Neobanks will account for a market size of more than $2 trillion globally by 2030 and grow at a compound annual rate of 53.4 per cent as digitally savvy users increasingly demand easy-to-access financial services, the Boston Consulting Group has said.
Regulatory changes combined with the mass adoption of the internet and smart technology will drive the sector's growth, a report by the management consultancy said.
“The FinTech sector in the GCC is expected to be valued at $3.45 billion by 2026 as a direct result of a boom in growth rates for digital payments and digital remittances,” said Bhavya Kumar, managing director and partner at BCG.
“As regulators relax barriers to entry, new companies and established players are looking to capitalise on the demands of a young and highly connected population that wants convenient, on-demand access to their finances and is keenly aware of what to expect in terms of sophisticated user experiences.”
Often referred to as challenger banks, neobanks are financial service providers that operate online only and have no physical presence.
They offer digital, mobile-first financial solutions for specific services long associated with traditional institutions such as retail banks, payment providers and international wire services, BCG said.
Neobanks are increasingly popular among Generation Z, as they serve their needs better than traditional banks.
FinTech start-ups first emerged after the 2007-2009 global financial crisis. The ensuing shake-up of banking regulations and the rise of new technology have enabled neobanks to disrupt the market with consumer-friendly services such as shorter account opening times, faster peer-to-peer transfers, credit building and payday loans.
Some traditional financial institutions have responded to the neobank challenge, including in the Middle East.
Banks such as Abu Dhabi Commercial Bank, Emirates NBD and Mashreq were quick to launch digital operations with Hayyak, Liv and Mashreq Neo, respectively.
There are at least 333 neobanks worldwide, including start-ups and digital-only operations by legacy players, a tracker by The Financial Brand publication showed.
There has been a more than 200 per cent increase in the number of neobanks since 2015, according to BCG’s FinTech Control Tower report.
The growth of these institutions is spurred by the need for on-demand and easy-to-access financial solutions sought by a young and increasingly digitally savvy demographic, BCG said.
“Traits that have often defined success for neobanks include digital and mobile-centric services, great user experiences, a lean and agile technology-first culture, and building brands that users have an emotional connection with,” the report said.
More than half of the GCC’s population is under 30. The region has one of the highest connectivity rates in the world, with more than 90 per cent of its population connected to the internet, far surpassing the global average of 51.4 per cent, according to the research.
It is expected that about two thirds of the GCC’s population will have 5G connections by 2026.
This combination makes the region ripe for FinTech and neobanks to hasten their growth, the report said.
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This year, Saudi Arabia licensed three digital banks and 19 FinTech companies to provide consumer microfinance, digital insurance and payment-related services, BCG said.
There were regulatory advances across the GCC, such as accelerator FinTech Hive at the Dubai International Financial Centre, as well as others in Abu Dhabi and Manama in Bahrain, the consultancy said.
“While traditional banks will retain a strong position in the near term, especially in terms of corporate banking and retail mortgages, neobanks will gain share in specific product areas such as payments, lending, buy-now-pay-later, cards and digital wallets, and remittances, by targeting specific customer groups such as the tech-savvy youth, expatriate populations and women,” the report said.
