In an economically strategic move away from the longstanding reliance on the oil and gas industry, the MENA region is all set to become the next API economy.
Though still at a nascent stage, Open Banking or the API economy has all the building blocks – forward-looking strategy, regulatory frameworks, growth in primary sectors, and customer readiness – in place as an impetus to growth.
Let’s first see what Open Banking is and why it is important in a rapidly digitalising and an interconnected global economy.
Open Banking – What makes it highly relevant?
Drawing an analogy, Open Banking can be viewed as a bridge, connecting two towns and thereby, giving people more options to travel. As a byproduct, local economies are promoted.
In more technical words, it is sharing a bank’s customer data, by consent, with authorised third parties via Application Programming Interface (APIs) to develop customer-centric, innovative and customised services and products. As an example, Citi’s Developer Hub, which enables developers to connect to Citi via API, is being used by Intuit to authorise data sharing with QuickBooks and Mint.
The Present Play: MENA Region and Open Banking
To gain an insight into the current scope of Open Banking in the MENA region, it is imperative to first understand two aspects, that is, growth of digital banking and fintech in the region as a whole, and the dynamics of Middle Eastern states with reference to financial regulation and infrastructure.
Booming Digital Banking and Fintech Sector in MENA
The size of the digital banking market can be assessed from the 43% compound annual growth rate, and a customer base of 25 million people being served by 25 digital banks in the region. To sum, almost a quarter of Middle Eastern customers already use digital banking.
According to Dealroom, there are over 800 Fintech startups in the MENA region with a net value of USD 15.5 Billion.
Underpinning this growth are penetration rates of 93% and 70% for mobile telecommunication and internet respectively. As forecasted, smartphone penetration rate is to reach 80% and over 90% in MENA and GCC respectively by year 2025.
Collectively, this sets the tone for Open Banking in the region. For a more nuanced understanding of the key drivers of Open Banking, it will be helpful to review each element separately.
Regulatory Policy Development
Based on the wider 2030 Economic Vision of MENA region, the process of Open Banking regulatory framework has been kickstarted in the region. Open Banking framework has been considered to be critical in the early stages of this new industry, as viewed by 94% of survey respondents covering 18 Arab Countries’ central banks and monetary authorities’ representatives.
Bahrain, for example, considered as the regional market leader in the space, embarked upon the Open Banking journey in 2018, which took shape in 2020 in the form of Bahrain Open Banking Framework.
In the Kingdom of Saudi Arabia, the Open Banking Framework was launched in 2022. It provides a standardised structure for sharing financial information among players, encouraging innovation and increasing competition in the market. In addition, the Account Information Services (AIS) framework, outlining guidance on the sharing of banking data, provides use-cases for Open Banking’s account information sharing services for credit risk assessment, and tax filing etc.
The presence of 40 financial free zones in the UAE across seven Emirates has encouraged innovation in digital banking, allowing foreigners to own neo banks in the region while maintaining international banking regulatory standards.
Similarly, establishment of a regulatory sandbox, isolated testing environment by SAMA (Saudi Arabian Monetary Authority), supports fintech initiatives. In line with the Saudi Vision 2030, so far 20 fintech solutions have been accepted by this regulatory sandbox environment. In addition, the launch of an Open Banking Lab by SAMA is set to be positioned as a go-to tech environment for speedy development and deployment of Open Banking services. Similarly, Dubai International Financial Centre’s (DFIC) Open Finance Lab generates further interest in Open Banking in the UAE.
Additionally, considering payments play a crucial aspect of Open Banking, significant work has been done for this, including Saudi Arabia and UAE laying payment rails. SARIE, Saudi Arabia’s instant payment system, is an example of this and adds to the Kingdom’s agenda to have a 70% cashless economy by 2030.
With these elements coming together, collaboration, even on a cross-border level, is the requirement of the hour. Project Aber is an example of this; a collaborative effort of Saudi Arabia and UAE for the viability of a single dual-issued digital currency for domestic and cross-border payments.
Going Micro: The Movers of the API Economy
Open Banking Infrastructure Providers and White Label Solutions can be considered as local yet integral movers of the API economy. Following are some leading examples of the same:
Tarabut Gateway, a Bahrain-based organisation, is one of the largest Open Banking infrastructure providers in the region. As the first licensed Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP) in the MENA region, it connects banks and fintechs through its single universal Open Banking API. Thereby, allowing access to millions of financial accounts, unlocking data-driven insights and making instant account-to-account payments.
Being a proponent of collaboration, Tarabut is not only among the first fintechs to be tested in the Saudi Central Bank’s sandbox but also has been selected as the technology platform partner for DFIC’s Open Finance Lab, and established partnership with leading banks and fintechs across the region.
To offer an alternative to time-consuming payment software development by banks, white label solutions enable efficient and cost-effective ways of launching payment services, without banks needing to develop their own solutions. For example, prominent neobanks like Chime and Revolut rely on white label solutions to offer innovative banking services to their customers efficiently. Similarly, ABN Amro's new banking app, Grip, is powered by Tink's open banking platform, enabling non-ABN Amro customers to access and manage five different bank accounts simultaneously.
Where these are early movers of the sector, it is important to learn from global trends and advanced markets of the U.S and Europe.
Global Trends of the API Economy
- Regulatory Development
The adoption of Open Banking is being driven by regulatory developments in different markets, promoting competition and innovation. For example, Europe’s revised Payment Services Directive (PSD2) has mandated banks to open their APIs to third-party providers. Similarly, the case of different MENA region countries has been mentioned above.
- API Standardisation
As the network of stakeholders in the Open Banking market expands to include non-bank financial institutions, fintech startups, and other third-party providers, API standardisation becomes more critical than ever.
In simple words, by offering a common language for banks and third-party providers to communicate, API Standardisation reduces development costs and simplifies compliance requirements. NextGenPSD2, an initiative of the European Union under the Berlin Group, is an example of this.
- Artificial Intelligence
With the growth in Open Banking, and an increase in the number and volume of transactions, AI-powered systems are playing a pivotal role in analysing large volumes of data in real time to detect and prevent fraudulent transactions, and provide personalised product recommendations and financial planning tools.
Closing the Gaps: Way Forward
There have been significant developments in the Open Banking sector in the MENA region - true. However, challenges of limited access to financial services and poor financial literacy persist. Where it poses social and economic threats to segments of the community, there lies further opportunity and higher scope for Open Banking.
Concentrated effort towards standardisation and interoperability among financial systems will advance the impact of Open Banking towards promoting financial inclusion and provision of customer-centric customised solutions through facilitating Digital Banking and Fintech.
To make this happen, it is imperative for regulators, banks, and fintech companies to collaborate. It is then that the MENA region will truly emerge as the next API economy.