The adoption of neobanks - banks that operate only online and don't have a physical presence - and traditional banks' digital offering in the UAE is increasing and should continue to do so.

Yet, a mass exodus from traditional banks to neobanks is unlikely, according to S&P Global Ratings.

"Neobanks don't and, in our view, won't represent a threat to traditional banks," remarked its credit analyst Puneet Tuli.

"Customer loyalty, the regulatory environment, neobanks' non-existent physical presence, and traditional banks' comprehensive services represent significant barriers to a widespread adoption of neobanks," he stated.

"In general, we believe that the central bank of the UAE will continue to maintain the stability of the traditional banking system and encourage banks to strengthen their digitalization efforts," he noted.

"Over the past few years, we have seen an emergence of neobanks and an increase in traditional

banks' digital offering in the UAE," he added.

Neobanks try to attract traditional banks' customers by typically offering products and services at a lower cost. The regulatory environment for fintechs in the UAE is also somewhat supportive of the emergence of neobanks.

Neobanks are still in the early stages of their development in the local UAE market. Their current

product and service offering is limited and mainly concentrates on raising deposits and issuing credit cards.

Neobanks' main customer value proposition is the convenience they offer. Customers can open bank accounts, transfer funds, and apply for loans easily and swiftly.

Sometimes they also try to increase demand by lowering the costs for end-users. Unlike traditional banks, neobanks are generally not weighed down by legacy IT infrastructure and complex change management initiatives.

While neobanks can be an alternative to traditional banks, in our view, they tend to act as secondary banks in many markets, because local populations still prefer traditional banks for core activities that require higher-touch customer service, such as borrowing and saving.

It doesn't help that most customers in the UAE continue to prefer traditional banks, which have digitalized successfully and whose digital products and services outperform those of banks in many other emerging markets, remarked Tuli.

Therefore, we don't expect a significant migration from traditional banks to neobanks in the foreseeable future, stated the analyst.

In the past few years, neobanks haven't just increased their presence in the UAE, but globally--and their growth isn't limited to a particular country or region. In Europe, for example, neobanks like Revolut, N26, and Monzo attracted millions of users and expanded their services, he added.

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