The UAE and Gulf have by now seen their fare share of neo-banks. But traditional banking heavyweights can be quite as influential in the digital domain too. Image Credit: Shutterstock

Banks will face a make-or-break period - or they will be consumed by the digital financial ecosystem movement. These platform-based ecosystems offer jointly developed and distributed goods and services.

As a result, organizations can enter new markets, develop new services, and acquire new customers more quickly and affordably than with conventional product development and go-to-market models. By 2030, digital ecosystems may account for a sizable portion of the banking industry's revenue pool.

Several established banks and financial institutions are beginning to mobilize as neo-banks and make financial transactions more accessible to all segments. In the Middle East, more than 20 neo-banks serve approximately 15 million customers and gaining popularity as they provide rapid access to digital financial services. These include Liv, Wio, Now Money, MenaPay in the UAE; STC Pay, AlAhli Digital in Saudi Arabia; and CASHU in the UAE, Kuwait, Bahrain, Oman, and Qatar.

According to our assessment, more neo-banks are under development and we can expect more launched in the next 12-24 months.

Despite the potential that neo-banks offer, fewer than one-third of the world’s largest banks are making significant investments in digital ecosystems. Nearly one-fourth do not invest in them beyond the occasional pilot. However, competitors from outside the traditional banking sector are taking action.

What is preventing banks from engaging digital ecosystems more fully? Given the risks associated with departing from existing business models, the fear of cannibalization, and the complexities of partner-based initiatives, not even the largest and most well-resourced institutions are certain about which approaches can generate the highest risk-adjusted returns.

Four ecosystem plays have been identified that can give incumbent organizations a strong marketplace advantage:

Build an ecosystem around the core and play as an orchestrator.

Under this model, organizations serve as the primary orchestrator, building an ecosystem that is closely tied to their traditional core business. They partner with businesses in different domains to build the ecosystem, then bundle their financial products with complementary offerings.

This archetype is suitable for banks that command a strong share in a specific market, or that wish to transform into an ecosystem player outright and helps banks defend against challengers. An apt example is Saudi British Bank (SABB), which has announced a strategic partnership with Visa’s Cybersource payment gateway and risk platform, to foster the bank’s growth in an evolving e-commerce space.

Go deep into specific verticals and markets

Financial institutions build ecosystems in specific industry sectors where they have strong existing penetration and growth prospects, offering their core products and services to these segments and tailoring or introducing others to provide additional value.

In this model a bank would partner with one or more large players in a given industry to help reach scale quickly, enabling all participants to benefit. For instance, STC Pay disrupted the remittance market in Saudi Arabia, and their cross-border money transfer service is powered by Western Union.

STC Pay has also launched Visa-powered physical and virtual debit cards for its customers. Now STC Pay is in the process of converting into a digital bank, STC Bank, with a capital of $670 million (SR2.5 billion). This approach allows digital banks to build on a differentiated client base and use their expertise to gain dominance in niches that competitors would find challenging.

Use ecosystems to learn and experiment

With this strategy, banks and financial services institutions use digital ecosystems as a learning lab to enable experimentation, diversification, and piloting to deal with external opportunities and threats.

Institutions can use these incubators to explore new products and business models, access modern technologies, and gauge which concepts have the potential for substantial commercial upside. Critically, such experimentation can reveal where products need to be simplified to work effectively on digital channels and where compliance procedures need to be streamlined — improvements that are cheaper and easier to address while still in the prototype.

This can be seen with the updated Regulatory Sandbox framework by Saudi Central Bank (SAMA), which provides more flexibility to companies in applying when they are ready with their proposed business models and concepts, rather than specific ones determined for the cohort. This fundamentally allows for further experimentation to find the best use cases in today’s new ecosystem.

Play as a contributor.

There are several ways in which banks can capture value on platforms managed by others. One is to be a generic contributor and embed white-labeled products and services such as payments or loans in non-proprietary ecosystems as additional avenues to drive growth.

For example, meem, the retail banking arm of Gulf International Bank, and MRSOOL, one of the largest delivery platforms in Saudi Arabia, launched co-branded debit and credit cards. This archetype can be an effective way for banks to experiment before committing to the core business.

Digital ecosystems can be a game-changer for banks, allowing them to leapfrog into new markets, acquire new customers, and diversify their product portfolio.

However, financial institutions must develop an ecosystem strategy that is closely aligned with the company's customer and commercial goals, as well as a road map that considers the necessary capabilities and investments. Those who approach the ecosystem opportunity with confidence and intent can de-risk complexity and returns, gaining an advantage over competitors who are slower and less disciplined.