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UAE neobanks will complement, not replace traditional banks

S&P Global analysts say large scale migration is unlikely

Despite the rapid expansion of neobanks in the UAE, they are unlikely to generate a significant migration from traditional banks to neobanks in the foreseeable future, a report showed on Thursday.

“Neobanks are still in the early stages of their development in the local UAE market. It doesn’t help that most customers in the UAE continue to prefer traditional banks, which have digitalised successfully,” S&P Global analysts Puneet Tuli and Mohamed Damak wrote in a paper titled Future Of Banking: Neobanks In The UAE Will Complement, Not Replace, Traditional Banks.

Neobanks try to attract traditional banks’ customers by typically offering products and services at a lower cost. The regulatory environment for fintechs in the UAE is also somewhat supportive of the emergence of neobanks. Their current product and service offering is limited and mainly concentrates on raising deposits and issuing credit cards, the report noted.

In the past few years, neobanks haven’t just increased their presence in the UAE, but globally. According to Statista, the number of neobank customers worldwide reached about 188 million in 2022, up from about 19 million in 2017. This figure will likely exceed 350 million by 2026. The rise in customer numbers was accompanied by an increase in the number of neobanks to more than 500 in 2022.

In the UAE, the number of bank customers is high and continues to expand. More importantly, the target customer base has a propensity to adopt digital banking services. According to data from research firm GWI, smartphone penetration in the UAE reached 96.2 per cent in 2022, which is among the highest worldwide and slightly exceeded the average penetration rate of 95 per cent in Europe

The UAE’s large expatriate population, particularly low-income workers who send money home, contribute significantly to the demand for lower-cost and higher-speed money transfer companies, the report noted. According to the World Bank, UAE expatriates sent $46.5 billion to their home countries in 2021. “In our view, neobanks could attract a portion of UAE banks’ and exchange houses’ money transfer operations by lowering transfer fees, providing better exchange rates, and reducing transfer times. Even so, exchange houses still dominate remittances and process more than three-quarters of international outward remittances in the UAE, with Dh145.7 billion in 2022,” the analysts wrote.

Neobanks provide digital banking solutions and user-friendly interfaces, but their product offerings are often limited, compared with traditional banks, the report noted. “Neobanks typically focus on basic banking services, such as offering payment solutions, taking deposits, issuing credit cards, and conducting money transfers. These services and offerings are less sophisticated than those of traditional banks,” the analysts wrote.

While the digital-first approach offers convenience and accessibility, it poses challenges for customers who prefer face-to-face interactions. This is particularly important in markets like the UAE, where corporate lending, which is more relationship-driven, accounts for more than 70 per cent of banks’ lending activities, the report said.

The CBUAE is aware of traditional banks’ very important role in financing the local economy. At the same time, the CBUAE recognises the potential benefits neobanks bring to the financial ecosystem. “By embracing innovation and challenging traditional banks, neobanks can enhance competition and drive innovation in the economy,” the analysts wrote.

To strike a balance between protecting traditional banks and unlocking the opportunities neobanks offer, the CBUAE encourages financial innovation through supportive regulations. In 2020, the CBUAE launched the “FinTech Office” to develop the fintech ecosystem in the UAE. As part of the strategy, the CBUAE, the Securities and Commodities Authority, the Dubai Financial Services Authority, and the Financial Services Regulatory Authority of Abu Dhabi Global Market set out guidelines for financial institutions that adopt certain technologies. These technologies include application programming interfaces, big data analytics, artificial intelligence, biometrics, cloud computing, and distributed ledger technology.

Despite neobanks’ keen focus on gaining market share in certain product categories, for example deposits, credit cards, and remittances, a mass migration from traditional banks to neobanks particularly in segments such as corporate banking and retail mortgages, is unlikely, the report noted. “As the banking industry in the UAE continues to evolve, a coexistence of traditional banks and neobanks is more likely — with each catering to specific customer segments and providing unique advantages,” the analysts wrote.