Deepening outreach: Harnessing innovation to transform banking services while balancing consumer protection and innovator empowerment

Bahrain has laid the foundation for strong growth in its financial technology (fintech) companies and ecosystem and is pursuing a two-fold strategy to expand the industry in the years ahead. The first prong aims to leverage fintech to facilitate integration of domestic payments infrastructure and improve links between retail banks, merchants and service providers. The second element involves enabling fintechs to scale across the region. The use of technology to integrate financial services and establish a unified payment and settlement network for the Arab world can enrich the region’s financial ecosystem.

Supportive Ecosystem

The kingdom is well placed to succeed due to the rapid digitalisation of financial services during the Covid-19 pandemic and the development of the necessary underlying architecture. Bahrain became the first country in the region to achieve nationwide 5G coverage in 2021, opening a new frontier in the provision of digital services. The central bank’s regulatory efforts to link fintech solution providers with local banks, coupled with innovations in regulatory technology, are also well advanced. The Central Bank of Bahrain (CBB) formed a dedicated Fintech and Innovation Unit to enhance services related to open banking, electronic know-your-customer (e-KYC) solutions and contactless payments, among other areas.

Open banking enables banks and account holders to share information with third parties such as fintech companies, merchants and other service providers through open application programming interfaces (APIs). Essentially, it underpins the fintech ecosystem, driving growth by breaking down regulatory and technological barriers to the seamless transfer of payments and information. The CBB is also building a suite of open banking initiatives and solutions on FinHub 973, a cloudbased architecture and artificial intelligence-enabled marketplace. The platform hosts more than 430 APIs for local players to develop banking and financial solutions, some of which leverage the Regulatory Sandbox Framework (RSF) that allows financial institutions to pilot new solutions that may fall outside of existing regulations. As of June 2022, 16 companies from the MENA region, and a handful from elsewhere around the world, were piloting related solutions.

Confidence Boost

Applications are diverse, ranging from buy now, pay later solutions to cryptocurrency services, crowdfunding platforms, digital contract payments, financing and investment platforms, artificial intelligence (AI) and analytics, remittance and robo-advisory services. After initially focusing on e-KYC and anti-money-laundering, the RSF aims to incubate open banking solutions, underpinned by the Bahrain Open Banking Framework. This highlights three key use cases: payment initiation, account information and essential services that link the two.

The National Bank of Bahrain recently became the first bank in the region to launch open banking solutions in partnership with Tarabut Gateway, an aggregation service provider that enables customers to connect accounts across any bank in Bahrain and create a consolidated view of their finances.

In a bid to accelerate the open banking revolution, the CBB launched the Bahrain Open Banking Supernova 2022 event, challenging local financial institutions to find customer-centric solutions based on open banking use cases. Many competitors will be based out of Bahrain Fintech Bay (BFB), an ecosystem builder and fintech hub that offers innovation labs, accelerator programmes and educational opportunities. It houses many of the country’s 120 fintech start-ups and has incubated more than 90 since its founding in 2018.

Multinational financial services giant Citi, for its part, launched a new global technology hub at its corporate campus in the kingdom in September 2021. It carried this out in partnership with Tamkeen, the country’s semi-autonomous private sector development organisation. Citi plans to hire some 1000 coders over the next decade in order to develop two of its global systems.

BFB’s performance helped fintechs in the Middle East achieve a 30% compound annual growth rate in terms of capital between 2017 and 2021, with the sector projected to attract some $2bn in venture capital in 2022. BFB’s success has also been driven by an open-handed approach to cooperation with regional players, underscored by a 2021 agreement with Israel’s fintech association, FinTech-Aviv, to collaborate on joint projects and community events.

Sector Strategy

Deepening this regional imprint is the overarching goal of the fintech aspect of the Financial Services Development Strategy (FSDS) 2022-26, part of the Covid-19 Economic Recovery Plan. Under the FSDS, the government prioritises financial job creation – including 3000 opportunities in fintech and other vital sector roles by 2024 – legislation and policies, markets, financial services, technology and the insurance sector. Perhaps the most eye-catching fintech aspect of the plan is an ambition to launch a digital dinar, a central bank digital currency (CBDC). The CBB has floated the idea of piloting a CBDC since 2018. There is also a possibility that Bahrain will join an ongoing project between the UAE and Saudi Arabia to launch a common, or at least tradeable, wholesale digital currency.

Such a nexus makes sense as the country currently ranks third behind the UAE and Saudi Arabia in terms of regional fintech development, according to Arab Monetary Fund’s FinxAr index, which highlighted Bahrain’s progress in developing legislation and financial market infrastructure as its primary advantages. Successfully piloting a CBDC will ensure that the central bank has a more accurate record of local bank activities, allowing tighter control of the monetary system, and easier trade with other countries subscribed to the same system. While the building blocks for a payments system across the Arab world are already in place in the form of Buna, which allows financial institutions and banks to use Arab currencies including the dinar for settlements alongside other international currencies, a network of tradeable CBDCs would be a world-leading development. The FSDS enables Bahrain to step up the integration of its retail banks into the Buna platform, but the roll-out of a CBDC will likely take longer than the strategy’s five-year remit. Meanwhile, the strategy pledges to enhance e-KYC regulations, including the integration of related services with the Bahrain Credit Reference Bureau (Benefit), a credit data assimilator. The plan also calls for further support of companies working in fintech and other prominent emerging sectors such as AI and cybersecurity. Other FSDS priorities include achieving consistent 10% annual growth in electronic fund transfers, which will be facilitated by upgrading electronic remittance infrastructure and linking more retail banks to the Arabian Gulf System for Financial Automated Quick Payment Transfer. The service also connected the first Bahraini banks to its real-time gross settlement systems across the Gulf in early 2021. Further region-wide elements include a plan to continue to develop the GCCNET network, a payment gateway that allows companies to collect funds over the internet using secured socket layer protocol.

These advancements aim to create an instant realtime payment platform that will link banks and merchants, via open APIs, across the country and the wider Gulf. Bahrain already has the foundation for such a system in place in the form of the Benefit electronic payments network, which provides services such as remittance, payments and fund transfers facilitated through a digital wallet. Benefit receives specific mention in the FSDS and is in line for infrastructure upgrades that will further integrate its services with new smart city features as they are rolled out.

Such seamless financial interactions will require strict monitoring to ensure regulatory compliance, and the FSDS intends to improve Bahrain’s regulatory approach via supervisory technology (suptech). These systems allow regulators to monitor money flows, screen for money-laundering, terrorist financing and other violations automatically. Adopting suptech is a necessary first step for the automation of workflows between the central bank and licensed financial institutions, allowing staff to focus on more complex tasks.

Way Forwards

As it moves ahead, the CBB is paying close attention to the demands of stakeholders for digital banking licences and deeper consumer data-protection legislation. Moreover, respondents to the BFB’s survey for the “Bahrain FinTech Ecosystem Report 2022” noted that the time needed for regulations to be updated to reflect new applications that have graduated from the RSF should be shortened. Respondents also suggested that regulators were too risk averse, which they felt inhibited efforts to attract international funding, particularly for innovative solutions.

Looking ahead, regulators are expected to continue to strike a careful balance between consumer protection and innovator empowerment. The fact that Bahrain’s regulatory and legal framework ranked highest in a list of factors that boost growth is telling. Fintechs may lobby for fewer regulations, but most appreciate that they are necessary for the financial sector to flourish.