Technologies have been introduced that address consumer and market dynamics and support the drive towards greater autonomy and flexibility.
Gargi AgarwalAssociate,Banking & Finance
Bahrain’s banking and financial sector has been undergoing substantial transition over the years. The payment landscape, for instance, has moved from traditional systems to digital alternatives. Technologies have been introduced that address consumer and market dynamics and support the drive towards greater autonomy and flexibility.
The Central Bank of Bahrain (“CBB”) is the sole regulator of the financial services sector in Bahrain. The CBB performs a vital role in ensuring that these developments take place without compromising on strict security and regulatory standards. As a regulator and facilitator, CBB has supported the introduction and structured development of advanced payment systems that have enabled the growing digitalisation of the financial sector. In this article, we will look at the various initiatives undertaken by CBB, explore the digital tools and technologies that have been adopted, and examine the steps taken in ushering a digital economy.
Regionally and globally, the growth of digital payments has been on a steady rise in recent years. It has been supported by the proliferation of new technologies along with changes in consumer behaviour. Such digital transformation has been achieved via the following:
(a) Open BankingOpen banking is also known as "open bank data." Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). . As part of its initiative to implement this service in Bahrain, CBB developed the Bahrain Open Banking Framework (Bahrain OBF) in 2020. It was based on global ISO standards that were further customised to be made suitable for Bahrain’s payment ecosystem. In 2021, the second phase of the framework was issued to enhance the range, effectiveness and cost-efficiency of services in a more customer-centric manner.
Bahrain’s banking and financial sector has been undergoing substantial transition over the years. The Central Bank of Bahrain as a regulator and facilitator has supported the introduction and structured development of advanced payment systems that have enabled the growing digitalisation of the financial sector.
(b) Real-time serviceThe ability to conduct safe and secure financial transactions in real time is, undoubtedly, one of the main advantages of operating within a digital payment ecosystem. This provides customers the ability to access their data or initiate transactions or pay bills using a suite of products and services that have been tailored with this component..
(c) Unique identity through IBANThe digitalisation of banking services requires systems in place that would protect the identity of account holders, and at the same time, prevent the possible duplication or replication of any account. CBB’s adoption of the International Bank Account Number or IBAN is a step towards building a safe environment for financial transactions as well as integrate the national banking system with the internationally accepted ISO numbering system to identify bank accounts. IBAN is used in making or receiving local and cross-border payments, and minimises delays and costs associated with incorrect account numbers.
(d) Arabian Gulf System for Financial Automated Quick Payment Transfer (“AFAQ”)The Gulf Cooperation Council (GCC) member countries implemented the AFAQ in 2020, a regional payment system that offers an additional channel of transferring funds through a faster and more secure means at lower transaction cost. AFAQ, operated by the Gulf Payments Company is a Real Time Gross Settlement service for cross-border payments between GCC countries, which aims to support the growth of trade and flow of investments between the GCC member states, and as a result accomplishes economic diversification.
(e) Faster fund transfersA key element in making digitalisation effective was to pave the way towards fund transfers that are instantaneous or near instantaneous. A one-stop-solution to make digitalisation effective was envisioned that would allow safe, contactless, person-to-person payment through the CBB authorised Electronic Fund Transfer System (EFTS). It enables bank customers to make immediate low-value payments using Fawri, Fawri+ and Fawateer.
Fawri allows same-day or future-dated payments to single or multiple recipients. Fawri+ enable transfers to be made available within thirty (30) seconds to the account of the recipient. Fawateer, the Electronic Bill Presentment and Payment (EBPP) enables bank customers to settle bills from both online and offline billers, immediately or on a date of their choice.
