This is an excerpt from The Future of Fintech in the Middle East 2023 report.

The Middle Eastern banking and payment landscape is in the midst of an evolution. The advent of new technologies such as artificial intelligence (AI), blockchain, big data and cloud computing, as well as the increasing demand for more convenient, secure, and faster payment methods, is spurring many established financial institutions to invest heavily in their digital capabilities.

By partnering with fintech firms to develop innovative solutions, the focus has shifted from an industry that is driven by a network of branches, operations, and debt, to one that prioritises back-office transformation and takes a more customer-centric approach.

The era of simplified payments is upon us and the financial ecosystem – which, in 2023, is made up of telecommunications firms, retailers, and fintech firms, to name a few, are all competing for their share of the market. However, financial services providers must be as innovative and tech-savvy as their customers, ensuring that they are providing products that operate on digitalonly models, are mobile-first, and focus on user experience.

Today’s customers require digital-first, mobile-first, and UX-first financial services as non-negotiables. According to the OECD, 55% of the population in the Middle East and North Africa (MENA) are under the age of 30 – the age group that I like to refer to as the ‘Instagram and Tiktok generation.’ However, according to The World Bank, around 1.4 billion adults remain unbanked around the world, a dramatic figure given that 2.8 billion people reside in the MENA region.

A significant proportion of the Gulf Cooperation Council (GCC) population are expatriates, which may explain why a substantial number of remittances flow from this region to developing or emerging countries. With such a diverse group of potential customers with varying needs across the Middle East, fintech firms must work to leverage this untapped opportunity.

To stay ahead of the curve, many established banks are investing heavily in their digital capabilities and partnering with fintech companies to develop innovative solutions.

The world of banking is undergoing a rapid transformation, with telcos, retailers, and fintechs all competing for a share of the market. The rise of neo-banks, or digital-only banks, has been a significant driver of this trend, as they have disrupted traditional banking models and opened new possibilities for customers. As a result, many companies outside of the banking industry have started to explore opportunities in this space.

AI is shifting the retail payments ecosystem

Neobanks offer a clear success story for the fintech industry, proving rise of neo-banks, or digital banks have disrupted traditional banking models and opened new possibilities for customers. Beyond intuitive interfaces, faster services and personalized offerings, the increased use of AI and machine learning tools are helping neobanks to set themselves apart from competitors.

For instance, AI/ML tools can refine and enhance data analysis across the retail payments sector, allowing nimble neobanks to rollout expedited and customised services at a pace that is often not feasible for legacy incumbents.

Early adoption of AI/ML tools will allow financial institutions to position themselves effectively for a mobile-first digital world, which will place the user’s specific needs and desires at the heart of its online ecosystem.

These trends explain why neobanks are gaining popularity among retail customers in the Middle East, as the ability to offer a range of digital banking services such as account opening, online payments, and money transfers through a seamless customer experience immediately sets neobanks apart. Notable neobank players in the region include UAE-based Wio and the Saudibased D360.

Recently, the Middle East has become a hotbed for digitisation and an ideal location for expansion by those in the payments sphere. There is a massive effort to shift economies away from heavy reliance on government spending and the energy sector, and toward economies spurred by diversified private sector investments leading to lower volatility and increased sustainability. This has helped to foster healthy FinTech ecosystems in the region.

AI and cloud regulations are emerging

The adoption and usage of AI is part of several national visions across the Middle East and in my view, the region is ahead of the game and companies based in the region are trendsetters, rather than followers. There are multiple entities that have been formed to specifically deal with technologies such as AI, and even cloud.

In Saudi Arabia, for instance, we have the Saudi Data and Artificial Intelligence Authority which was established to oversee the eight AI initiatives and development policies. These authorities are responsible for promoting regulations, launching tools, and granting licenses to fintech firms.

As far as AI is concerned, this is very clear cut. However, with blockchain, while the likes of the UAE central bank launching its own cryptocurrency, it’s more in line with working shoulder to shoulder with the rest of the world. In this case, business ventures are being considered, as well as providing sandbox environments to those fintech firms that create solutions to contribute to the economy.

More skilled IT people are needed for emerging technology to thrive

With the Middle Eastern population being mostly made up of expatriates, the region has been lucky regarding IT talent. However, it is a very competitive environment, but understanding payments is a niche skill and what I regard as a science. Hiring fintech experts is a challenge because fintech itself is always evolving.

Compared to five years ago, the skill set of those in the payments desert of the Middle East has drastically improved due to government-led initiatives. In addition to this, as greater talent emerges, just by being around these skilled employees, those without that foundational knowledge will learn new skills. With each new startup that is established, more people will want to experience the status of working for a company that creates technological solutions to long-standing problems. While a lot of investment is going into various private sectors, I could see the region gradually tilt the balance to become the hub of all payments activity. There’s a lot of scope and a focus on reshaping the way the entire digital payment system is set up.