In Part I, we discussed the intricacies of the global open banking ecosystem and the potential of open data to transform the global financial sector. In Part 2, we will be exploring the intricate regulatory ecosystem of open banking in the Middle East (ME). The UAE, Bahrain, KSA are at the forefront of the open banking movement in the region - their combination of industry-led and regulator-led models are unlocking the perfect balance between the region’s growing consumer demand for targeted financial propositions and e-commerce.
Key drivers of open banking in the Middle East
The ME certainly sees open banking as an opportunity to leverage its rapidly expanding financial services sector. In a survey of central banks and monetary authorities representatives from 18 Arab countries, 94% said they view their national open banking frameworks as critical in the early stages in the finance industry. Their eagerness in implementing open banking is very compatible with the digitally native young population (almost 30% of the population between 15-29). Most notably, the UAE and Saudi Arabia have, respectively, a 200% and 120% mobile phone penetration rate, a 99% and 96% internet penetration rate. While open banking is still in its infancy in the region, the spectrum of models from industry-led to market-led shows the growing interest in and, the disruptive power of Open Finance.
The region's growth in open banking could easily be attributed to both regulatory and commercial intervention. The exponential growth in the region’s e-commerce is the result of investment in digitalization, financial services, logistics, infrastructure, and optimal demographic conditions. In parallel, central banks took this as a cue to start building a localized Open Finance ecosystem that perfectly combined broad global learnings with specific regional needs around financial inclusion. This came in the form of innovative standards and regulations that managed to optimize the OB industry in the region.
The progressive approach to open banking regulation has seen early entrants such as Tarabut Gateway (Bahrain), Dapi (UAE), and Lean Technologies (Saudi Arabia) generate significant investor interest as they enable open banking propositions to launch in the market. With Lean Technologies recently announcing a successful $33m Series A, led by Sequoia Capital - the first investment by the US VC firm in the GCC.
Regulators and markets are leading the way in Middle Eastern OB
As explained in Part I, Bahrain and Kuwait are implementing a mainly regulator-led model. Bahrain was the first country in the region to propose open banking legislation that encouraged financial firms to make APIs available publicly. Bahrain's government established the Bahrain Open Banking Framework (OBF) in October 2020 to establish standards and encourage the adoption of open banking. Bahrain’s leadership in this growth sector has seen instant developments, demonstrated by the launch Zain Bahrain went live with Tarabut Gateway Open Banking payments solution in December 2021. The service enables customers to use the service to pay their bills, recharge lines, and finalize all payment transactions from an app easily and without needing to enter card details.
In the UAE, open banking is primarily industry-led with guidance from the Abu Dhabi Global Market (ADGM) and Dubai International Finance Centre (DIFC). In April 2020, ADGM introduced a framework to supervise third-party FinTechs that provide these services, while the DIFC has been working with industry players to establish an API sandbox. As a result, banks in the country have been enthusiastic, with up to 88% of UAE banks wanting to open up their APIs in 2020.
In the middle of the spectrum of models, could be the unconventional approach of Saudi Arabia. Saudi Arabia recently shifted from an industry-led approach to a legislative approach to accelerate adoption. In December 2019, the Saudi Arabian Monetary Authority (SAMA) published draft payment services regulations. Subsequently, SAMA and the country’s central bank began to issue licenses to FinTechs working in the payments space; they recently announced the launch of an Open Banking Framework is expected to go live in mid-2022.
Challenges up ahead?
Despite its progress, the Middle East's FinTech ecosystem still faces obstacles. While the ecosystem is fast evolving in regards to tech-based solutions, it could benefit from additional funding from outside the country to expand its influence. Still, we see the MENA region amass a 215% year-on-year increase in venture capital.
Furthermore, while many Middle Eastern banks are collaborating with FinTechs on pilot initiatives and in-depth discussions, there have been few significant alliances so far. Only 5% of banks cooperated to" win" according to a Deloitte assessment of the interaction between digital leaders and FinTechs in the Middle East, while 15% partnered to "differentiate". While more banks want to offer FinTech features that improve the customer experience and differentiate them from the competition, fewer banks are willing to invest in an ecosystem of partnerships built around the value propositions offered by FinTechs. Often banks are hesitant to incorporate them into their overall strategy, preferring a "wait and see" strategy rather than proactively handling anticipated regulatory changes. To reach its full potential, the Middle Eastern FinTech industry needs to see greater integration between Fintechs and commercial banks through long-term partnerships.
The region is eager to diversify its financial services, namely through a strong commitment to restructuring its already sophisticated payments sector. Open banking might be a straightforward innovative process however, the complex dynamics between traditional banks, regulators, merchants, and third-party providers reveal an ecosystem in constant flux.
However, as technology and consumer demand continue to disrupt industries and force new approaches from financial institutions, fintech, and merchants, open banking will play an increasingly important role in the enablement of innovative fintech solutions. We expect the early success stories of Rain, Tabby, Spotii, etc. to be just the start!