Over the past few years, we have seen an emergence of neobanks and an increase in traditional banks' digital offering in the UAE. Neobanks try to attract traditional banks' customers by typically offering products and services at a lower cost. The regulatory environment for fintechs in the UAE is also somewhat supportive of the emergence of neobanks.

Neobanks are still in the early stages of their development in the local UAE market. Their current product and service offering is limited and mainly concentrates on raising deposits and issuing credit cards. It doesn't help that most customers in the UAE continue to prefer traditional banks, which have digitalized successfully and whose digital products and services outperform those of banks in many other emerging markets. Therefore, we don't expect a significant migration from traditional banks to neobanks in the foreseeable future.

Neobanks Are A Global Phenomenon

In the past few years, neobanks haven't just increased their presence in the UAE, but globally--and their growth isn't limited to a particular country or region. In Europe, for example, neobanks like Revolut, N26, and Monzo attracted millions of users and expanded their services across multiple countries. In the U.S., Chime, Varo, and Ally Bank experienced rapid growth. Asia is another region where neobanks, such as WeBank in China, KakaoBank in South Korea, and Tonik in the Philippines, expanded their footprint.

According to Statista, the number of neobank customers worldwide reached about 188 million in 2022, up from about 19 million in 2017. This figure will likely exceed 350 million by 2026. The rise in customer numbers was accompanied by an increase in the number of neobanks to more than 500 in 2022 (see chart 1).

Chart 1

Neobanks' main customer value proposition is the convenience they offer. Customers can open bank accounts, transfer funds, and apply for loans easily and swiftly. Sometimes they also try to increase demand by lowering the costs for end-users. Unlike traditional banks, neobanks are generally not weighed down by legacy IT infrastructure and complex change management initiatives. While neobanks can be an alternative to traditional banks, in our view, they tend to act as secondary banks in many markets, because local populations still prefer traditional banks for core activities that require higher-touch customer service, such as borrowing and saving.

The UAE Is A Hotbed Of Digital Banking

The number of bank customers in the UAE is high and continues to expand. More importantly, the target customer base has a propensity to adopt digital banking services. According to data from research firm GWI, smartphone penetration in the UAE reached 96.2% in 2022, which is among the highest worldwide and slightly exceeded the average penetration rate of 95% in Europe (see chart 2).

Chart 2

High share of expats

The UAE's large expatriate population, particularly low-income workers who send money home, contribute significantly to the demand for lower-cost and higher-speed money transfer companies. According to the World Bank, UAE expatriates sent $46.5 billion to their home countries in 2021 (see chart 3). In our view, neobanks could attract a portion of UAE banks' and exchange houses' money transfer operations by lowering transfer fees, providing better exchange rates, and reducing transfer times. Even so, exchange houses still dominate remittances and process more than three-quarters of international outward remittances in the UAE, with UAE dirham 145.7 billion in 2022.

Chart 3

Tech-savvy population

The tech affinity of the UAE's population supports the demand for neobanks additionally and has led to the emergence of an attractive ecosystem for banks and fintechs, which offer state-of-the-art services that appeal to millennials and tech-savvy customers (see chart 4).

Chart 4

In the past few years, standalone neobanks, such as Zand, Wio Bank, and Al Maryah Community Bank, emerged in the UAE, while traditional banks launched their digital offerings, for example Emirates NBD's Liv and E20, and Mashreq Bank's Mashreq Neo.

Comparison website Finder suggests that the number of adults with neobank accounts in the UAE increased to 19% in 2022, up from 17% in 2021. We expect the adoption of digital-only banks will rise to about 35%-40% by 2027, in line with the global average. The question remains whether customers will continue referring to traditional banks for prime activities or if they are willing to switch to neobanks.

Supportive regulator

The supportive regulator in the UAE enhanced the formation of several neobanks over the last few years. The CBUAE supports neobanks by providing necessary licenses and approvals, while ensuring that they meet the necessary regulatory standards. This has made it relatively easier for neobanks to enter the UAE and to innovate, compared with other Middle Eastern economies.

Support from traditional banks

Most neobanks in the UAE benefit from traditional banks that have invested or partnered with them to offer customers access to neobank services (see chart 5). This helped strengthen the credibility of neobanks and made them more accessible to customers.

Chart 5

Key Limitations Remain

Less sophisticated offering

Neobanks provide digital banking solutions and user-friendly interfaces, but their product offerings are often limited, compared with traditional banks. Neobanks typically focus on basic banking services, such as offering payment solutions, taking deposits, issuing credit cards, and conducting money transfers. These services and offerings are less sophisticated than those of traditional banks.

Reservations about "digital only"

While the digital-first approach offers convenience and accessibility, it poses challenges for customers who prefer face-to-face interactions. This is particularly important in markets like the UAE, where corporate lending, which is more relationship-driven, accounts for more than 70% of banks' lending activities.

Lack of trust

Neobanks often face bottlenecks in raising funds. As recent bank collapses demonstrated, raising and maintaining customer deposits is based on confidence. Customers who are unfamiliar with neobanks and their relatively new banking model may have concerns about the safety and security of their funds--especially since the UAE doesn't have a deposit insurance scheme.

The Best Of Both Worlds

The CBUAE is aware of traditional banks' very important role in financing the local economy, considering that the UAE doesn't have a broad local capital market. The regulator understands the systemic risks associated with any disruption or failure within the banking system. It therefore prioritizes protecting the interests of depositors and aims to ensure the overall health and stability of the banking system.

At the same time, the CBUAE recognizes the potential benefits neobanks bring to the financial ecosystem. By embracing innovation and challenging traditional banks, neobanks can enhance competition and drive innovation in the economy.

The ultimate goal consists of preserving the stability of the banking system while protecting traditional banks against major potential disruptions from nonregulated entities--which don't include neobanks--new market players, and big technology companies. Up to now, the latter's involvement in the UAE is still limited to the provision of payment services, for example through Apple Pay or Samsung Pay.

Mass Exodus From Traditional Banks To Neobanks Is Unlikely

Despite neobanks' keen focus on gaining market share in certain product categories, for example deposits, credit cards, and remittances, a mass migration from traditional banks to neobanks, particularly in segments such as corporate banking and retail mortgages, is unlikely. Customer loyalty, the regulatory environment, and neobanks' non-existent physical presence represent significant barriers to a widespread adoption of neobanks. As the banking industry in the UAE continues to evolve, a coexistence of traditional banks and neobanks is more likely--with each catering to specific customer segments and providing unique advantages.