RIYADH — Digital influence in banking was already well underway prior to the COVID-19 outbreak, and a new report by Boston Consulting Group (BCG) sheds light on how recent events have accelerated this further across the segment. The report, titled ‘The Regulator’s Dilemma: Financial Innovation Within a Regulatory Paradigm,’ details how tech giants’ success in raising standards concerning online experiences has driven increased consumer demands for digital banking services in the Kingdom of Saudi Arabia (KSA).

As online services witness an uptake amongst Saudi customers, banking is fast becoming digital. As per the report’s findings, the use of digital banking channels has increased significantly across the country during the pandemic, with 43 percent of customers using online banking and 55 percent using their respective banks’ mobile app more often.

This year, consumer expectations have shifted to include simpler interfaces and journeys, digital-first experiences, data-driven personalized offerings, and frictionless, on-demand access to information and services. Moreover, the pandemic has further pushed these trends, propelling financial institutions to move from a digital as a choice to a digital as the only choice approach.

“COVID-19 and subsequent events that took place have increased consumers’ already ravenous appetite for digital financial services. Like many other nations across the region and wider world, this applies to the KSA as well,” said Harold Haddad, managing director and partner, BCG Middle East. “Consumer demands have grown with Apple, Google, Facebook, Netflix, and other leading tech influencers simultaneously elevating the quality of digital interactions and online experiences — transcending industries to implicate banking too. As banks and financial technology (fintech) firms strive to accommodate customers with progressively sophisticated solutions, regulators are poised to take on a more important role in the coming period.”

The report highlights that regulators are not alone, and emphasizes the need to orchestrate across a set of actors. Regulators are one of six main actors in the national fintech ecosystem, with the others being education and research institutions, venture capital funds, startup incubators and accelerators, public institutions, and incumbent banks.

Looking ahead, how successfully regulators steer the ever-evolving sector will depend on how well they understand and support new aspects of fintech innovation, cybersecurity, and consumer privacy and security. In the Middle East, operational fintech’s have grown from 30 in 2008 to more than 200 today, and these firms, together with traditional banks, are working relentlessly to ride the current wave of digital momentum. Because they are developing and adopting the latest digital technologies at an unprecedented pace, regulators need to proactively build their fintech agenda or else they’ll be struggling to keep up.

“The ultimate objective from a regulator standpoint is to maintain the financial sector’s stability while protecting consumers from inequitable, deceptive, or abusive activities,” said Haytham Yassine, principal, BCG Middle East. “We have seen from numerous studies that economies that foster innovation in financial services open doors for digital advancement and economic growth. Regulators in KSA should build on the country’s fintech momentum and further drive their regulatory agenda to foster financial innovations amid the increased consumer appetite for digital banking channels.”

BCG has identified four areas where KSA regulators can take proactive measures to support innovation while preserving stability:

• Revamp regulatory frameworks to foster fintech’s: Regulators can continue building on their momentum in this space and move licensing from entity-focused to activity-centric, focusing for example on issuing electronic money, providing payment services, and offering crypto-exchange, among other activities. At the same time, they can use a risk-based approach to mandate initial capital requirements for licensed fintechs.

• Set up innovation sandboxes to safely test new ideas, products, and services: In these conceptual, controlled environments, fintechs can try out new ideas within pre-defined parameters. In addition to encouraging innovation while maintaining control over regulation and supervision, these will show where new or revised regulations may be required.

• Encourage banks to collaborate via open banking: Sharing and leveraging customer-permissioned data by banks with third-party developers and firms means they can build applications and services together. Wider access to financial data will also open up new opportunities.

• Build up cyber resilience: Regulators should set up dedicated cybersecurity functions, proactively develop related strategies, and bring together public and private entities to share strategic and technical cyber practices and learnings.

“Rather than working in isolation, regulators in the KSA should proactively pull in and work with the broader fintech ecosystem to make the national fintech agenda as effective as possible and foster innovation,” added Harold. “Consumer demands for digital will continue to increase, and regulators can help lead the charge by innovating and transforming financial services.” — SG