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Digital Influence in Banking – New Report Finds it was in the UAE Before COVID

Digital influence in banking was already well underway prior to the COVID-19 outbreak, and a new report by Boston Consulting Group (BCG) sheds light on how recent events have accelerated this further across the segment. The report, titled ‘The Regulator’s Dilemma: Financial Innovation Within a Regulatory Paradigm,’ details how tech giants’ success in raising standards concerning online experiences has driven increased consumer demands for digital banking services in the United Arab Emirates (UAE).

As online services witness an uptake amongst UAE customers, banking is fast becoming digital. As per the report’s findings, the use of digital banking channels has increased significantly across the UAE during the pandemic, with 42 per cent more customers using online banking and 65 per cent more using their respective banks’ mobile app more often. This year, consumer expectations have shifted to include simpler interfaces and journeys, digital-first experiences, data-driven personalized offerings, and frictionless, on-demand access to information and services. Moreover, the pandemic has further pushed these trends, propelling financial institutions to move from a digital as a choice to a digital as the only choice approach.

“COVID-19 and subsequent events that took place have increased consumers’ already ravenous appetite for digital financial services. Like many other nations across the region and wider world, this applies to the UAE as well,” said Harold Haddad, Managing Director and Partner, BCG Middle East. “Consumer demands have grown with Apple, Google, Facebook, Netflix, and other leading tech influencers simultaneously elevating the quality of digital interactions and online experiences – transcending industries to implicate banking too. As banks and financial technology (fintech) firms strive to accommodate customers with progressively sophisticated solutions, regulators are poised to take on a more important role in the coming period.”

The report highlights that regulators are not alone, and emphasises the need to orchestrate across a set of actors. Regulators are one of six main actors in the national fintech ecosystem, with the others being education and research institutions, venture capital funds, startup incubators and accelerators, public institutions, and incumbent banks. At present, UAE regulators have taken steps towards fostering fintech innovations. Abu Dhabi Global Market (ADGM) makes use of a regulatory sandbox that allows testing of fintech solutions within a controlled environment, employing evaluation criteria such as level of innovation, consumer benefit, and testing readiness and scenarios among those most widely adopted. Furthermore, the Central Bank of the UAE has recently rolled out its stored value facility (SVF) regulations, regulating, licensing and supervising SVF providers including e-wallet solutions.

Looking ahead, how successfully regulators steer the ever-evolving sector will depend on how well they understand and support new aspects of fintech innovation, cybersecurity, and consumer privacy and security. In the Middle East, operational fintech’s have grown from 30 in 2008 to more than 200 today, and these firms, together with traditional banks, are working relentlessly to ride the current wave of digital momentum. Because they are developing and adopting the latest digital technologies at an unprecedented pace, regulators need to proactively build their fintech agenda or else they’ll be struggling to keep up.

“The ultimate objective from a regulator standpoint is to maintain the financial sector’s stability while protecting consumers from inequitable, deceptive, or abusive activities,” said Haytham Yassine, Principal, BCG Middle East. “We have seen from numerous studies that economies that foster innovation in financial services open doors for digital advancement and economic growth. Regulators in the UAE should build on the country’s fintech momentum and further drive their regulatory agenda to foster financial innovations amid the increased adoption of digital banking channels.”

BCG has identified four areas where UAE regulators can take proactive measures to support innovation while preserving stability:

Revamp regulatory frameworks to foster fintechs: Regulators can continue building on their momentum in this space and move licensing from entity-focused to activity-centric, focusing for example on issuing electronic money, providing payment services, and offering crypto-exchange, among other activities. At the same time, they can use a risk-based approach to mandate initial capital requirements for licensed fintechs.

Set up innovation sandboxes to safely test new ideas, products, and services: In these conceptual, controlled environments, fintechs can try out new ideas within pre-defined parameters. In addition to encouraging innovation while maintaining control over regulation and supervision, these will show where new or revised regulations may be required. ADGM’s RegLab and DFSA’s Innovation Testing License (ITL) are prime examples of the impact such initiatives can help drive.

Encourage banks to collaborate via open banking: Sharing and leveraging customer-permissioned data by banks with third-party developers and firms means they can build applications and services together. In jurisdictions without open banking, regulators have set up virtual innovation zones to simulate the concept. ADGM launched the FinTech Digital Lab for banks, startups, tech companies, regulators, and others to collaborate, pilot, and validate new offerings. Wider access to financial data will also open up new opportunities.

Build up cyber resilience: Regulators should set up dedicated cybersecurity functions, proactively develop related strategies, and bring together public and private entities to share strategic and technical cyber practices and learnings.


  • Executive Economic Development Advisor (Emerging Markets) | Contributor

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