Digital Transformation of the Banking Sector in the Gulf Countries: A New Era of Opportunities

Market Concentration and Technological Achievements

The banking sector in the Gulf Cooperation Council (GCC) countries is characterized by a high concentration, with a few large players controlling a significant share of the market. For instance, in the United Arab Emirates (UAE), the top 5 banks hold approximately 60% of the market share, while in Kuwait and Qatar, they control about 85% and 70%, respectively. Since the banking sector in the Gulf Cooperation Council (GCC) is highly concentrated, with a few large banks holding a substantial share of the market.

In the UAE, for example, the top five banks account for about 60% of the market capitalization of the Abu Dhabi Securities Exchange and the Dubai Financial Market . Similarly, in Kuwait, the top five banks account for about 85% of the market capitalization of the Kuwait Stock Market, and in Qatar, the top five banks account for about 70% of the market capitalization of the Qatar Stock Exchange.

The banking sector in the GCC is facing heightened competition due to the rapidly evolving technological landscape. The World Bank reports that the GCC region boasts one of the highest internet use rates globally, with a rate of 94% in 2023. In the UAE, for instance, the internet use rate stands at a staggering 99%, while there are more than two mobile phones per person. Similarly, in Saudi Arabia only 4% of the population has not embraced the internet but the number of mobile phones exceeds the number of people residing now in the country by 1.2.

This technology's advancement is a bedrock for the growth of digital banking services, including neobanks that are challenging the dominance of traditional banks. As a result, legacy banks are increasingly adopting fintech and digitization to stay competitive.

Growth of Digital Payments and Mobile Banking

The GCC region for the last three years demonstrates the trend of rise in popularity of digital payments, with the total volume of such payments being $100 billion in 2020, according to the International Labor Organization. This year this value is expected to reach $140-150 billion. The rise of usage of mobile devices in the region is also contributing to the growth of non-cash transactions. In Qatar, 91% of the population uses mobile devices, while in the UAE, this figure stands at 80%. Notably, over 50% of credit card transactions in the UAE are made through mobile in 2023. As a result, non-cash payments account for more than 80% of total transactions in the GCC, with projections indicating that this figure will reach 90% by 2025.

Mobile banking is becoming increasingly popular, with an estimated 70% of the population in the region using mobile banking services by 2024, according to a report by the International Finance Corporation. Saudi Arabia has already surpassed this number, with 76% of banking customers using online or mobile bank applications. Most banks in the region offer various perks associated with using mobile bank apps including non-physical prepaid debit cards (50%), virtual discount coupons (51%) and various benefits for loyal clients (53%).

The use of digital payments in the region surpassed $100 billion in value in 2023, according to a report by the World Economic Forum (WEF). Banks in the region are actively integrating blockchain technology into their operations. In 2020, around 70 banks in the region already used blockchain platforms. By 2025, this number is expected to rise to 100.

Fintech and Banks

Fintech adoption is becoming increasingly prevalent in the Gulf countries. According to a report by the World Bank, 75% of banks in the region planned to partner with fintech companies in 2023. This trend is driven by the recognition of the power of fintech to deliver sustainable economic growth, promote financial inclusion and create the economy of abundance.

Several Gulf countries are focusing on the digitization of the banking sector as part of their governmental strategic initiatives. For example, the UAE's National Program for AI and Digital Transformation is aimed to help banks to adopt more innovations allowing seamless digital transition of the country’s economy. Additionally, the UAE's Open Banking Regulatory Sandbox creates an opportunity to test all new digital decisions in the favorable legal environment.

Regulators in the region have recognized the potential of fintech and are committed to creating a favorable regulatory environment.

The Stimulation of Innovations

The digitization and fintech adoption are also being stimulated through interbank investments too. For instance, Bank Muscat, Oman's largest bank, has set up a strategic investment fund to invest up to $390 million in banks in the GCC over the next few years. Moreover, Gartner predicts that banking and security firms will invest $12 billion into fintech adoption and new innovations over the next 10 years, due in part to recent launches of public cloud data centers in the region.

The initiatives like Saudi Arabia’s Vision 2030 and the New Kuwait Vision 2035 are encouraging governments to utilize cloud services. After adopting the Cloud First Policy in 2019 to promote cloud adoption throughout the public and private sectors, Saudi Arabia has seen a 16% increase in the use of cloud services. By 2030, there might be a $10 billion market for cloud services in the Kingdom. Also the Saudi Arabian Monetary Authority established the Fintech Saudi initiative to accelerate the growth of fintech in the country. Moreover, as Faisal Alibrahim, Saudi Arabia's minister of economy and planning, told the audience during the last WEF in Davos, Saudi Arabia initiated reforms aiming to accelerate the non-oil side of the economy. Also in Davos Mohammed Al Jadaan, Saudi Arabia's minister of finance, stressed that the country would tap international and local debt markets this year to fulfill its strategic goals.

Traditional lenders and fintech startups in the region are racing to launch digital banking offerings, viewing the market's rapid adoption of mobile technology and economic growth as a massive opportunity. Around 40 digital banking offerings have been launched in the last year, with the UAE hosting six new neobanking brands. Neobanks in the Gulf countries are currently serving over 32 million customers, with the number of users of bank applications of all banking organizations in the Persian Gulf projected to reach 150 million by the end of the current year.

Another trend is the use of artificial intelligence (AI) and machine learning to improve processes in the banking sector. Banks are introducing AI systems in credit risk assessment, data processing, and customer service, which accelerates decision-making processes and improves customer service quality. AI-driven solutions such as identification document verification and biometric validation solutions, know-your-customer and customer due diligence, significantly mitigate the risk of fraud.

The metaverse, a virtual space where users can interact and engage with one another in a shared, immersive environment, is becoming a reality as technology advances. Millennials and Generation Z, who constitute approximately 60% of the population in the GCC, are comfortable with digital interactions and expect seamless experiences across all touchpoints.

The legacy banks have struggled to connect with the new generation of users, but those that can offer services on the metaverse platform will have a unique opportunity to engage with them. By bridging the metaverse with real-life banking, banks can also establish payment rails in the metaverse's back-of-the-house. This presents a perfect opportunity for banks to interact with consumers and provide them with innovative solutions.

We are observing a gradual shift of Gulf region banks towards becoming technology and data-driven companies, generating revenue from various digital services such as software, banking-as-a-service (BaaS), digital banking, and digital currencies. They are developing digital banking platforms and modernizing their technological infrastructure to facilitate the efficient growth of digital product marketplaces, mega apps, cloud services, API governance, and third-party data connections management.

Challenges and Solutions

However, there are challenges to the adoption of cloud services in the banking sector of Gulf countries. According to IDC, the Gulf’s lack of IT talent and skills availability is a major challenge for 45% of organizations when it comes to cloud management. This situation will slow the race of adoption of cloud services in the banking sector.

Digitization is also helping to combat crime risks in the banking sphere. The banking watchdogs are working to make the banking sector more vulnerable to financial crime risks. The Central Bank of the United Arab Emirates has issued a guidance note encouraging FIs to use the ‘Digital ID’ framework to conduct a customer background check. The Saudi Central Bank made an assignment to local banks to figure out and carry out a plan for the sourcing/development and use of counter-fraud digital innovations to mitigate fraud risks in their activities. The Qatar Central Bank ordered local banks to gather enough resources, including digital technology, to prepare effective decisions while facing challenges from cyber crime and other kinds of fraudulent activities of the criminals.

A breathtaking increase in the use cases of AI in the banking sphere is slated to benefit the overall security of the Gulf banks. This will help banks to stay ahead of financial crime and maintain the trust of their customers and the society in the broad meaning.