Insights: How BaaS can transform consumer financing in Saudi Arabia

Consumer lending in Saudi Arabia has been rising for several years due to the increasing demand for high-cost consumer goods, such as cars and home renovations.

The Saudi Central Bank (SAMA) revealed that consumer loans of Saudi commercial banks rose 13 per cent to SR445.8bn during H1 2022 compared to SR394.2bn in 2021.

With the country’s rapid shift towards digital finance, SAMA is working towards enhancing the financial sector’s digital transformation, with more than 35 fintechs already operating under its ‘Regulatory Sandbox’.

According to the regulator, these companies can use open banking services to utilise their customer’s banking data, with consent, to provide innovative financial services which meet changing demands.

Of these 35 fintechs, Sulfah was recently announced as the third consumer microfinance company to be granted a license in the kingdom. The regulator clarified that it would continue to provide licenses to companies specialised in this type of activity.

SAMA also indicated that licensing consumer-targeted activities, including other forms of financing such as point of sale (PoS), is a strategic step towards promoting the kingdom’s financial stability and supporting economic growth and development, in line with Saudi Vision 2030.

There is clearly a big focus in Saudi Arabia on bringing new fintechs specialising in consumer finance to the market. But what roles are financial institutions playing in improving access to and the quality of these services?

Consumer lending made easy through banking as a service (BaaS)

Securing a bank loan that suits individual needs can be difficult, time-consuming, and often unsuccessful. However, this is becoming much easier with banking as a service (BaaS).

A good example of this is the installation of solar panels in people’s homes. Using solar energy will save consumers money in the long term; however, many cannot afford the initial upfront cost to install the panels.

With BaaS, financial institutions can utilise a combination of traditional and alternative data sources to provide a more granular breakdown of the contextual factors that might support a loan. For example, if a customer has a poor credit score, primarily due to historical factors, yet has an exemplary record of paying their energy bills on time, a bank could offer a favourable loan for solar panels within the existing user journey.

Customers with solar panels can also reduce their loans when not at home, as surplus energy can be sent back to the national grid, effectively paying customers for what they haven’t used. Immediately, a circular economy is established whereby banks become enablers of both access to finance and sustainable environmental solutions.

With the Saudi solar energy market expected to record a CAGR of more than 10 per cent during the forecast period, 2022-2027, funding the installation of a solar panel project is an excellent example of how BaaS is supporting responsible consumer lending.

Another example is funding major life events such as weddings, funerals, or even home renovations, which can all be extremely costly. Institutions providing access to an array of financing options at the PoS allow consumers to choose higher-end models and services despite the cost.

Rather than choosing items that simply offer a solution, consumers can ensure they purchase products that truly suit their individual needs, with a financing solution to match. The financial institutions in this situation are monetising BaaS by acquiring and retaining more customers.

According to a study by Research and Markets, the embedded finance industry in Saudi Arabia is expected to grow by 38.7 per cent, reaching $3.65bn in 2022. As adoption grows, Saudi Arabia is entering a new era of opportunity, which gives more consumers access to loans, helping to fulfill its goals of being a leader in financial services on the global stage.

Accessibility, awareness, and personalised services are vital for consumers to access financing in the kingdom and worldwide. For financial institutions, BaaS enables them to provide these services in context – how and where consumers need them.

Nour Sabri is the lead client partner – BaaS at Finastra.