24 minute read
Cloud on the Horizon
from December 2022
by meafinance
Cloud adoption is the backbone of digital innovation, and it is shaping the future of the financial services sector. Leading thinkers and senior executives from the region’s top banks and fintechs debate the future of banking and payments in the age of the cloud
Financial institutions are racing to take advantage of the shift toward cloud services after business demands for resiliency, scalability and operational efficiency accelerated digitisation at the height of the pandemic. Cloud computing has opened countless doors for banks, giving them the freedom and flexibility to innovate without the time and resource commitments that are unavoidable with on-premises systems.
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The cloud gives banks access to on-demand resources such as networks, storage and APIs that can be rapidly provisioned and released with minimal management or service provider interaction. Cloud adoption is
the backbone of digital innovation, and it is shaping the future of the financial services sector.
Banks in the Middle East are accelerating and strengthening their digital channels as growing customer demands together with pressure to reduce operational costs and boost efficiency are leaving financial institutions with no option but to adopt new innovative technologies.
MEA Finance in partnership with Oracle Financial Services hosted an exclusive roundtable themed The Future of Cloud for Banking and Payments in Dubai, where senior representatives from banks and financial institutions shared insights on how the cloud is meeting the distinct operational requirements of financial institutions. They also shed light on how cloudbased solutions provide universal access to payment schemes and efficient management of substantially increasing payment volume across multiple timescales.
Oracle Financial Services, a majorityowned subsidiary of Oracle, provides retail and corporate banks with a secure cloud platform while bringing automation to manage legacy applications and easily scale services according to customers and local market demands.
Deloitte said that digital technology has been a catalyst for radical innovation, as previously closed industrial systems have become networked and open, providing ideal conditions for open banking to flourish.
The cloud offers financial institutions a dynamic platform to develop, trial and offer innovative services—driving operating and business model transformation. It enables banks to store and process data in remote servers instead of local systems while offering several benefits such as increased security, faster processing speeds and lower costs.
Cloud solutions offer financial institutions an opportunity to synchronise their enterprise; break down operational and data silos across risk, finance, regulatory, customer support and more.
Presentations
Parag Ekbote, Head of Business Development at Oracle said in his opening remarks that the world is witnessing healthy growth in the payments space as the financial service sector has emerged stronger from the economic impact of the pandemic.
“From a growth perspective, the Middle East and to a larger extent the Asia Pacific region has seen the highest growth in numbers,” Ekbote said adding that the initiatives that are being implemented business given how e-commerce and the development of marketplace platforms together with the network economy are driving changes in the banking sector.
Ekbote said the six underlying themes that are driving innovations in digital payments include migration to ISO 20022, real-time rails including real-time instant payments, request to pay, open banking, SWIFT Go and embedded finances. From a payment infrastructure standpoint, Ekbote said that outsourcing is becoming a reality.
The sourcing models in the digital payments landscape are rapidly changing and Ekbote highlighted that financial
THE ABILITY TO MAKE REVENUE FROM PAYMENTS DOES NOT EXIST UNLESS THERE IS A HUGE SCALE AND THERE IS AN ECONOMY OF SCALE AT PLAY, OUTSIDE OF THAT THE FINANCIAL PRODUCT IS BECOMING FAIRLY COMMODIFIED
– Viplav Rathore
within the region, “which I’m sure some of you are a part of clearly signifies that.”
Global central banks raised key interest rates earlier in November following the US Federal Reserve’s fourth consecutive ‘jumbo’ interest rate hike of 75 basis points to fight inflation that has sent shockwaves through financial markets. Ekbote said that, in the short term, the net interest margins of financial institutions are increasing but there is a liquidity squeeze therefore “the focus on fee-based income continues and it has to continue.”
Several banks are considering business cases to focus on in 2023 and beyond. Ekbote highlighted that the goal for banks should be to make payments, a high-volume transactional institutions are partnering with different third-party processors to outsource payments services. He identified banks’ environmental, social and governance (ESG) initiatives as one of the drivers of outsourcing in the payments industry.
Preetham Prabhu, Senior Manager of Payments at Accenture opened his presentation by giving an insight into the National Payment Systems Strategy (NPSS), the UAE’s real-time payments platform and the impact that instant payments will have on the Middle East region and the banking sector.
Prabhu noted that as the UAE is modernising its national payments infrastructure there are several other regulatory pressures such as anti-money laundering and fraud monitoring that
need to be complied with. The everevolving regulatory landscape not only needs compliance but simulates growth and competition.
