How neobanks are transforming GCC’s banking landscape

The GCC region’s banking sector has undergone profound changes as the proliferation of innovative technologies, shifting customer expectations, and disruptive forces propel the financial services industry forward.

The region is on the brink of banking transformation, propelled by its youthful, tech-savvy population and the need for on-demand and easier-to-access financial solutions.

The combination of the aforementioned makes the Gulf region ripe for fintech firms and neobanks, also known as challenger banks, to accelerate growth.

While GCC’s neobank credentials may fall short of those in other financial hubs in Asia and Europe, the region has made considerable progress on its digital banking licensing regime. The sector’s market value is projected to hit $3.45bn by 2026.

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

Over the years, the GCC region’s digital banking ecosystem has seen the entry of new players, expansion of existing fintech and telecommunication players into digital banking, and incumbent carving out specific digital banking platforms.

“Neobanks have already begun to carve out their space in the GCC region. Driven by a young and digitally savvy population, supportive legislation, and an increasingly tech-driven economy, their role ahead will only be further enhanced,” says Asad Ahmed, MD and head of Middle East financial services at Alvarez & Marsal.

However, strengthening that competitive advantage by capturing a higher share of consumers’ wallets and generating material profits remains a challenge for most neobanks. McKinsey said, in its Building a Winning AI neobank report, that the answer lies in embedding data and artificial intelligence (AI) capabilities extensively across all aspects of neobanks’ operations.

The adoption of AI in the banking sector is maturing, and neobanks are leveraging the technology to launch products at high velocity and seamlessly integrate open banking features. Open banking APIs facilitate the secure sharing of customer data between banks and non-bank financial institutions – a perfect growth catalyst for neobanks.

Scaling digital banking

Neobanks, banks that operate only online and do not have a physical presence, have arrived in the GCC and are here to stay. Moreover, their adoption and that of greenfield banks, which are incumbents’ response to these digital attackers, have soared in the region and are anticipated to persist.

“With endless technological possibilities and digital transformation in banking, neobanks can elevate the customer experience by bridging the gaps in traditional banking and simplifying the age-long complex banking processes,” according to EY.

Challenger banks’ primary customer value proposition is convenience. They allow customers to open bank accounts, transfer funds, and apply for loans easily and swiftly without having to visit a physical branch. In today’s digital-first world, new digital players such as Ruya are shaking up the market and transforming banking for individuals and companies.

Ajman-based Ruya, a digital-native Islamic community bank, is the latest challenger bank to join the UAE’s buoyant digital banking ecosystem after it secured preliminary approval from the Central Bank of the UAE as a ‘specialised bank’ earlier this year.

Abu Dhabi-based Wio Bank is one of a handful of neobanks that has reached scale and profitability in today’s uncertain environment by focusing on specific characteristics and capabilities in their strategic and execution plans.

Founded in September 2022, the state-owned neobank reported a full-year profit of $544,588 (Dhs2m) and revenues of Dhs266.4 m in 2023, marking its first full year of operations since its establishment. It also registered a significant increase in customer base across small and medium enterprise (SME) and retail sectors, with more than 50,000 Wio Business and 40,000 Wio Personal customers.

Wio has partnered with several entities, including the Abu Dhabi Global Market, Khalifa Fund and HUB71, to support and provide startups, freelancers, and SMEs with access to simplified and seamless banking services.

Saudi Arabia’s neobank market has yet to reach maturity, but the kingdom is already showing a growing appetite for alternative banking solutions that allow customers to access banking services without stepping into brick-and-mortar branches.

Last year, two of Saudi Arabia’s three licenced challenger banks – D360 and STC Bank – launched in a pilot phase. The GCC region has also seen the birth of several successful digital native banks, including Zand Bank, YAP and Saudi Digital Bank.

Overall, the rise of neobanks in the GCC is transforming the region’s banking landscape, promoting competition, and driving innovation across the sector, driven by tech advancements, regulatory support, and customer demand.

An expanding ecosystem

Technological advancements are driving the growth of the GCC banking sector, with innovation poised to play a crucial role in transforming the region’s financial ecosystem in the future. Armed with banking licences, skilled talent, extensive experience, ample capital, and valuable data, innovative incumbents are now on the offensive.

“Traditional banks are investing heavily in their digital infrastructure to match the flexible and speedy customer-centric approach that neobanks can more easily offer,” says Ahmed.

McKinsey said traditional banks in the GCC have been swift in adopting new technologies and service models. However, the sector’s long-term outlook continues to hinge on how incumbents respond to disruptive forces emerging both from within and outside the banking industry.

Several incumbents are launching greenfield neobanks to keep pace with evolving customer preferences and access new market segments. Existing players are starting to realise the merits of starting afresh.

Abu Dhabi Commercial Bank (ADCB) launched Al Hilal Digital in 2022. The lifestyle digital exclusive bank offers family accounts, an e-commerce marketplace, and other ‘beyond banking’ features.

Kuwait’s Boubyan Bank Group launched Nomo, one of the world’s first Islamic digital banks, in 2021. In April 2023, Nomo partnered with ADCB and Al Hilal Bank, giving UAE customers access to UK-based Shariah-compliant multicurrency current and savings bank accounts. Furthermore, Kuwait Finance House (KFH) launched its greenfield digital bank ‘tam’ in October 2023.

“tam is not only for completing banking transactions, but it is a substantial leap in digital transformation initiatives, supporting a user experience that aligns with the modern lifestyle of youth,” Khaled Yousef Al Shamlan, CEO of KFH Kuwait said at the launch event.

A successful new greenfield venture can represent a projected 10 per cent or more of its parent firm’s revenue, delivered at a fraction of the cost of traditional products.

The banking business is rapidly changing as financial services products and services built on innovative technologies are increasingly being placed in the hands of end customers.

Going forward, as banking customers’ behaviours and expectations change, so do financial institutions’ business and operational models.