The disruption of financial industry with challenger banks

With continuous disruption in the financial and banking space, the Middle East region has witnessed a considerable increase in digital and neobanks. However, despite the rise, there is still significant room for expansion, driven by shifting customer behaviour and growth in millennials and GenZ.

In an interview with Gulf Business, Saqr Ereiqat, co-founder and managing partner of Riddermark and Ahmad Abu Eideh, CEO of United Arab Bank, share their insights from the industry.

Tell us about Fintech Surge and your vision for it.

Saqr: In today’s world, finance and technology are inextricably linked. Fintech Surge is at crossroads of the financial industry’s most significant technological breakthroughs and discussions, with the potential to have an immediate and massive impact. The event will provide a platform for banks, insurances, technology providers and regulators to exchange ideas and thoughts regarding the latest industry trends.

The global fintech market is valued at about $127.66bn in 2018, and is expected to grow to $309.98bn at an annual growth rate of 24.8 per cent through 2022.

New analysis from Accenture, built on datasets covering 20 of the largest economies responsible for over 75 per cent of global GDP worldwide, suggests that as much as $416bn in revenue will be at stake as the open data wave arrives. This revenue is likely to be captured or defended by agile players who recognise the opportunity early.

Tell us about your inaugural fireside chat for the event.

Saqr: One of the main subjects of conversation was challenger banks. In the words of Ahmad, “[…] banks need to have continuous engagement and joint ventures with Fintechs.

What are challenger banks and neobanks, and how are they different from traditional banks?

Saqr: A neobank is an autonomous bank that accepts payments but does not have a physical presence. Instead, it uses the processes of a regular brick-and-mortar bank to provide credits on the backend from a commercial bank.

Users can communicate with the bank through the app, and payments are usually instant credit. Challenger is a hybrid of a traditional bank and a neobank. Although it is highly digitised, it does have key branches and staff interacting with customers. Customers may connect with the bank via the app, and payments are generally processed instantly.

What will the bank of the future look like? Will we see traditional banks follow in the footsteps of challenger banks?

Ahmad: We must consider open banking to be the future of banking. Challenger banks are building their infrastructure to support open banking with ‘plug and play’ APIs that link into your network. Open banking is a critical component that is not being discussed, but we must be aware of its future possibilities.

What are the main challenges for the financial services industry? And what most significant change do you believe is required by them?

Ahmad: Banks, in my opinion, need to engage in ongoing collaboration and joint ventures with fintechs. Fintech firms are enthusiastic about what they offer, and banks should take full advantage of such talented individuals. Usually, the generations younger than us will advise us.

In the Middle East region, the challenger bank landscape aims towards the younger generations as around 30 per cent of the population are aged between 15 and 29. Furthermore, when it comes to the region’s competitors, there is a strong emphasis on mobile and digital banking, with the majority offering digital-only services.

Usually, challenger banks emerge in three different ways: divestment from groups, failed banks, and new entrants. So, where do you think challenger banks will rise from in the region?

Ahmad: In the case of failed banks, when a business acquires a bank or a failed bank, it typically does so to get a banking license, which are generally in short supply by the regulators.

In general, Central banks encourage potential investors to acquire the licenses of existing banks. Another alternative is divestment, but there is a fourth option: transforming current banks into challenger banks. From my experience, it is simpler to establish a new bank than to restructure or modify the DNA of an existing bank. Therefore, in the future, I believe physical banks will transform into challenger banks.

This interview is part of a series of discussions hosted by Fintech Surge taking place at Dubai World Trade Centre from October 17–20.