He also highlighted customers’ evolving demands for better service delivery such as the ability to track and trace payments on a real-time basis using SWIFT gpi as well as other operational aspects that are affecting commercial banks in the payments space such as real-time financial crime monitoring and cybercrime.
The UAE’s NPSS is a state-of-the-art, instant payments clearing and settlement rail which is an interbank, real-time clearing and settlement infrastructure to which all the commercial banks operating in the country will connect. It comes with a new messaging scheme, which is based on ISO 20022, a new network infrastructure to support the messaging scheme and it supports 24/7, 365 clearing and settlement and instant line-by-line clearing and settlement mechanisms.
The presentation by Nihad Nazir, Chief Digital and Technology Officer at Mercury Payments, focused on the UAE’s booming real-time payments industry. Nazir said that the biggest game changer for Mercury as a business is that real-time payments are revolutionising the UAE market not because it is going to give the country’s banked population a faster and better way to transact but because the NPSS strategy will open up digital payments to a segment that is still relying on cash payments.
“Around 120 billion transactions were processed last year across approximately over 55 real-time payment schemes globally,” Nazir said adding that there was $200 billion of aggregate net savings for consumers and businesses in 2021, driven by the migration from conventional ways of moving money to real-time payments.
The unveiling of an instant payment platform in the UAE bodes well for the country after real-time payments schemes in Saudi Arabia and Bahrain helped unlock $166 million and $246 million of economic output, respectively in 2021.
Nazir highlighted that the digitalisation of the payments space has also seen a 7.3% increase in payments-related fraud cases due to the real-time nature of the innovative technologies. However, the change that is currently underway in the global payment sector is enabling what Mercury Payments calls payments 4.X—embedded payments and embedded finance where “transactions are going completely transparent, seamless and simply put invisible.”
The change from 4.0 to 4.X is going to be driven by the availability of real-time payments in the market and by cloud technologies. “The agility, the speed and scale at which banks need to migrate from legacy platforms cannot be delivered if they are on on-premise platforms that we have all been conventionally used to,” Nazir said.
He said that there is a need for a convenient way for expatriates in the UAE to move money, but traditional methods have proven to be expensive, inconvenient and occasionally unreliable. The true impact of real-time payments is projected to go beyond the domestic market, but its influence will be felt in how it will facilitate cross-border payments given that 80% of the UAE’s population is made up of expatriates.
The mandate of Mercury Payments in the UAE’s NPSS and the IPP strategy is to enable 4.5 million unbanked and underbanked users in the market to participate in the instant payment strategy that the central bank is set to introduce early next year. Meanwhile, Nazir said that Oracle Financial Services was adopted for the implementation of the project because it has a native ISO 20022 platform and
– Rizwan Qazi
meets the UAE’s regulations to keep the data within the country.
Growth of digital payment in the UAE
The emergence of new technologies and evolving customer needs are driving major innovations in the payments industry while offering financial institutions a window to be more innovative and efficient in delivering services.
The growth of the digital payments sector in the UAE and the entire GCC can be attributed to the sustained cashto-noncash conversion, the ongoing growth of e-commerce and the increasing integration of payments into retail and corporate customer journeys. It is also being fuelled by regulatory support that is driving both retail and commercial banks to leverage these adoption rates to advance their digital transformation strategies.
Anand Sampath, Executive Director, Head of Global Payables & Receivables at First Abu Dhabi Bank (FAB), said that the GCC payments industry is expected to expand by around 14 to 15% in the next seven to eight years until 2028 and growth in the UAE is projected at 7%—which is not a small number.
Meanwhile, the payments industry revenue in the UAE is expected to grow to $18.7 billion over the next decade driven by the tech-savvy population in the Middle East’s second-largest economy. “The outbreak of COVID-19 accelerated the implementation of electronic payments in the Gulf region, and it is taking us to the next level. The UAE is on the cusp of something big following the central bank’s completion of the world’s largest pilot of central bank digital currencies transactions in October,” Sampath said.
“Today payments take two to three days to clear, and they are associated with all kinds of frictions and uncertainties,” he added. However, the project mBridge, between the central banks of the UAE, Hong Kong, Thailand and China demonstrated faster, cost-effective and secure cross-border monetary settlements using central bank money, identified as a G20 economic priority.
From a revenue perspective, Viplav Rathore, Managing Director - Head of Cash Management Products for Africa & MENAP at Standard Chartered argued that digital payments are becoming commodified—one of the most feared words by banking executives.
