The Saudi banking sector is driving economic growth and social inclusion through digital transformation
RIYADH: The digital revolution in Saudi Arabia’s banking sphere has significantly improved the country’s economic panorama, experts told Arab News, facilitating seamless financial transactions for customers.
Located in the heart of the Middle East, the Kingdom is distinguished not only by its deep-rooted history and cultural heritage, but also by its rapid use of digital advancements, especially in the area of banking.
In recent years, the nation has undergone a significant transformation in the banking sector, driven by the ambitious Vision 2030 program led by Crown Prince Mohammed bin Salman.
This visionary endeavor aims to expand the economic landscape, reduce dependence on oil revenues and propel the country into a new era of prosperity.
In an interview with Arab News, Saudi Arabian economist Talat Hafiz shared how digital transformation has positively impacted the country’s overall economic landscape.
Hafiz said: “This has enabled (customers) to conduct financial transactions and carry out transactions related to financial enterprises in real time, 24 hours a day and all year round, which has made it easier to do business in the Kingdom and in turn has had a positive impact on the overall economy as it has allowed save time and effort and ultimately reduce costs for businesses.”
Fabrice Franzen, partner at Bain & Co., told Arab News that the Kingdom is one of the first countries to benefit from a full digital banking license without the need to open branches.
“SAMA (Saudi Central Bank) has actively promoted the digital bank model and three licenses have been issued to local investors and companies, which should be implemented soon,” he added.
Franzen predicted that this should create healthy competition with traditional players and spur further innovation and improve customer experience.
Infrastructure and government support
The journey towards digitalization began with significant investments in telecommunications infrastructure.
These efforts have positioned Saudi Arabia as a leader in digital regulatory maturity and network speed among G20 countries.
According to the International Telecommunication Union’s Regulatory Maturity Index, the Kingdom secured first place in the Middle East and Africa and ninth among G20 countries.
Notably, Saudi Arabia ranked sixth in the world for the fastest download speeds on fifth-generation networks, demonstrating its remarkable progress.
Development of digital banks and banking solutions
STC Bank given the green light in 2021. Screenshot
Demonstrating government support for digital transformation in the banking sphere, the Saudi Arabian government has approved the licensing of two local digital banks in 2021: STC Bank and Saudi Digital Bank.
This involved the transformation of stc pay into a local digital bank, now known as “STC Bank”, equipped to conduct banking operations in the Kingdom, with a capital of SR2.5 billion ($670 million).
Moreover, an alliance of companies and investors led by Abdul Rahman bin Saad Al-Rashed and Sons Co. has established another local facility called Saudi Digital Bank with a capital of SR 1.5 billion.
The launch of Saudi Riyal Interbank Express, also known as SARIE – which literally translates from Arabic to mean “fast” – marked a significant turning point for the Kingdom’s digital banking sector.
This system not only increases the efficiency of the national payment infrastructure, but also fits seamlessly into the current development trajectory observed in the Kingdom’s payment sector.
According to Hafiz, this system provides all Saudi commercial banks with a mechanism to make and settle rial payments.
The economist added: “It provides a basis for improving banking products and services and underpins the Kingdom’s payment system strategy.”
Hafiz asserted that SARIE is a “state-of-the-art payment method” as it provides banks with a mechanism to safely and efficiently exchange remittance and direct debit messages on behalf of their customers, as well as for their own commercial purposes.
According to the economist, SAMA has consistently shown a strong interest in promoting the security and increasing the efficiency of payment systems, which is in line with its overarching focus on financial stability.
As a result, the central bank plays a key role in both the development and operation of payment systems in the Kingdom.
For Hafiz, SARIE undoubtedly marked a significant milestone, with a profound impact on consumer behavior and operational efficiency of financial institutions across the country.
Saudi Arabia’s support for fintech companies
An important catalyst for the development of the sector was the implementation of acceleration programs aimed at strengthening the expansion of emerging fintech companies.
This initiative has been developed to facilitate the transfer of best practices, tools and resources to empower emerging companies in the field of financial technology, support their development and strengthen their presence in the Kingdom.
According to Bain and Co., SAMA actively supports the development of Saudi Arabia’s vibrant fintech scene by providing a wide range of licensing options.
“Local investors (institutional, family offices) are also actively investing in fintech, ensuring a healthy flow of seed capital and supporting subsequent capital raises,” said the AN partner.
He added that Saudi fintechs benefit from a large domestic market of over 30 million inhabitants, which allows for rapid scaling.
