accounts. The unique proposition allows customers to get finance to invest in the UK’s property market.

Similarly, Mashreq trimmed its nationwide branch network from 34 in 2019 to just 10 this year. The Dubai-based bank is one of several UAE traditional lenders that operates ‘digital spinoffs’ offerings with its consumer-facing Neo and business-focused NeoBiz.

Emirates NBD launched Liv., a digital-exclusive bank for millennials, in 2017. Building on this success, the bank unveiled E20 in 2019, a digital bank that caters to the needs of small and medium-sized enterprises.

Dubai Islamic Bank also introduced its digital spinoff rabbit in December 2021. The shariah-compliant lender’s digital banking platform offers current accounts, globally accepted debit cards as well as payments and money transfer services.

“The scattered market, where Saudi Arabia and the UAE comprise 80 per cent of the GCC’s total population, highlights the need for scalable cloud solutions. Amidst the rise of digital initiatives by incumbents, striking the right balance between innovation and regulatory adherence is crucial,” adds Topliceanu.

Overall, GCC mainstream banks are leveraging their existing resources to beat neobanks at their own game by introducing cloud-native digital spinoffs that enable faster time-to-market for the launching of new products.

These greenfield or speedboat banks are independent, cost-effective and agile digital banking spinoff that operates like fintechs.

Stepping into the spotlight 

The business of banking is changing rapidly and open banking is the perfect growth catalyst for neobanks. McKinsey said though several banks are adopting open-banking enablers, successful challenger banks gain a competitive advantage by building an open platform from the outset.

Cardoso said many GCC countries are at the forefront of exploring advanced banking technologies.

Open banking is revolutionising the GCC financial industry by enabling the secure sharing of customer financial data between banks, non-bank financial institutions, and third-party financial services providers.

“Open banking empowers neobanks to lead the shift towards digitised banking (and capture market share). We engage with banks and neobanks via partnerships; more comprehensive bank connectivity is better for the wider financial ecosystem,” adds Almoayed.

When looking at open banking, the power comes through the use of application programming interfaces (APIs), which enable third parties to bypass traditional intermediaries and replace them with more innovative technology.

“Banks have an opportunity to integrate into the growing ecosystem by embedding their services in apps run by big tech companies, cross-industry players, fintechs and other third-party providers,” said Accenture.

Open banking in the Gulf region exists on a spectrum, from models driven by regulators to those led by industry. In UAE, open banking is industry-led, with guidance from the Abu Dhabi Global Market (ADGM) and Dubai International Finance Centre (DIFC).

ADGM has developed its API regulatory guidance, while DIFC has been collaborating with industry players to establish an API sandbox.

SAMA issued a roadmap for open banking in 2021 and published an open banking framework in November 2022. Saudi Arabia also unveiled its ‘Open Banking Lab’ to speed up the development of open banking in the country in December 2022.

Last September, the Central Bank of Bahrain ordered retail banks and financial institutions operating in the kingdom to implement the requirements for the second phase of its open banking framework. The framework seeks to enhance the reach and quality of services offered by retail banks through digital online and mobile channels.

“The GCC has rapidly moved forward with truly transformative financial services innovation,” Almoayed reveals, adding that the region is committed to building an ecosystem where traditional banks, fintechs, and neobanks coexist and complement each other through collaboration.

GCC traditional banks still enjoy some benefits of being consumer’s financial focal points.

However, though they are expected to retain a strong position in the near term, neobanks will gain share in specific product areas such as digital payments, digital lending, buy-now-pay-later (BNPL) and remittances, by targeting specific customer groups such as the region’s tech-savvy youth.

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