Commoditisation implies that the payment services and products that are being offered by one bank can’t be easily differentiated from that being offered by their competitors. “The ability to make
revenue from payments does not exist unless there is a huge scale and there is an economy of scale at play, outside of that the financial product is becoming fairly commodified,” Rathore said while asking what are the value-added services that banks are bringing to the market together with payments.
Though commoditisation means perfect competition, banks want to exist as monopolies and several players want to prevent their services and products from being easily copied thus, they fight to defend and differentiate their product offering as much as they can. Rathore said that his experience with real-time payments in the region has been that financial institutions are trying to take cash and cheques out of circulation adding “we need to incentivise when we are doing that.”
Ahanjit Champati, Director & Regional Head of Payments, Global Liquidity & Cash Management at HSBC Bank Middle East concurred with Rathore on incentivising the replacement of cash and cheques with digital payments while recalling his experience in India. Champati highlighted that there was muted adoption of India’s Immediate Payment Service and Unified Payments Interface two years after the official launch, but cash backs were introduced to drive uptake.
“The first aspect will be how financial institutions can attract customers to move from a card experience to a bank transfer experience and that is what NPSS is as a strategy. And then come to the fact that how will real-time payments impact corporate banking?” Champati asked.
Post-pandemic growth is spurring the expansion of the digital payments sector in the GCC, having shown resilience both to COVID-19 and some major macroeconomic shocks that are affecting other regions such as high inflation.
Multiple factors will drive the growth of payments revenue in the UAE and the GCC at large. “What the UAE government and central bank have done over the past 12 years is on the forefront of driving innovation and change in the financial service sector,” said Rizwan Qazi, the Chief Revenue Officer at Mercury Payments. GCC countries are exploring the prospect of developing further domestic payments infrastructure, along with cross-border links to enable faster payments between consumers and businesses across the region.
Qazi urged financial institutions to lend more aggressively while highlighting that payments are only enabled when
– Nihad Nazir
banks give people consumption power. “Consumption power comes from giving credit, people who make low income with no access to credit are not going to drive your payment revenue and revolution, so you have to consider all these points,” he said.
Sanjay Rakesh, Head of Corporate Banking Operations at Zand said that from a digital bank point of view it should be a top-down approach whereby financial
institutions provide the infrastructure and regulatory compliance required to serve the unbanked and underbanked.
From a fintech perspective, Saad Ansari, Co-Founder & CEO of Xpence said that the challenge that financial technology companies face in the GCC market is that “we are that thirdparty layer between the bank and the consumer,” delivering the required services to the customer is a major challenge. The relationship between banks and fintechs is no longer about competition but is now about collaboration through adopting cuttingedge technology services to meet customer needs and expectations.
Ansari agreed with Qazi that banks should embrace the fintechs as collaborators, not competitors. “Ultimately, we are using your payment
rails, your infrastructure and we are paying for it,” he said.
Murthy Ranjit, Oracle Financial Services’ Director & Head of Banking Pre-sales, Financial Services GBU in MENAT and Israel said that he concurred that there is more than just inclusion but collaboration adding, “gone are the days where banks were competing with fintechs.” Ranjit highlighted that the cloud, open banking and other innovative technologies are creating room for collaboration between banks and fintech firms.
Responding to a question on whether the cloud assists in bringing on board the unbanked, Finali Fernando, Regional Head of Product - Global Payments Solutions at HSBC Bank Middle East said that it is a privilege operating in the UAE market, a jurisdiction that has an appetite for cloud technology and is catering to the
wider Middle East region. Though cloud adoption lags in key financial markets, it is the way forward, added Fernando.
Going with the approach where central banks are prompting the collaboration between banks and fintechs, Enaz Ebrahim, MD & Head of Consumer Payment Solutions at Magnati said that currently, the FAB Group supports four digital payment platforms Payit, Careem Pay, Magnati
and PayBy—all which are delivering same services to the UAE market.
“This is where the central bank’s support is coming to play saying fintechs are here to help banks and collaboration makes sense,” Ebrahim said adding that financial institutions alone probably cannot deliver the products and services required by the 10 million people in the market—talk about the financial inclusions or the underbanked.
The UAE central bank recently passed a mandate that requires banks to extend their banking services to previously underbanked and unbanked segments of society including domestic helpers—a workforce that previously received its salaries 100% cash. Ebrahim said that Magnati has partnered with several financial services providers including LuLu International Exchange to launch DWallet Card Payment Service to provide a unified payment solution to domestic workers.
