Traditional UAE banks must snap up neobanks to survive

Creative Commons

• Almost one in five UAE adults have a digital-only account
• Traditional banks need to build a robust digital bank strategy
• More than 168m people in MENA still don’t have a bank account

The UAE’s growing army of digital-only banks could soon be snapped up by traditional banks as digitisation continues apace, experts have told AGBI.

A global survey published on Tuesday by UK-based comparison platform, Finder, said 19 percent of adults in the UAE have a neobank account, up from 17 percent last year – and that adoption could hit 34 percent next year and 41 percent in 2027.

The UAE has similar neobank adoption levels to Hong Kong, Singapore, Spain and Mexico, the report added.

• Zand unveils big names as UAE’s digital banking rivalry hots up
• Wio Bank has a big idea: let SMEs spend less time on banking

The global market size for neobanks is estimated to be worth around $300 billion, with roughly 400 neobanks around the world serving close to one billion clients, according to a 2022 report by consulting firm Simon-Kucher. 

More than 50 neobanks launched globally in 2021, the report said.

Neobanks provide digital-only customer relationships, and aim to act as full replacements for traditional banking offerings.

“No bank is built overnight and is only as good as the people building it,” said Gaurav Dhar, CEO of Marshal FinTech Partners, and a MENA FinTech Association board member.

“This is a 10-year initiative to become a significant market leader. I see a day when large traditional banks buy neobanks, and small traditional banks merge or are acquired by neobanks.”

UAE banking goes digital

A number of standalone digital banks have launched in the UAE and wider region including YAP, which raised $41 million in July to fund its expansion; Wio, backed by Abu Dhabi’s $110 billion state holding company ADQ; and homegrown Zand, backed by Emaar Properties founder Mohamed Alabbar, who is chairman of the bank.

UAE banks have also launched their own digital offerings aimed at younger, tech-savvy consumers, such as Liv. and E20 by Emirates NBD, Mashreq Neo from Mashreq Bank, and ADCB Hayyak by Abu Dhabi Commercial Bank – but experts said the legacy spinoffs are not on par with digital disruptors.

“Incumbent banks should be concerned. Each of them should not only have a digital strategy but also a digital bank strategy, with three options: build a neobank, acquire a neobank, or digitise and defend against them by copying their strengths,” said Christoph Stegmeier, senior partner in Simon-Kucher’s global banking practice. 

“As of now, they [banks] are not on a par in terms of delivery speed, decision agility and user experience.

“They do have other advantages though, such as a larger client base, brand or, in some cases, licences.

Dhar warned that banks that rush to market to demonstrate that they have digital-only propositions “will fail or fade”. 

“On the flipside, those that are addressing the fundamentals of engagement processes related to B2C or B2B banking on a digital front will succeed over a period of time,” he said. 

While traditional banks may be temporarily on the back foot when it comes to aspects of technology adoption, speed and customer engagement, their days are not numbered.

“They need to become more competitive on all fronts,” he added.

Conversely, Dhar said it is challenging for a neobank to offer everything a traditional bank does right out of the box. 

“Having said that, they are ambitious to catch up,” he added. 

“The best ones will move quicker than others and retain customers. The shift from primary to secondary accounts will be an interesting point to review in the years to come.”

Small footprint

More than 168 million people lack access to a basic bank account in the Middle East and North Africa, according to the World Bank.

With a large share of the population aged under 30, the region’s growing population presents considerable opportunity for digital-first banks.

Vicky Bhatia, CFO at Zand, said the UAE’s digital banking space is in its nascent stages, with a “relatively small footprint” of fully digitised service providers, adding that legacy banks still have significant hurdles to overcome.

“We’re not limited by physical presence or a landmark location,” he said. 

“We’re invisible, but we’re everywhere the customer needs us to be. Standalone digital banks are also free from any legacy in technology, mindset, process, or policy. 

“That’s why we’re better equipped to build a robust data infrastructure vital for successful AI-enabled personalisation. 

“This is one of the challenges existing banks are facing as they partially migrate to the cloud or develop strategies for a multi-cloud data infrastructure environment.”

Navneet Dave, managing director at Network International, said that neobanking adoption is “poised to boom” in the UAE but that, ultimately, both legacy players and challengers might see more benefit from working together rather than battling for customers. 

“Neobanking is becoming increasingly competitive here in the UAE, particularly in terms of product, service, and back-end technology,” he said. 

“We expect more entrants as neobanking’s appeal as a contributor to financial inclusion and frictionless payment experiences in the UAE gains more traction. 

“I believe that challenger and traditional banks would benefit more from taking a collaborative route. 

“Traditional banks can help neobanks secure primary bank accounts to scale and broaden their presence, for example, while neobanks can help the former connect with young, tech-savvy customers. 

“They can help each other address some of their major challenges – like sustainability and profitability for challenger banks, and digital transformation and innovation for traditional banks.”