(f) Bahrain Cheque Truncation System (“BCTS”)The move from traditional payment channels to automated ones has been prompted by the need to develop efficient systems that help in cutting through the backlog, and create a smooth experience for all stakeholders. Cheque clearance is one such activity that has always been viewed as a labour-intensive process. CBB authorised the BENEFIT Company to operate the BCTS to help speed up clearing of cheques by eliminating physical movement of cheques, and allowing depositors to receive proceeds of their cheques in their account by 15:00 on the same day. The digitisation of cheques brought a new level of convenience to customers and made the process even more seamless. E-cheques retain all basic functions, legal validity and benefits of paper cheques while providing additional benefits for users including tracking and secure electronic signature functions.
(g) Digital walletsDigital wallets store vital user data related to payment and other personal information that can then be used for credit or debit cards, loyalty cards, gift cards, coupons, hotel reservations, etc. Mobile companies, banks, airlines and retail outlets have championed the use of digital wallets and used them to offer customer convenience in transacting.
The future of the digital payment landscape lies in the way the banking and financial sector is able to respond to the evolving market dynamics, changes in consumer behaviour, developments in technology and other unforeseen events that might impact communities. With digital adoption becoming increasingly commonplace across a variety of sectors, the banking industry, too, has remained agile in building a cohesive ecosystem for innovative ideas.
As part of this drive towards shaping digital payments, Bahrain’s financial services sector has been making steady progress in developing newer and more dynamic financial technologies or FinTech.
(a) The CBB regulatory sandboxThe CBB regulatory sandbox is a virtual space for testing new and innovative financial solutions and offers CBB licensed institutions, FinTechs, startups and companies an opportunity to assess the viability and effectiveness of their innovations alongside volunteers in a live and controlled environment. The CBB oversees and supervises the sandbox and regularly reviews its regulations in line with new technologies and solutions being tested. Consequently, further regulations were introduced to address issues like payment services, digital wallets, crowdfunding, open banking, crypto-assets, cloud computing, digital financial advice (robo-advisory) and insurance aggregators, amongst others.
(b) Central Bank Digital CurrencyThe CBB is currently working towards providing a digital version of the Bahraini Dinar that would help support customers making peer to-peer payments, without the need of any intermediaries. It will mimic cash in every aspect whilst remaining intangible and virtual in nature and will be operating on Distributed Ledger Technology (DLT).
(c) Central Addressing System (“CAS”)The main purpose of CAS would be to ease the process of transferring funds by eliminating the need to input a long IBAN number and instead summarises the IBAN number into a unique identifier (such as national ID, phone number, etc.). It works as a central addressing directory, and allows participants to register their customers and map them to unique identifiers. Registered customers will then be able to send and receive payments and also request to pay using their unique identifiers.
(d) Request to Pay (“R2P”)R2P is expected to be both a module and a service that would enable applicable stakeholders to initiate a payment request from intended payers such as individuals and businesses. R2P will support online integration with businesses and other entities, and it will be extended to other authorised channels. R2P will follow the international ISO 20022 standards for implementation, data specification and content using a universal financial industry message scheme.
(e) Direct Trading System (“DTS”)DTS is expected to provide investors with easy access to buying, selling, rollover, transfers and settled government securities without the need of any intermediary. This system will cater to individual investors and will be available via a user-friendly mobile application and website that will also allow users to deposit funds from their accounts held in any bank across Bahrain.
(f) Fast FawriFast Fawri is the next generation iteration of the existing EFTS infrastructure, and is expected to allow bank customers to conduct frequent Fawri payments available 24/7, including weekends and public holidays. It will enable round-the-clock service with the support of a collateral management tool to track available securities, deposits, and reserves of each bank in the CBB’s Collateral Pool.
(g) Open FinanceCBB is focusing on transitioning to open finance, an extension of open banking which allows third-party providers to access customers’ account data and initiate payments. Open finance will empower customers by enabling them to gain control over their financial data, help them make better informed financial decisions and get access to customized financial services.
The growth and development of Bahrain’s financial services sector is in part a result of collective efforts to build a comprehensive ecosystem with new regulations and information the introduction of innovative solutions as outlined in this article. We anticipate that the fintech sector will continue to develop apace into the future.
For further information,please contact Gargi Agarwal
Published in February 2023
