Opening Up MENA's Banking Sector

Open banking is an idea whose time has come. The new term has emerged with the explosion of digital companies that are now increasingly offering financial services, and competing with traditional banking powerhouses.

Open banking is a secure way for customers to share their financial data with financial technology companies, known as fintechs.

Fintech allows financial services to be provided through digital tools and has emerged as the domain of small-to-medium enterprises in the region and elsewhere in the world. Doing away with legacy infrastructure, small fintech providers are challenging established banks and financial institutions.

In its simplest form, Apple Pay and PayPal are examples of open banking.

But the banking sector is not sitting idle and is prepared to maintain its market share with a number of digital services of its own, often in partnership with fintech firms.

A new report by Accenture, built on data sets covering 20 of the largest economies responsible for more than 75% of global GDP worldwide suggests that as much as US$416 billion in revenue will be at stake as the open data wave arrives.

“This revenue is likely to be captured or defended by agile players who recognize the opportunity early,” the management consultancy noted.

OPENING UP SAUDI BANKING
Virtually all the world’s major financial regulators and banks are putting in place some policies to support open banking.

The Saudi Central Bank plans to launch an open banking framework in 2022 as part of its commitment to diversify its financial-services sector, a key objective of Saudi Vision 2030 and a step toward making the country a regional and global fintech hub.

“Several factors make the Saudi market ripe for disruption by open banking. The relatively small number of banks means that adoption and standardization could occur faster than in other markets,” according to consultancy Strategy&. “The country’s relatively young population has adopted payment technology enthusiastically. The budding fintech ecosystem has strong backing from the government and the central bank.”

Strategy& expects Saudi banks to be able to move swiftly on the Open Banking area, given the relatively small number of incumbent players, all of which are preparing themselves for open banking.

“It is also evident that collaboration among all players — banks, payment service providers, and the Saudi Central Bank — will be critical to accelerating the process and ensuring the best implementation of open banking,” the consultancy noted.

The Central Bank of Bahrain also issued comprehensive rules on open banking in 2018 and launched the Bahrain Open Banking Framework in 2020.

In the UAE, the Abu Dhabi Global Market’s regulatory authority introduced a new regulatory framework for the authorization and supervision of FinTech firms providing third party services to customers of financial institutions. And in Dubai, the Dubai International Financial Centre set up an innovation license to encourage international fintechs to move to the freezone.

Both Bahrain’s and the UAE’s large and competitive financial sectors also lead the region’s vibrant fintech sector with technology incubators like Bahrain’s Fintech Bay and the UAE’s Fintech Hive and Hub71.

While regulators are playing a key role, open banking remains industry led.

Mastercard notes that the push to diversify from oil in the Gulf states is tying the countries together to form a global open banking microcosm.

“Some markets are pushing the agenda through regulation; others are letting the financial sector control the degree to which it embraces open banking,” according to the Mastercard report. “Where regulations are in place, banks will be under pressure to comply and will need to prepare upfront to ensure smooth and quick compliance.”

FINTECH FRENZY
While regulations are catching up, the fintech industry is gaining ground across the world and the wider MENA region.

The Middle East Institute estimates that the region’s FinTech sector is growing rapidly with a compounded annual growth rate (CAGR) of 30%.

“By 2022, it’s predicted that 800+ FinTech companies from sub-segments including payments, open banking, RegTech and compliance, smart lending, InsurTech, blockchain, and cybersecurity solutions for the financial industry (such as anti-money-laundering, anti-fraud, identity theft, identity management, and others) will raise over $2 billion in venture capital funding,” MEI noted.

Fintech accounted for all 12% of all venture capital deals in the wider MENA region in 2020, according to Magnitt, a regional research firm.
And that figure is expected to expand as the region’s young, tech-savvy population demands cheaper, fast and accessible services demands more from the financial services industry.

“No longer can incumbent banks assume they’re at the forefront of the customer relationship,” according to the Mastercard. “That now depends on state-of-the-art customer experiences, differentiated products and services, and competitive pricing. Otherwise, someone else will replace or disintermediate them. That’s as true for big banks as it is for small banks that may lack the technological infrastructure, investment capital and partnerships to innovate.” ©