Driving Prudent Innovation in the Kingdom’s Financial Sector

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By Yazeed A. Alnafjan, Deputy Governor for Financial Innovation, Saudi Central Bank (SAMA)

In recent years, Saudi Arabia has embarked on an ambitious journey of economic transformation, guided by the Vision 2030 framework. Whilst the vision is expansive, spanning many aspects of the economy and society, one of the key pillars is developing a thriving and innovative financial-services sector.

This pillar is being executed under the guidance of the Financial Sector Development Program (FSDP), a multi-year program shaping the sector’s future by strengthening existing financial institutions and driving innovation, ultimately cementing Saudi Arabia’s position as a leader in financial innovation.

A vibrant fintech (financial technology) sector is an essential component in making this a reality, and as such, both FSDP and Fintech Saudi—an initiative led by Saudi Central Bank (SAMA) and the Capital Market Authority (CMA) to act as a catalyst for fintech in the region—were launched in 2018.

The national fintech strategy has very ambitious goals, and the results so far have been promising. By 2030, more than 525 fintech companies will likely be active in Saudi Arabia, with 18,000 new jobs created and a 13.3-billion SAR (Saudi riyal) direct contribution to the country’s gross domestic product (GDP). Nearly 207 fintechs are already operating in the Kingdom, creating thousands of jobs. There has also been a large influx of local and international venture capital (VC), clearly indicating that the program is yielding positive results.

The aforementioned strategy is designed to support economic growth, improve access to services, enhance financial and monetary stability, and bolster competitiveness in the sector. It does not simply aim to increase the number of fintechs or chase trends but rather further enable their development and address actual gaps in the market.

This strategy is, in one sense, a continuation of the journey that SAMA began a long time ago through its development of important financial-market infrastructures, such as the local card scheme MADA (Saudi Payments Network) and Instant Payments platforms, both of which were necessary to enable and drive efficiencies in the sector. Harnessing fintech is a natural continuation of this approach; however, the ultimate goal remains the same.

Supporting the development of talent

A skilled workforce is critical to the strategy’s success, and while the Kingdom has a large workforce, it needs continued upskilling in emerging technologies. Hubs and accelerators are key to the strategy, supporting fintech startups and giving entrepreneurs a boost on their way to success.

Such initiatives are already making a difference. In 2018, 10 local fintechs employed 70 employees; today, more than 200 fintechs employ more than 5,000 Saudi nationals, and this number is set to grow as more fintechs, both regional and global, move to the Saudi market.

With the focus on new and exciting technologies, such as artificial intelligence (AI), it is worth noting that these technologies bring new potential cybersecurity risks that must be managed carefully—something that SAMA has considered in its balanced approach to adopting AI. As the number of AI experts increases, so, too, must the number of cybersecurity experts to deal with potential threats and drive innovation in that area.

Collaboration internationally, regionally and domestically

Both domestically and internationally, collaboration is key, and SAMA has initiated and joined several innovation projects.

Like many central banks, SAMA has been investigating the potential of wholesale central bank digital currency (wCBDC). Throughout the process, relevant stakeholders, such as commercial banks, have actively participated to gain hands-on experience.

These technologies are being leveraged across a range of use cases to familiarize the financial industry with the possibilities of such emerging technologies, all while ensuring that any adoption is aligned with the overall objectives of improving the sector’s stability, efficiency and effectiveness.

Internationally, SAMA has developed relations with peer central banks to share knowledge and execute joint projects, providing opportunities for all parties to learn from each other and address different pain points. The Bank for International Settlements (BIS) has been instrumental in establishing innovation centers globally, and SAMA is participating in key experimental projects, such as mBridge and Pyxtrial.

mBridge is a pilot platform built by the BIS to facilitate cross-border payments between commercial banks in different countries. It has four founding members and 25 observer members, including the World Bank, and is run at the BIS Innovation Hub (BISIH) in Hong Kong. The project, based on distributed ledger technology (DLT), uses a central bank-issued wholesale CBDC as the cross-border payment instrument.

Pyxtrial is an initiative started by the London-based BIS Innovation Hub to monitor asset-backed stablecoins and identify, for example, asset-liability mismatch risks or other risks that could manifest. This and other projects in the supervision field are laying the foundations for SAMA to monitor and supervise innovations as they emerge in the future, enabling sectoral growth, without delaying the adoption of new technologies.

Driving internal adoption in the central bank

To be an effective regulator in the evolving Saudi financial-services landscape, SAMA has nurtured a strong culture of innovation. SAMA’s Innovation Hub executes highly innovative projects within the bank and identifies gaps in the market that SAMA can help address using emerging technologies.

The hub has led SAMA’s experiments with DLT and, most recently, generative AI (GenAI). The use of AI has proven most promising in the areas of supervision, financial- and monetary-stability monitoring, and internal business processes.

For example, SAMA has experimented with the technology to provide a conversational interface to different policies and procedures and to explore how it can be used to address inefficiencies—for example, dealing with large amounts of structured and unstructured data. While these experiments are still in the prototype stage, they have provided SAMA with many insights into both the potential of these technologies and their risks.

Outside of generative AI, SAMA has been exploring how other forms of AI can be used to interpret non-traditional data sources, such as satellite imagery, to identify key macro-indicators, such as heavy industry’s contribution to GDP or changes in consumer behaviors.

