The digital banking scene in the Middle East and Africa (MEA) is undergoing a significant transformation, with neobanks and challenger banks emerging as key players in reshaping financial services.
These digital-first institutions are bridging gaps in traditional banking, offering innovative solutions to meet the needs of a diverse and underserved market.
Neobanks in the MEA region, much like their global counterparts, operate solely in the digital realm, without any physical branches. On the other hand, challenger banks are predominantly digital but may have limited physical presence, distinguishing them from traditional banks. It’s worth noting that digital banks can fall into either category, whether neobanks or challenger banks.
While neobanks are still in their nascent stages compared to more mature markets like Europe and the US, they are gaining traction in the MEA region. This is particularly significant given the challenges individuals and SMEs face in accessing traditional financial services, such as opening bank accounts. Neobanks and challenger banks in the MEA region have emerged through two main avenues:
Banks creating their own neobanks
Unlike in regions like the UK, where neobanks are typically independent entities, in the MEA region, traditional banks have taken the lead in establishing neobanks. This has been achieved either through developing neobank platforms in-house or acquiring existing technology.
For example, Emirates NBD launched Liv, Mashreq Bank introduced Mashreq Neo, and ADCB established ADCB Hayyak in the Middle East. Similarly, Leumi Bank created Pepper in Israel, ABC Bank launched ila Bank, and Gulf International Bank of Bahrain introduced meem. In Türkiye, Akbank’s subsidiary, AkOde, developed Tosla.
Independent neobanks with bank partnerships
There are also independent neobanks operating in the MEA region, such as Now Money and Rise in the UAE, and Dopay in Egypt. These neobanks typically partner with established banks to operate under the bank’s licence.
For instance, Now Money partners with Commercial Bank of Dubai (CBD), Rise with United Arab Bank, and Dopay with Barclays and Visa. In Türkiye, Papara received approval in 2016 to operate as an electronic money institution. Papara launched a non-bank dependent prepaid card with the Mastercard logo and has since become a member of Mastercard, Visa, and the Interbank Card Centre, boasting over 12 million users.
Partnerships have played a crucial role in enabling neobanks and challenger banks to expand beyond their initial markets. This approach has proven valuable in a region with diverse countries, making expansion without partnerships both time-consuming and costly.
Government support
Government support has played a crucial role in facilitating the growth of neobanks and challenger banks in the MEA region. For instance, in Saudi Arabia, the Saudi Arabian Monetary Authority (SAMA) granted licences to STC Bank and Saudi Digital Bank in June 2021, followed by D360 in February 2022. In Israel, One Zero became the first bank to launch in over 40 years in January 2021, following open-banking reforms adopted in October the same year.
In Africa, the digital banking landscape has seen significant growth, with the continent hosting 21 digital banks serving over 18 million customers as of 2022. Notably, 80 per cent of these digital banks are concentrated in Nigeria and South Africa, although the landscape appears to be diversifying further based on recent data. Pan-African bank Ecobank is pursuing an API approach, allowing non-bank fintechs to connect to its financial infrastructure and access a broader range of products and services.
However, neobanks in Africa have faced challenges, particularly concerning bad debt. Despite this, there have been positive developments, such as South Africa’s TymeBank posting a profit for the first time in December. Nonetheless, many neobanks on the continent remain loss-making as of the current year.
Expanding services
In both Africa and the Middle East, neobanks and challenger banks have expanded beyond their core businesses through mergers, acquisitions, or organic growth to become superapps. For instance, TymeBank in South Africa acquired Retail Capital in 2022 to complement its buy now, pay later (BNPL) product, MoreTyme, while Liv in the UAE incorporated gametech and other components in 2020 to attract a younger audience. In terms of user adoption, the top 10 digital banks in Africa in 2022 are as follows:
In addition to the mentioned players, other notable participants in the digital banking sector in Africa include Orange Bank, a subsidiary of the French telecommunications giant Orange, which boasts extensive coverage in West Africa, and 7aweshly from Egypt.
A significant development occurred in November 2021 when the Central Bank of Nigeria (CBN) granted provisional approval to MTN of South Africa and Airtel of India, both prominent telecom companies with significant presence across Africa, to operate payment service banks in Nigeria.
This decision opens up opportunities for Nigerians, particularly the unbanked population, to access telecoms payment platforms such as MoMo and Smartcash. They can now join local telecom operators like Glo and 9mobile, which already hold this, and operate independently rather than forming partnerships.
This is an excerpt from The Fintech Times: Middle East and Africa (MEA) 2024 Report.