Banking in the GCC region is undergoing a significant transformation with the growing impact of regulatory-led open banking initiatives. The Central Bank of Bahrain is preparing to enter the second phase of its open banking plan. Saudi Arabia has announced the gradual implementation of open banking use cases. Kuwait is testing open banking products, and the Central Bank of the UAE has initiated an open finance initiative covering banks and insurers.
With open banking regulatory directives, which require the sharing of customer data (with the customer’s consent) with trusted third parties, incumbent banks are entering a new era of competition. New banking entrants such as fintechs and payment providers can access incumbents’ now-exclusive customer relationships and entice customers away with new products and services.
If they articulate the right vision, however, incumbent banks can meet this challenge head-on, adopt the regulatory dictates of open banking and go beyond them. Banks that embrace open banking—which will grow at a global annual rate of 25% to 27%, according to MarkNtel Advisors and Grand View Research—can retain their market share and transform themselves, create new revenue streams, and forge deeper customer relationships. In Saudi Arabia, for example, we project an open banking penetration rate of 20% with retail customers by 2030.
Incumbent banks can take three actions to take advantage of open banking and position themselves in its vanguard.
First, they can tap the customer trust they have earned to power their core business. To this end, they can begin by offering their customers open banking-enabled products, such as advanced personal financial management. These products are vital to gaining the consent needed to access customer data from other financial relationships and stop this data from simply flowing to other financial institutions.
This data-sharing consent enables a holistic understanding of customers’ financial behaviours, positions, and transactions. It allows banks to play a larger role in customer finances, identify otherwise overlooked segments eligible for premium offerings, tailor customer retention strategies, and improve selling and cross-selling capabilities. Moreover, the data enable banks to proactively monitor their customers’ finances and mitigate risks.
The consent to access customer data means that banks can streamline operational processes and better serve customers across their life cycle. Banks can use data to make customer applications easier, expedite onboarding, and reduce errors and delays. They can facilitate payment initiation services, allowing account-to-account transfers.
Second, incumbent banks can expand their revenue boundaries. Open banking enables banks to better assess potential customers’ creditworthiness and risk profiles by leveraging a wide range of data from linked accounts, such as transactional data, invoicing, payment history, and cash flow patterns. The resulting insights will allow banks to offer new products tailored to previously overlooked segments, such as micro- and small enterprises and gig-economy workers.
Banks can also exceed the regulatory mandates of open banking to monetise their data and services through premium application programming interfaces (APIs). European banks such as Barclays, BNP Paribas, NatWest, and Nordea have already created premium APIs beyond the regulatory mandate. These premium APIs encompass diverse services, including foreign exchange trading, beneficiary account validation, credit scoring, and derivatives trading.
Third, incumbent banks can use open banking to transform themselves by introducing new business models and propositions that extend beyond traditional banking roles. As banks meet open banking mandates and launch open banking products, they gain the capabilities to breach barriers between industries and develop innovative ecosystem plays, such as banking-as-a-service (BaaS) and banking-as-a-product (BaaP).
BaaS transforms a bank into a provider of capabilities, such as financial products, operations, technology, and licenses for nonbanking organisations to offer financial services — thereby gaining access to new customers through third-party distribution channels. For example, Standard Chartered Indonesia partnered with Bukalapak, a prominent e-commerce platform with over 110 million users and 20 million business owners as customers. Together, they announced the creation of a digital banking venture that combines Bukalapak’s e-commerce ecosystem with Standard Chartered’s BaaS solution.
BaaP entails a bank opening its platform and customers to third parties and their value-added products and services. Such collaborations have created banking platforms for small and medium-sized businesses, offering on-demand cash position visibility, easy payroll and direct deposit management, and access to additional products, including insurance, personal finance management, security, and utilities.
Open banking in the GCC region presents incumbent banks with a chance to offer existing and new customers tailored products and services while broadening their scope with new business models and partnerships across industries. It starts with a change of perspective from observing regulatory compliance to seizing competitive advantage.
