The Banking Executive Magazine - October 2023

UAE NEOBANKS 19 million in 2017. This figure will likely exceed 350 million by 2026. The rise in customer numbers was accompanied by an increase in the number of neobanks to more than 500 in 2022. In the UAE, the number of bank cus- tomers is high and continues to ex- pand. More importantly, the target customer base has a propensity to adopt digital banking services. Ac- cording to data from research firm GWI, smartphone penetration in the UAE reached 96.2 per cent in 2022, which is among the highest world- wide and slightly exceeded the aver- age penetration rate of 95 per cent in Europe The UAE’s large expatriate popula- tion, particularly low-income work- ers who send money home, contribute significantly to the de- mand for lower-cost and higher-speed money transfer compa- nies, the report noted. According to the World Bank, UAE expatriates sent $46.5 billion to their home countries in 2021. “In our view, neobanks could attract a portion of UAE banks’ and exchange houses’ money transfer operations by lowering transfer fees, providing better exchange rates, and reducing transfer times. Even so, ex- change houses still dominate remittances and process more than three-quarters of inter- national outward remit- tances in the UAE, with Dh145.7 billion in 2022,” the analysts wrote. Neobanks provide dig- ital banking solutions and user-friendly inter- faces, but their product offerings are often lim- ited, compared with traditional banks, the report noted. “Neobanks typically focus on basic banking services, such as offer- ing payment solutions, taking deposits, issuing credit cards, and conducting money transfers. These services and offerings are less sophisticated than those of tradi- tional banks,” the analysts wrote. While the digital-first approach offers convenience and accessibility, it poses challenges for customers who prefer face-to-face interactions. This is particularly important in markets like the UAE, where corporate lend- ing, which is more relationship-dri- ven, accounts for more than 70 per cent of banks’ lending activities, the report said. The CBUAE is aware of traditional banks’ very important role in financ- ing the local economy. At the same time, the CBUAE recognises the po- tential benefits neobanks bring to the financial ecosystem. “By embracing innovation and challenging tradi- tional banks, neobanks can enhance competition and drive innovation in the economy,” the analysts wrote. To strike a balance between protect- ing traditional banks and unlocking the opportunities neobanks offer, the CBUAE encourages financial innova- tion through supportive regulations. In 2020, the CBUAE launched the “FinTech Office” to develop the fin- tech ecosystem in the UAE. As part of the strategy, the CBUAE, the Secu- rities and Commodities Authority, the Dubai Financial Services Authority, and the Financial Services Regula- tory Authority of Abu Dhabi Global Market set out guidelines for finan- cial institutions that adopt certain technologies. These technologies in- clude application programming in- terfaces, big data analytics, artificial intelligence, biometrics, cloud com- puting, and distributed ledger tech- nology. Despite neobanks’ keen focus on gaining market share in certain prod- uct categories, for example deposits, credit cards, and remittances, a mass migration from traditional banks to neobanks particularly in segments such as corporate banking and retail mortgages, is unlikely, the report noted. “As the banking industry in the UAE continues to evolve, a coex- istence of traditional banks and neobanks is more likely — with each catering to specific customer seg- ments and providing unique advan- tages,” the analysts wrote. ISSUE 178 OCTOBER 2023 the BANKING EXECUTIVE 23