Shiba Nair, Senior Manager - Platform Development and Customer Experience at National Bank of Fujairah weighed in saying that the adoption of real-time payments does not happen overnight because a bank has discovered an innovative opportunity or a fintech is saying they have an instant payment system. She said that players in
the financial services sector understand the importance of digitalisation but unless banks move to the cloud, they cannot fully take advantage of advanced technologies such as APIs or open banking.
Digital payments were growing rapidly in the GCC even before the outbreak of the pandemic with the number of consumer real-time payments transactions in the UAE soaring to an annual rate of over 9% between 2014 and 2019. The astronomical growth is evident not only in the adoption of digital payments but of consumers’ expressed preferences.
New challenges that the banking sector face
The digital payments sector is at a tipping point. At a time when the fintechs are making immense inroads into the payments market, financial institutions
and card networks are finding it difficult to remain relevant and are on the verge of being relegated to just being utility players for third parties.
For banks to remain relevant, they must redefine the payment experience through real-time payment offerings, deliver personalised connections through best-in-class customer experience and collaborate
pragmatically with fintechs to open up untapped revenue streams.
Recalling the challenges that Fernando highlighted earlier, Rathore said that Standard Chartered expanded into Saudi Arabia recently and financial regulators in the Gulf state do not recognise the concept of APIs, the cloud and open banking. “We can sit there via global banks and teach them about the latest financial innovations, but the reality is that is how it works in Saudi Arabia and Egypt as well,” Rathore said adding that it will be a while before financial regulators in these markets see the value of the cloud, open banking and APIs.
From a global banking perspective, the above situation forces banks to increase
looking at certain markets that they can expand into as specific ecosystems. Standard Chartered unveiled its global payments hub in September 2021. SCPay is developed with a full cloudnative architecture and is powered by containerised microservices, APIs and data analytics.
“With innovations come challenges. How quickly is a bank innovating because the technology from the past two years has already become obsolete and this is a major hurdle that financial institutions face in addition to what Rathore mentioned,” Sampath said. The other challenge that most banks face is the increased number of regulatory requirements, he added.
Sampath said that there is always a catch-up between revenue, innovation and the service that a bank seeks to deliver to its customers to ensure a seamless experience. One of the key challenges for incumbents is the complexity and high cost of running legacy payments infrastructure and the cloud has long been touted as the vehicle for transformative change.
Priyanka Sarup, Global Transaction Banking Solution Lead at Oracle Financial Services said that the innovations that are being spearheaded by the central bank create regulatory challenges for banks due to increased requirements. On new payment rails, Sarup said that the fact that the volumes will increase dramatically when the UAE is launching its real-time payments scheme will likely create challenges for financial institutions.
Banks and financial institutions must adapt if they are to cope with substantial increases in real-time instant payment volumes, especially during peak seasons such as Black Friday sales or Amazon’s Prime Day and future-proof cloud-based payment solutions are the answer.
Sarup said that a cloud-based solution such as payment as a service (PaaS) enables banks to balance their performance, economics and security requirements because central banks will keep on churning out innovative solutions “it is an ever-changing landscape.”
– Ahanjit Champati
Responding to the question on cloud compatibility, Raju Adnani, Head for Payments and Receivables for TTS MENA at Citi said that if innovation is left to financial institutions, it is unlikely that banks will implement more innovations to enhance inclusion while adding that innovation will be very focused on what it means for them.
Adnani applauded GCC central banks for the innovative initiatives that are being implemented in the digital payments industry over the past 12 years. However, he noted that there is a lack of standardisation, and the sector is largely fragmented. “The way Immediate Payment Instruction was implemented compared to how Invoice Processing THE OUTBREAK OF COVID-19 ACCELERATED THE IMPLEMENTATION OF ELECTRONIC PAYMENTS IN THE GULF REGION AND IT IS TAKING US TO THE NEXT LEVEL. THE UAE IS ON THE CUSP OF SOMETHING BIG FOLLOWING THE CENTRAL BANK’S COMPLETION OF THE WORLD’S LARGEST PILOT OF CENTRAL BANK DIGITAL CURRENCIES TRANSACTIONS IN OCTOBER
– Anand Sampath
Platform would be introduced going forward are very different,” Adnani said adding that there is learning to do. “I look forward to NPSS being a perfect implementation, but banks have to comply.
Sampath admitted the existence of regional silos, “but one good thing that has happened to in the GCC is Buna”— the cross-border and multi-currency payment system owned by the Arab Monetary Fund.
