Rules on open banking are essential for KSA becoming a regional digital hub

Open banking, where financial institutions share a customer’s financial details once consent is granted, is increasing in popularity across the Middle East. It is transforming Saudi Arabia’s financial services sector by encouraging competition and the introduction of new services. The Kingdom is already a lucrative market with swift digital transformation initiatives, in part because around two-thirds of the Kingdom’s population is under 35.

Saudi Arabia is putting in place the necessary framework to accelerate the adoption of open banking. Last January, the Saudi Central Bank, also known as SAMA, announced an open banking policy aimed at increasing efficiency and trust in financial services, while earlier this year the UK Regtech firm Konsentus launched the Open Banking Exchange in Saudi Arabia in January of this year.

Several factors are behind the Middle

East’s adoption of open banking, such as the COVID-19 pandemic which accelerated the need for banks and regulators to digitalize their operations. Local policies also play a vital role. Several milestone infrastructure projects are currently underway, including digital rails that will enable real-time payments — such as Saudi Arabia’s instant payment SARIE system announced last April — and provide a secure way for customers and firms to process funds.

Saudi Arabia has prioritized its financial sector’s transformation as part of the Financial Sector Development Program, under the Saudi Vision 2030 plan for economic and social reform. The initiatives include the launch of Fintech Saudi — a platform that aims to boost the capabilities of the Kingdom’s fintech industry — and plans to shift 80 percent of transactions toward cashless payments by 2030. Additionally, the issuance of Payment Services Provider regulations has encouraged institutions to offer payment services such as digital wallets, payment initiation and aggregation. Another key initiative is the national quick response payment system which allows digital wallets to connect with other secure software systems.

The region’s high internet penetration and use of mobile phones, as well as a youthful population that embraces digital options, are also key factors. According to World Bank data, Saudi Arabia has one of the highest global internet penetration rates, at 98 percent, while its mobile phone penetration runs at more than 120 percent.

All these initiatives have helped to create an environment that is ripe for disruption and competition. The time has come for open banking to blossom in the Kingdom, supported by a solid foundation of centralized infrastructure and supportive regulation.

The move toward an open banking environment in the Kingdom means many traditional banks will need to update their systems further. Its young population has already embraced banking technology, particularly as the government and the central bank continue to support its fintech ecosystem. As a result of the number of financial institutions in Saudi Arabia, open banking may move more quickly than in other markets.

Furthermore, Saudi Payments, the country’s key network, is constantly modernizing its state-of-the-art infrastructure. Saudi Payments’ Electronic Bill Presentment and

Payment system, known as SADAD, in particular, allows the type of account-to-account payments that serve as a springboard for open banking.

The Kingdom’s native digital fintechs are well-positioned to benefit from this new era. To improve their value proposition, incumbent banks will need to quickly adapt their business models, embrace open application programming interfaces for use in software and focus on partnerships. This is particularly true when we consider that, in less than 12 months, three new digital Islamic banks have been licensed by SAMA.

This year will be critical for players as Saudi Arabia diversifies its financial services sector to achieve its goal of becoming a regional innovation hub. Open banking represents a paradigm shift for banks and the financial services industry, one that will alter how banks view their business models, services and competitors. Banks, the central bank, fintechs and payment providers must work together to gain public trust. First movers will help set the stage and write the rules for open banking, with the potential to emerge as winners.