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neobanks will represent a global market size of more than $2 trillion by 2030 and will grow at a compound annual growth rate of 53.4 percent as digitally savvy users increasingly demand easily accessible financial services, according to The Boston Consulting Group.

Regulatory changes related to the mass adoption of the internet and smart technologies will drive the growth of the sector, according to a report by the management consultancy.

“The FinTech sector in the GCC is expected to be valued at $3.45 billion by 2026 as a direct result of a boom in growth rates for digital payments and digital transferssaid Bhavya Kumar, Managing Director and Partner at BCG.

“As regulators lower the barriers to entry, new companies and incumbents are trying to move away from the demands of a young and highly connected population who want convenient, on-demand access to their finances and know exactly what to expect in terms of sophisticated user experiences.”

Often referred to as challenger banks, neobanks are financial service providers that operate exclusively online and have no physical presence.

They offer digital, Mobile-first financial solutions for specific services that have long been associated with traditional institutions such as retail banks, payment providers and international money transfer services, BCG said.

Neobanks are becoming increasingly popular with Generation Z as they serve their needs better than traditional banks.

FinTech startups first emerged after the 2007-2009 global financial crisis. The ensuing shock to banking regulations and the rise of new technologies have enabled neobanks to disrupt the market faster with consumer-friendly services like faster account opening times Peer-to-Peer TransmissionsCredit building and payday loans.

Some traditional financial institutions have responded to the challenge of neobanks, including in the Middle East.

Banks like Abu Dhabi Commercial Bank, Emirates NBD and Mashreq quickly launched digital operations with Hayyak, live and Mashreq Neorespectively.

There are at least 333 neobanks worldwide, including start-ups and digital-only operations from legacy players, a tracker by The financial brand publication showed.

According to BCG’s FinTech Control Tower report, the number of neobanks has increased by more than 200 percent since 2015.

The growth of these institutions is fueled by the need for on-demand and easily accessible financial solutions sought by a young and increasingly digitally savvy demographic, BCG said.

“Traits that have often defined the success of neobanks include digital and mobile-centric services, great user experiences, a lean and agile technology-first culture, and building brands that users have an emotional connection with,” it said in the report.

More than half of the population of the GCC is under 30 years old. The region has one of the highest connectivity rates in the world, with more than 90 percent of the population connected to the internet, far exceeding the global average of 51.4 percent, according to the research.

It is expected that by 2026, around two-thirds of the GCC’s population will have 5G connections.

This combination makes the region ripe for FinTech and neobanks to accelerate its growth, the report said.

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This year, Saudi Arabia licensed three digital banks and 19 FinTech companies to offer consumer microfinance, digital insurance and payment-related services, BCG said.

There have been regulatory advances across the GCC, such as the accelerator FinTech Hive in the Dubai International Financial Center as well as others in Abu Dhabi and Manama in Bahrain, the consultancy said.

“While traditional banks will retain a strong position in the short-term, particularly in relation to corporate banking and retail mortgages, neo-banks will gain market share in certain product areas such as payments, loans, buy it now, cards, digital wallets and remittances by targeting specific customer groups such as tech-savvy youth , emigrants and women,” says the report.

Updated October 29, 2022 at 4:00 am