Barbara Biro, former Head of Digital Ecosystem at RAKBANK weighed in saying she understood “well the hustle of the prioritisation and the regulatory requirements.” Financial institutions always found a way to make room for other types of innovations, Biro said as she noted that this kind of innovation was cosmetic in her experience. She said some banks lack the motivation to innovate, they do not know what they are doing, why they are doing it and what value does it bring to their businesses in the future hence they are copying competitors and fintechs.
Biro argued that legacy systems, legacy infrastructure and legacy technologies are not ‘really’ an impediment to innovation in the financial service sector but the challenge facing the majority of banks in the UAE and the entire GCC is the lack of strategy. “If banks do not create potential use cases with a different type of products, not the legacy products, then they will not be in a position to serve the different requirements emerging in the market,” she added.
On legacy systems not being a challenge to innovation in banking, Sreedevi Mani, Vice President of Payments Platform at Emirates NBD said that it depends on where the organisation positions itself in its digital transformation journey.
The cloud provides banks the choice to move from a capital-intensive model to a flexible business approach that brings the operational cost down while keeping data security the top priority. However, Mani said that the compatibility of the cloud to a bank’s system and how technologies mature in an organisation is of paramount importance.
Anushri Chordia, Head of Product Excellence Transaction Banking, Wholesale Banking Group at Commercial Bank of Dubai said that COVID-19 accelerated investment by financial institutions to upgrade their systems.
Chordia said that there’s no single roadmap or strategy that banks follow while posing questions that are rising in the financial service sector including whether banks want to be the first adopters or fast followers. She noted that the major challenge facing other banks is that IT will be pursuing its strategy, operations have their own, so is transaction banking, making it impossible to adopt one single roadmap.
Houssam Chaker, Head of Sales, Banking - Middle East at Oracle Financial Services said that the cloud is the potential game-changer that is helping banks to innovate and drive the strategy to build new customer experiences, create and market offers while optimising operations.
Meanwhile, Rajalakshmi Balasubramanian, Vice President, Group Program Management Office at Emirates NBD said that one of the prime challenges that banking institutions are facing is catering to four different generations and trying to figure out how to adapt to their changing demands.
On the challenge of catering to the expectations of consumers across generations, Anand Krishnan, Head of Technology at Emirates Investment Bank said that from a business point of view banks have to weigh options and find out what drives growth.
The widening generations that banks have to cater to include customers that
– Krishnadas Nair
THE PLAYERS IN THE FINANCIAL SERVICES SECTOR UNDERSTAND THE IMPORTANCE OF DIGITALISATION BUT UNLESS BANKS MOVE TO THE CLOUD, THEY CANNOT FULLY TAKE ADVANTAGE OF ADVANCED TECHNOLOGIES SUCH AS APIS OR OPEN BANKING
– Shiba Nair
still want to sign a piece of paper instead of e-signature and other customers that opt to remit $25 million the traditional way and disregard innovative technologies such as a QR code-enabled electronic form that is on offer, Krishnan said adding that trustworthiness and personal relationships are still two areas of strength for senior customers.
“There are bigger risks that the banking institutions need to take into consideration which includes climate change and making sure that sustainable finance is integrated into their operating policies,” Balasubramanian said while noting that as a core aspect of banking, digital payments’ impact on sustainability cannot be underestimated.
While retail banking is rapidly adopting real-time payments, Fuad Ashreff, Executive Director, Transaction Banking at First Abu Dhabi Bank said that he wonders when the transformation will reach corporate banking where they cater to corporates and SMEs’ working capital solutions. Nazir weighed in saying that at the end of the day the rails that trade finance use for payments is either SWIFT or any other that different banking departments use for cross-border payments. “My view is that once real-time payments come into effect and there are bilaterals between payment networks, transaction banking is set to have corridors opening up where they can do real-time payments as an alternative to let’s say SWIFT that is currently in use,” Nazir added.
Krishnadas Nair, Regional Head - Business Development, Corporate Banking-Middle East, Turkey & South Asia at Oracle Financial Services said that what is underlying the entire innovation umbrella is one thing that is sensitive to most bankers, that is what can they offer that differentiates from others.
Nair said that to do differentiation, banks are building several overlays. “That goes back to the saying that, if bankers can focus on banking and leave the technology part to solutions vendors and aggregators, there will be a lot of standardisation that will come up, and equally,” he said.
Globally, the origination and adoption of digital payment solutions have emerged from various needs yet, on a broad basis the real-time instant payments ecosystem is being driven by technological innovation, customer demands and regulatory requirements. Bankers and financial technology professionals who attended MEA Finance and Oracle Financial Services agreed that the new game for financial institutions is how they can deliver services and products to customers in real time.
