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Fintech competition means UAE banks must change to survive

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UAE banks have launched digital offerings aimed at younger, tech-savvy consumers, such as Liv. and E20 by Emirates NBD
  • UAE Banks Federation chairman stressed need to spend on digitisation
  • Physical banks closing as 95% of transactions now happen digitally
  • Digital bank launches in the region include YAP, Wio and Zand

The banking sector in the UAE could grow faster than the nation’s economy but competition from fintechs poses a threat to the survival of banks unless they restructure their operating models, according to a senior industry official.

Abdul Aziz Al Ghurair, chairman of the UAE Banks Federation, warned that banks will have to change the way they operate and increase their spending on digitisation amid the rising competition from fintechs.

“Competition from fintech and others will make it impossible to survive,” he said. “Banks need to fundamentally restructure their operating model.”

He was speaking on Tuesday at Abu Dhabi Finance Week, the first edition of a week-long event hosted by the Abu Dhabi Global Market. 

Al Ghurair said that reducing branch networks is “only a first step”. As a result of digital transformation in the sector, he said 95 percent of transactions now happen digitally for most leading banks in the UAE, in line with figures that are “among the top quartile in the world”.

About 50 percent of customer acquisition now comes through digital channels, he said, adding: “This has influenced the role of the physical branch in the UAE. Over 200 branches in the last three years have been shut down representing a 30 percent drop in number of branches in the UAE.

“One of the UAE’s leading banks has closed 80 percent of branches because of its digital transformation.”

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 Zand, backed by Emaar Properties founder Mohamed Alabbar.

“Digitisation in financial services will accelerate. Banks’ technology budgets and capabilities will have to continue to be on the rise.

“Strong digital capabilities give the bank opportunity to expand their role in tapping into non-banking revenue. We need to offer a lot more advantages,” said Al Ghurair.

He added that competition between banks and fintechs will increasingly move to more collaboration as new entrants continue to crop up in the market.

“The structure of the sector will change. The number of players is unlikely to decline despite the wave of consolidation. The attractiveness of the sector is likely to attract new entrants including international players and non-banking players,” he said.

Yap
UAE digital banking platform YAP raised $41m in July to fund its expansion

“Collaboration between banks, fintech and big tech will unlock greater value for the industry and unleash innovation for the UAE customer,” he added.

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, while 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.

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.

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

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.

“I believe banks in the UAE are well-positioned for the future,” Al Ghurair said.

“Our banking sector today is solid and robust. Banks are well capitalised and profitable – a pre-requisite for having a healthy financial sector in the long run.

“Total assets of the UAE banking sector have grown 12 times from $75 billion to today $900 billion [in the past 20 years]. The UAE has emerged as an undisputed financial centre in the region and among the top seven globally.”

He forecast that the UAE banking industry will continue to grow over the next few years. 

“Today revenue for banking is at $16.5 billion. By 2030, we expect that to grow by 52 percent to $25 billion in revenue. This growth is more than the country’s GDP growth over the next eight years.”

S&P Global Ratings noted in a report last week that the earnings performance of banks in the Gulf region will recover almost to pre-pandemic levels in 2022, attributed to accelerated economic recovery.

The UAE Central Bank projects real GDP growth to increase to 5.4 percent in 2022, supported by higher economic activity and higher oil prices, with non-oil GDP rising by 4.3 percent.

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