The Role of Digital Innovations in Banking Sector Development: The Case of Gulf Countries

Cutting-edge digital innovations create the necessary breeding ground for the further development of modern banking. They help retain a customer base and form effective strategies for expanding into international markets. The main driver of digital innovations in banking is the fintech sphere, which consists of startups.

Fintech startups refresh the activities of traditional banks. Banks that engage in fintech innovations and deal with fintech companies can stay competitive in a rapidly changing environment, particularly in the 21st century, when data flows quickly and new technologies emerge at an accelerated pace.

Open Banking

Any modern technology applied in the banking sector facilitates process automation, reduces the cost of information acquisition and processing, and enables big data use. Additionally, technology allows banking to become ubiquitous, for example, through open banking APIs. With open banking, the banking sector can collaborate with other industries to improve the user experience and offer banking services in many of the places where customers are, such as online stores and telecommunications services.

At the same time, open banking dramatically reduces entry barriers into traditional banking value chains. This increases competition for legacy banks, as more companies enter these value chains, and makes it easier for any business to adopt banking services in their existing digital channels. Consequently, any company can offer financial products in their channels, exposing consumers to banking services through many more channels. Open banking infrastructure thus paves the way for a more advanced, connected, open data economy.

Various types of platforms can be used for open banking purposes, including B2C platforms that offer services for individual consumers and B2B platforms that provide technical services.

In the UAE, the Central Bank of the UAE, the UAE Banking Federation, and Etihad Payments are among the key advocates for open banking. In Oman, the local central bank is overhauling the open banking framework. Qatar National Bank is driving an open banking platform for fintechs. In Saudi Arabia, dozens of entities operating in the regulatory sandbox of the Saudi Central Bank (SAMA) tested open banking approaches in recent years, and Arab National Bank became the first Saudi bank to receive an open banking license from SAMA.

Virtual Worlds

The fintech sphere introduces new competitors like neobanks, financial entities operating in virtual (digital) worlds, and harnesses the capabilities of digital banking.

The evolution of virtual worlds and virtual goods (e.g., digital fashion items) creates a new avenue for demand and an opportunity to utilize digital worlds to enhance digital banking.

This is driven by the need for new payment methods, digital communication channels, installment payments, and the use of cryptocurrencies and digital assets as financial tools. The emergence of non-fungible tokens (NFTs) bring additional value to digital worlds. By integrating innovations such as NFTs, cryptocurrencies, blockchain, and artificial intelligence, the digital world serves as a business model that bridges the gap between virtual and real worlds.

The impact of technology implementation is most pronounced when discussing digital innovations led by fintech companies. Furthermore, the digitalization of banking operations facilitates financial institutions in engaging with their customers within virtual (digital) worlds.

In 2022, Commercial Bank International distinguished itself as the first UAE bank to venture into the realm of virtual worlds. Concurrently, the Dubai Strategy was implemented with the objective of drawing over 1,000 companies specializing in blockchain and virtual worlds.

On February 22, 2024, in conjunction with the celebration of Saudi Arabia's National Founding Day, the nation's government unveiled a comprehensive digital initiative known as the "Cultural Universe."

We observe an increasing trend where more banks and fintech firms establish their presence in various virtual worlds. This trend is logical as sales of diverse products through virtual worlds rise, leading to intensified financial transactions within these environments. For instance, the growing online luxury goods market in Gulf countries will be complemented by transactions facilitated through the financial digital infrastructure of virtual worlds.

Biometrics

The fingerprint scans, facial recognition, even iris recognition – all step by step replacing the outdated PINs and signatures of the past. Banks around the world are embracing this technology, with the Middle East leading the charge.

Back in 2014, Emirates National Bank in Dubai made waves with a pioneering program: fingerprint authentication for ATM transactions. Since then, we see a biometrics boom. Fingerprint scanners, facial recognition systems developed by various fintech companies, and banks are implementing it.

By 2021, every key bank in the UAE was offering biometric authentication for their mobile apps. Fingerprint, facial, and even voice recognition – the future is here. And the trend keeps surging. Qatar and Oman are following suit, with similar widespread adoption happening right now.

Gulf countries are making a world name for themselves in the field of iris recognition. Saudi National Bank (SNB) and Qatar National Bank (QNB) have already rolled out iris recognition capabilities in their ATMs.

The Digital Personalization of Banking Services

Digitization is the area where banks are investing most heavily at the moment. Banks are reducing the number of physical branches and redirecting investments into digital solutions. In this evolving landscape, smartphones have become an alternative to traditional bank branches.

There was a 20% decline in bank branches across the UAE between 2017 and 2023, a trend also observed in Saudi Arabia, Qatar, and Oman, where mobile phone penetration exceeds 90%. In Saudi Arabia, the rise of digital-only banks, such as STC Pay, highlights the shift towards digital financial services for consumers. The Saudi Arabian Monetary Authority (SAMA) introduced licensing guidelines for digital-only banks in 2020, establishing minimum requirements for applicants.

In Qatar, banks like Qatar Islamic Bank (QIB) have embraced digital transformation by offering advanced digital channels and solutions, particularly for small and medium enterprises (SMEs). The digitization remains a focal point of the Al-Dhameen program, realized by several Qatari banks, which provided credit guarantees.

Oman's Bank Muscat is among the key players expanding their digital capabilities to meet changing customer needs. Lastly, the UAE stands out as a hub for digital banking innovation. Banks, such as Abu Dhabi Islamic Bank (ADIB), have excelled in blending personalized customer experiences with enhanced digital banking opportunities.

Despite fewer physical branches, the importance of personalized services remains undiminished. Digitization accelerates the processing of client needs, yet the personal touch remains crucial. This is underscored by the adoption of bank video chats and visualization technologies, which elevate the level of personalization and human-like communication in digital banking services.

As we witness in banks across the Gulf countries, the shift towards digital does not diminish the significance of personalized services. Indeed, the proliferation of bank video chats and visualization technologies not only preserves but enhances personalization, setting a new standard for how banks interact with their clients in a digital age.

More Digitization, More Value-Added Services

Banks have been among the most proactive entities in embracing digital technologies and creating practical applications. Digital innovations provide financial market participants with optimal opportunities to create value-added services.

The digital transformation has led many banks to engage with digital transactions, digital signatures, digital wallets, and virtual service points, such as robotic service functions.

Recent years have seen a shift from analog and face-to-face services to digital tools. Customers are seeking a financial institution that can handle all their needs via phone or computer, and fintech companies with their innovative solutions are making these clients' dreams a reality.

Fintech companies prioritize customer experience when developing new products and services. Collaboration with fintech businesses allows banks to offer services that would be impractical for them to develop alone, yet these services attract new customer segments and aid in retaining the existing customer base. By integrating fintech solutions and applying cutting-edge digital innovations, banks remain competitive and move confidently into the future.

Digitalization has thus played a crucial role in transforming the banking industry from a traditionally static institution with little competition into a dynamic landscape where the providers of the best experiences and services emerge as winners.