Saudi Arabia may see rise in digital-only banks, boost banking penetration levels

Saudi Arabia is expected to see an uptick in applications for digital banking licenses as the Kingdom strives to accomplish one of Vision 2030 goals to become a digital economy, analysts told Argaam.

On June 22, the Cabinet approved the Minister of Finance to issue necessary licenses for STC Bank and Saudi Digital Bank.

In addition, the Saudi Central Bank (SAMA) pointed out that digital banks aim to keep pace with the latest developments in the financial and technical sector and strive to achieve the objectives of the Financial Sector Development Program (FSDP) and Vision 2030 by developing the digital economy.

“The new digital banks will help strengthen the already available digital offering in the Kingdom. They will reinforce and further promote the supportive regulatory framework, which continues to evolve based on the latest developments in the industry,” Ashraf Madani, Vice-President, Senior Analyst at Moody’s, told Argaam.

“We could see applications for new banks from investors or even from already existing conventional banks who aim to establish a separate digital-only brand,” he added.

Junaid Ansari, Head of Investment Strategy & Research, Kamco Invest, expected a rise in application numbers, but warned the success rate depends on how the business is implemented.

“Tie-ups and collaboration will be the key to a successful digital bank,” he stated.

According to Amin Sakhri, Director, Financial Institutions at Fitch Ratings, the development of the digital economy is part of Vision 2030, and SAMA has been instrumental in the rapid digitization of the banking sector in recent years.

“The pandemic added to this trend and is now acting as a catalyst,” he said, stating banks reacted fairly swiftly by enhancing their digital proposition, which included establishing or partnering with FinTech companies.

Referring to more sophisticated markets such as the US, UK or Continental Europe, Jorge Camarate, Partner with Strategy&, part of the PwC network and the leader of ME Financial Services Practice, said there might be room for more digital banks in Saudi Arabia.

“We do expect more companies to apply for a digital banking license. The Kingdom is seen as one of the most interesting banking markets in the region, with strong growth potential. Therefore, the country will continue attracting international financial institutions, as well as local non-financial companies looking to expand into banking.”

Asad Ahmed, Managing Director, Alvarez and Marsal, also expected the number of digital banks to increase in the future.

“Overall, the new digital banks will introduce positive competition within the banking sector. It will encourage banks to provide services and products which have a greater customer centric focus and will help lower operating costs. The entry of digital banks in the sector will energize digitization among the existing conventional banks,” he stated.

Driving financial inclusion

According to SAMA, digital banks will mainly focus on individuals and small and medium enterprises (SMEs) in the medium to long term.

Madani expected digital banks to boost financial inclusion in areas where conventional banks have been reluctant to expand.

“Digital banks will help increase consumer awareness among the younger generation, which could see new customers starting their banking journey at a younger age than today.

“Saudis, especially the younger generation, are very tech-savvy consumers and are likely to welcome digital banks as they become available in the market,” he added.

Saudi Arabia has the largest population in the GCC, with favorable demographic features as over 65% of the Saudi population is aged under 35.

Therefore, digitization of financial services for traditional and digital banks remains an opportunity, said Sakhri.

Ahmed stressed that the coronavirus pandemic has further accelerated the growth of digital financial services, benefiting large banks in the Kingdom.

“Sustainable and responsible finance is on the agenda of the banks along with increased financial inclusion; hence digital banks will go a long way in delivering this.”

Targeting millennials

On the other hand, Ansari believed millennials will move to digital banks, in addition to existing banking channels.

“As seen in other markets, digital banks tend to complement the overall flow of finance in an economy that helps both existing banks as well as new channels of lending.”

However, Camarate anticipated some millennials to switch to the new digital banks, especially if they can deliver a superior customer experience, combined with better pricing and other attractive offerings.

Empirical evidence from the UK and Europe has shown the banking mobility rate will not change substantially; however, more millennials will recourse to multi-banking, which has traditionally been low in the Kingdom, added Antoine Khadige, Principal with Strategy&.

Upcoming challenges

While security may be one of the key issues with digital banks, Ansari said that a few large trusted digital banks are more effective and have a great impact on the industry than having a number of smaller players that affect consumers’ trust.

Sakhri said that the ability of traditional banks to adapt will be tested, and their franchises undermined in the longer term.

“We expect these banks in the shorter term to be well equipped to weather this, in particular as these have well-established domestic franchises. However, FinTechs’ ability to compete with well-established institutions on other traditional banking products remains to be proven on a larger scale.”

This challenge for FinTechs is higher in Saudi Arabia, where dominant franchises enjoy significant market shares of lending and deposits, Sakhri added.

While in the early days, there will be limited impact as the two banks are new and the regulatory framework around their operations will be formalized in the days ahead, Ahmed said.

“However, the message to the conventional banks is clear – the banking sector is opening up,” he concluded.

Write to Parag Deulgaonkar at parag.d@argaam.com