Challenger banking services are on the rise in the Gulf, in what are traditionally viewed as semi-protected markets, as newcomers look to target customers and services neglected or underserved by traditional banks, especially in the micro, small and medium-sized enterprise segment.
Xpence Ltd, a neobank combining book-keeping and business banking is set to launch in Saudi Arabia after signing a deal with Riyad Bank, Saad Ansari, the company's CEO and co-founder, told S&P Global Market Intelligence.
It will begin testing in Saudi Arabia in February with a small customer set, with full rollout expected in the late second quarter. In Bahrain, the company has secured BIN sponsorship — an alternative to joining a card scheme — as well as card issuing, with an office there also set to be operational by mid-February, Ansari said.
He said micro, small and medium-sized enterprise clients present a quandary for banks, since while they are corporate customers, they behave more like retail customers. Traditional business banking has "failed to meet the needs of the modern entrepreneur," and Xpence aims to disrupt the way the next generation of entrepreneurs will do business banking, he said.
In the UAE Xpence expects to launch services towards the middle of the year "with a slightly different value proposition due to the risk appetite of the potential partner bank," said Ansari. The company is also in talks with banks in Oman and Kuwait.
"Our aim is to be [Gulf Cooperation Council]-wide by early 2021," he said.
Traditional banks make account opening "cumbersome and much more difficult than it should be, while simultaneously charging exorbitant fees for making payments or international money exchange," said Ansari.
"There's also a long list of other unmet needs, such as tracking employee spending and automating accounting and invoicing. The challenges entrepreneurs face with their banking services can have a real impact on their startups."
The situation in the UAE is especially acute, with many entrepreneurs having to wait several months to be able to open an account, according to a 2018 Dubai Chamber of Commerce report. Nearly two-thirds of entrepreneurs surveyed described banking as the "first challenge" faced when starting a business.
Rolling back coverage
It comes as increased regulatory requirements are causing international banks to "roll back coverage of smaller clients in the region," said Daniel Gould, deputy CEO of the Anglo-Gulf Trade Bank, or AGTB.
AGTB is the newest bank in the UAE, having received a digital banking license from the Abu Dhabi Global Market financial free-zone regulator.
It aims to disrupt corporate banking not just in trade, but also in transactional banking services such as payments, foreign exchange and other treasury services, beginning in the UAE, Gould told S&P Global Market Intelligence.
Traditional banks face the problem of high, inflexible costs related to legacy systems and rising per-customer costs, partly due to sanctions and compliance issues around anti-money laundering and countering the financing of terrorism, said Gould.
"If you move beyond the multinational companies, availability of working capital finance and trade finance solutions in particular is very uneven, and generally tends to be inflexible or expensive," he said.
AGTB will be able to deliver services more quickly and more efficiently, meaning that smaller customers will be profitable, says Gould.
He said the bank has used new processes to reduce the cost of onboarding and retaining new clients, in spite of significant compliance requirements.
AGTB has partnerships with around a dozen software vendors including Microsoft, Publicis Sapient and Assurance Software, with Gould comparing their tech stack with "a very multifaceted Lego brick solution."
"[T]he core design principle of our technology architecture is a data lake, 'single source of truth'-type architecture," he said.
Still, due to its smaller size, Gould said AGTB will not be "true competition" for domestic banks, especially in the short to medium term, but will be looking at collaboration and syndication.
One focus for AGTB will be the U.K. and UAE trade corridor, including services, with the expectation that Britain will need to further develop its non-EU trade partnership once it leaves the EU, Gould said.
This is a strategic trade corridor that has significant growth potential because of Brexit and other factors, he said.
According to the World Integrated Trade Solution, there were a total of $9.64 billion exports from the U.K. to the UAE in 2017, and $2.24 billion in the other direction.
AGTB will begin with UAE clients, then expand to the U.K., and then regionally.
"Ultimately, we will look further east, towards India and the Far East as these remain some of largest trading partners with the UAE," he said.
The Gulf Cooperation Council banking markets have generally been viewed as semi-protected due to the reluctance of local banking regulators to grant new banking licences, or with licences only on offer in free zones that have restrictions including on deposit taking.
Changes in customer preference are the main risk of technological disruption for retail banks in the GCC, with money transfers, foreign exchange and payment services business lines most at risk, according to an October 2019 report from S&P Global Ratings.
Nevertheless, many local banks offer sophisticated banking apps and online services.
In the UAE, several established banks including Emirates NBD Bank PJSC and Mashreqbank PSC have set up digital "flanker" banks, including SME-focused digital bank offerings.
Some GCC bank business lines will remain protected from fintech in the medium term, including corporate lending, where "human added value remains significant in the region," said the report.
"Therefore, even if customers' preferences continue to evolve, we think that risks to these banking systems remain contained, at least in the next two years."