Open Banking in Saudi Arabia

Open banking might be a recent topic in Saudi Arabia but it is developing quickly with the involvement of the Saudi Central Bank (SAMA) and the Council of Ministers which approved the Fintech Strategy in May 2022. The Fintech Strategy is one of the pillars of the Financial Sector Development Program (FSDP) under the government plan to reduce dependence on oil and diversify the economy – Saudi Vision 2030 – and aims to transform the Kingdom into a global Fintech hub to improve the financial services offered to its population.

It is following the approval of this strategic vision that the Saudi Central Bank issued its Open Banking Framework in November 2022 and launched the Open Banking Lab in January 2023.

The regulator’s vision is clear: after having considered other recognised open banking frameworks such as the UK standard, the EU PSD2 directive, Brazil’s Open Finance regulation, and Bahrain’s regime as well as local specificities of the Saudi market, they believe that the ecosystem will be able to overcome the challenges that may exist in order to benefit from the open banking opportunity.

The Saudi Open Banking Framework

The framework released in November 2022 includes a set of legislation, regulatory guidelines and technical standards to enable the development of open banking services in the Kingdom.

Like the neighbouring Central Bank of Bahrain, SAMA has taken time to identify mistakes made by pioneers like the United Kingdom and the European Union in order to roll out a framework that would satisfy all parties. Indeed, whereas banks have historically seen open banking more as a regulatory standard to comply with than an opportunity, it can be said that financial institutions in Saudi Arabia are looking forward to it. This is mainly because the framework allows banks to create premium application programming interfaces (APIs) around which they will be able to create a business model by charging third parties willing to use them. This should encourage banks to share richer data and thus, put Saudi Arabia at the forefront of the open banking movement.

Although SAMA had already deployed a regulatory sandbox back in 2018 for fintechs to test open banking services, this was the first issuance of a clear framework setting out requirements for banks and fintechs. Not only does the framework include guidelines in terms of customer experience but it also sets specifications for the APIs that must be deployed by financial institutions.

The Saudi Open Banking Lab

In accordance with the open banking framework, SAMA launched its Open Banking lab in January 2023 to enable innovation and accelerate the development of new financial services. It will provide banks and fintechs with a technical sandbox environment to let them develop, test and certify their solutions against the framework guidelines and standards. The lab comes with mock data and is designed to support many different use cases in retail and corporate spaces.

The Saudi Central Bank is focusing on “Account Information Services” (AIS) in the first phase and will later follow with “Payment Initiation Services” (PIS). Although there was already a regulatory sandbox even before the framework was rolled out, SAMA explains that this was done in parallel with the open banking programme intentionally in order to test new business models and identify the regulatory and technical challenges to consider when building a framework.

Local challenges that need to be addressed

The ecosystem appears poised to grow considering the rising number of active fintechs in the Kingdom, but there are still challenges that the regulator will have to tackle in order to keep developing the sector. Among these challenges, the scarcity of local talent with fintech experience is one of the main pain points for Saudi Arabian managers. As a result, a lot of them have decided to look abroad, which involves higher costs.

Moreover, although incumbents are evolving rapidly, technology can be seen as an issue. Indeed, many banks are still running legacy technologies for their core banking systems. There must be a cultural shift in the region so financial institutions start seeing technology as an investment opportunity rather than a cost centre.

Finally, onboarding customers could be more complicated than it seems, depending on the local mindset around sharing financial data. It is still a bit too soon to infer a conclusion on this.

How can the Saudi financial sector benefit from open banking?

Looking beyond these challenges, it is clear that open banking has a lot to bring to the Kingdom. Like in any other region of the world, open banking enables healthy competition and the development of innovation in the market. This means creating new offerings tailored to the needs of the Saudi population and therefore enhancing their banking experience.

It will also allow greater financial inclusion by letting specialised fintechs focus their business models on the unbanked, but will also offer efficient ways for the overbanked to handle their finances.

Lastly, open banking will transform payments in Saudi Arabia by improving the already advanced local payments infrastructure Saudi Payments which was created by the Central Bank. For instance, there is still some possible improvement in the processing of payments from cards since it is not yet realised in real-time.

Exciting times ahead

All in all, we are witnessing the rapid development of open banking in Saudi Arabia thanks to the government’s backing of fintechs and the important capital liquidity available in the region. The Saudi Central Bank is taking things in a thoughtful manner to avoid common mistakes made by other countries in the past and it is possible to think that the relatively small number of banks in the Kingdom will enable quicker adoption and standardization.

For a more comprehensive analysis of the regulation and to learn how the Open Bank Project can help you launch your open banking initiative, contact us.