Hafiz noted the importance of this program, especially when it comes to supporting new startups in fintech companies, as such programs are carefully designed to help fintech companies accelerate their growth by providing various services that will help them in an accelerated program increase scale of operations.
“The goals and objectives of the national Fintech strategy include the establishment of 525 Fintech companies in the Kingdom, which will create 18,000 jobs in the Fintech industry and contribute SR 13.3 billion to the Kingdom’s gross domestic product by 2030,” the economist emphasized.
The Saudi Central Bank is supporting the growing fintech scene in the Kingdom. File
Rapid development of electronic payments
By the end of 2021, the Kingdom’s retail sector witnessed a significant milestone in digital transformation: electronic payments accounted for 57% of all transactions, exceeding the target set in Vision 2030, according to central bank data.
Additionally, Saudi Arabia achieved the highest adoption rate for short-field communication, NFC and payments, reaching 94 percent, even ahead of EU countries as well as Hong Kong, Canada and the Middle East and North Africa region.
Financial literacy and social inclusion
Financial inclusion in Saudi Arabia aims to provide all citizens with affordable financial services, which is in line with the government’s efforts to improve financial literacy and economic participation.
According to Hafiz, this is becoming a major concern for Saudi Arabia’s financial authorities.
He attributed this to the aim of making financial services available to all citizens of the Kingdom at affordable prices, supporting the government’s efforts to improve the financial literacy of the public.
One of the main goals and objectives of the Financial Sector Development Program – the Saudi Vision 2030 program – is to improve citizens’ financial knowledge through proper financial planning and investments.
“Policymakers in Saudi Arabia have implemented robust policies that encourage and ensure increased financial inclusion as it is deemed essential to economic growth,” Hafiz added.
According to Franzen, the Financial Services Development Program has set an ambitious trajectory for the sector’s development as a means of supporting financial inclusion, literacy and efficiency.
“This benefits the economy and citizens of Saudi Arabia as they have greater access to cheaper and more secure banking solutions,” he added.
A diverse digital banking ecosystem
The digital banking landscape in Saudi Arabia is vibrant and offers a range of services to meet the changing needs of consumers.
“With the approval of three full digital banking licenses, Saudi Arabia is at the forefront of promoting fully digital banking solutions – on par with the United Arab Emirates and well ahead of other GCC (Gulf Cooperation Council) countries,” Franzen said.
He noted that the Kingdom can rely on advanced biometric customer identification regulations and centralized databases, which make digital implementation and authentication much easier.
Online banks, neobanks, challenger banks and banking as a service are all playing a role in the digital revolution.
“Although neobanks and challenger banks are still in their infancy, they are expected to accelerate innovation and put pressure on traditional players,” the Bain and Co. partner emphasized.
“Similar trends have been seen in other markets, such as the UK, where new digital banks have challenged incumbents on the High Street,” he continued, adding: “This has led to cheaper and more reliable financial services becoming the norm in the UK market (no or very low fees, instant solutions) to the benefit of the client.”
According to a report by KPMG, a global network of professional financial services firms, neobanks hold a 20 percent market share in Saudi Arabia’s digital banking sector.
Moreover, online banks have a 30% market share, while the banking-as-a-service segment is projected to reach a market valuation of $7 trillion by 2030, with an annual growth rate of 26%.
Better customer experience
Banks prioritize improving the quality of customer service thanks to advanced technologies. AI-powered chatbots offer instant support, and data analysis enables personalized financial advice. These improvements streamline operations and cultivate customer loyalty.
“In Saudi Arabia, 95 percent of people with bank accounts and internet access prefer digital banking channels over traditional banking channels such as physical branches and telephone banking,” according to a report by Backbase, a Dutch financial technology company.
Partner Bain and Co. said that “although customers have become accustomed to managing their lives from the comfort of their home using their phone (passenger transport, food delivery, online shopping, home entertainment), they expect a similar service from banks. “
Franzen added that mobile solutions provide an attractive alternative for people living in remote areas of the Kingdom, where branch densities are much lower than in major urban centers. It also offers cheaper banking solutions for people with lower incomes.
Future trends and forecasts
As digital banking players step up their operations, a noticeable trend is emerging: a surge in account openings, both primary and secondary accounts, as customers seek branchless alternatives.
Franzen said that as confidence in these digital-only players grows, a shift toward them serving as primary banks is expected, similar to countries such as the UK, where neobanks have secured more than 25 percent of core banking relationships.
“One of the key potential technology unlocks to power digital financial services would be greater flexibility around cloud usage and data storage policies,” he added.