Whilst the hub’s focus is primarily technical, it is also used to identify new considerations and potential risks, which has led SAMA to consider how best to guide the use of these technologies, particularly as the basis for new business models and fintech innovations.

Cloud adoption as an enabler of financial innovation

SAMA sees cloud technology as an important enabler of innovation in the sector, as it lowers the marginal cost of innovation. Rather than having to procure data-center space or infrastructure, innovators can experiment with various cloud-based services and APIs (application programming interfaces), such as those related to AI.

While the cloud can amplify creativity, it can also amplify risks, potentially exposing consumers to the threat of their data being compromised or misused if stored inappropriately. As such, it is important to ensure that data is processed correctly so that consumers’ rights are protected, particularly in an age in which data holds even greater value because of its usefulness in training generative AI models and for more nefarious purposes.

Furthermore, it is important to remember that the cloud is a form of outsourcing, and, as with all outsourcing arrangements, risks must be managed by regulated entities.

To assist Saudi-owned fintechs to navigate these hazards and reduce compliance costs for startups, SAMA and the CMA launched the Makken program at the end of 2023—an enablement program offering early-stage fintechs a range of subsidized services to help cover the costs of compliance with regulations whilst empowering them to still leverage the cloud. Ultimately, this will increase all fintech companies’ resilience and support the growth and stability of the financial sector.

Enabling prudent innovation through the regulatory sandbox

Regulations can promote or stifle startup initiatives, but given the need to ensure continuous consumer protection as well as financial and monetary stability, these initiatives do require oversight. This is where SAMA’s regulatory sandbox plays a vital role. It enables fintechs to prove their concepts in a controlled environment, ensuring a reliable product is launched. Regulations governing traditional financial products, such as payments and remittances, fall under SAMA’s jurisdiction, while the CMA regulates the capital market and securities-related activities.

The regulatory sandbox has been one of the most effective mechanisms to encourage financial innovation while ensuring regulation evolves in step with technology. Established in 2018, the sandbox has, to date, received applications from more than 500 fintech companies wishing to experiment with different business models, ranging from open banking to savings circles to peer-to-peer lending services for the underbanked.

At launch, only six fintechs signed up for the sandbox. Admissions rose to 20 in 2019, and by November 2023, more than 89 fintechs had operated within the confines of the sandbox before graduating and gaining operating licenses from SAMA.

The sandbox allows firms to offer their products with appropriate guardrails from a risk perspective while at the same time allowing SAMA to observe their products to understand them better. SAMA can then finetune or issue new regulations based on data rather than attempting to preemptively regulate without real market observations or insights. For example, after observing different business models in the sandbox, SAMA has issued or amended several regulations to enable new concepts and business models to be introduced into the retail financial sector, including micro-lending, debt and crowdfunding regulations, and to develop guidelines for buy now, pay later (BNPL) products.

Open banking enables easier access to banking services.

SAMA led the way in establishing an open-banking framework that provides a common interface to banking services with which fintechs can integrate.

By opening up APIs, the open-banking framework enables banks to provide new products and services and allows nonbanks to leverage these products and services securely, ultimately supporting a more competitive market.

Recognizing the challenges that fintechs may have in testing their integrations with these services, SAMA announced the launch of the Open Banking Lab in April 2023, providing a technical testing environment to develop, test and verify open-banking services.

As with other fintech products, open banking is a means to an end: It should ultimately enable new products, such as open finance or embedded finance, and lead to improved consumer experiences, better access to finance and other benefits.

The objective is not to open up access to banking APIs blindly or to everyone, particularly given the potential for new risks and destabilizing factors if intermediaries between consumers and banking facilities are not properly supervised. For example, the new intermediaries leveraging open-banking APIs between consumers and banks should manage the consumer data flowing through their platforms at a similar level as banks and ensure they are secure, particularly as they grow in systemic importance.

Where next?

The real measure of success is found in how the sector has become more efficient and in the experiences of Saudi consumers. Through financial technology and the broad digitization of the sector, 70 percent of payments are now electronic. There are also significant adoption rates of e-wallets, primarily provided by large local fintechs. As these wallet providers continue to innovate and offer more products and services, we expect significant value to be created in this area and further contributions to increasing access to financial services.

We have witnessed fintech’s impact on expanding the volume and value of e-commerce transactions in the Kingdom. Today, there are nearly 900 million e-commerce transactions per annum, with year-on-year growth of 43 percent—valued at more than 157 billion SAR in 2023, up 28 percent from 2022. Much of this growth has been enabled through SAMA’s various investments in financial-market infrastructure.

At SAMA, we are determined to continue on this journey towards a frictionless financial system with an efficient digital payment infrastructure, less use of cash, more digital access to financial products and improved access for all businesses. Fintech will play an important role in driving these broad objectives.

Further, we look to ensure financial and monetary stability continues to be maintained—even as we accelerate our adoption of emerging technologies—by understanding the cybersecurity and regulatory risks associated with these technologies and utilizing them to address these risks. Through this prudent approach to financial innovation, we seek to enable the sector to continue to grow sustainably and support the transformation of the economy that is underway in the Kingdom.