The future of the region’s financial services sector will be written in the cloud

The way that financial services are accessed and used today, plus the high levels of innovation in our region, make the cloud the natural home for the banks and financial services providers, says Naim Yazbeck Regional Director, Enterprise and Partner Group (EPG), Microsoft UAE

The Middle East and Africa is home to one of the world’s most innovative financial services industries. This reputation dates to before the pandemic. A 2018 study from The Economist Intelligence Unit showed how regional bankers, concerned about new industry entrants’ ability to build market share, had started to develop new differentiating offerings. Nearly two thirds (65%) of those polled said this was their strategy. And 57% said they were now viewing their services as a “digital ecosystem” with more than half prepared to engage in open banking, where FSIs expose their services to thirdparty developers through APIs.

Around the same time, Microsoft conducted a cross-industry survey to assess the relative maturity of MEA businesses regarding artificial intelligence. We found that the FSI sector was ahead of others, with 44% of organizations found to be in the two most mature stages of adoption.

Few of these advances can occur without the cloud. It is the toolbox of innovators, host to a vast array of technologies that allow any business to behave as a large-scale enterprise in the digital arena. Barriers to entry, in terms of skills, capital, and geography, are lowered and the scope for collaboration, productivity and cost-cutting is raised. Cost-cutting is of particular interest to regional FSI entities, the stakeholders of which are deeply concerned about financial sustainability.

McKinsey research on the African banking segment from 2021 showed that less than 10% of IT budgets was available for value-adding business functionality, with 70% of technology capacity dedicated to maintenance of legacy infrastructure, troubleshooting and daily operations. However, the study suggested that banks could cut costs by more than 20% through cloud migration, and by “pulling on modern levers” they could double the productivity of the IT function.

Naim Yazbeck, Regional Director, Enterprise and Partner Group (EPG), Microsoft UAE

The COVID factor

As with most industries, FSI was upended by the pandemic. Aware that regulators were becoming increasingly tolerant of cloud models, banks migrated in large numbers over the past two years. But their attraction to the cloud went beyond mere business continuity and cost-cutting. They saw the cloud as a foundation for innovation and for unlocking value creation.

Beset on all sides by new entrants, including fintech firms and neo-banks,

they saw an opportunity to build more convenient, always-on, responsive, and engaging customer experiences. This race to capture consumers’ hearts and minds in an overbanked region is a tough proposition. Banks must differentiate themselves at a service level, with convenience and individualisation being important benchmarks. They must offer the right products at the right time for the customer and provide a full range of engagement channels – digital, mobile, phone – while ensuring consistent service across all of them.

Regional banks enjoy a strong financial position. A McKinsey study concentrating on the Middle East shows corporate banks here to have average returns on equity of more than 12%, significantly outpacing European institutions, which average around 7%. But this does not mean that banks across MEA have become complacent. The rise of nontraditional players and FinTech, especially in Arab Gulf nations such as the UAE and Saudi, is forcing FSI players to embrace new business models that blend thirdparty products and capabilities with their own, especially since evidence suggests this is what customers want.

Service ecosystems

A Deloitte study shows 82% of Middle Eastern banking customers are willing to leverage FinTech to address their banking needs. Financial institutions have an opportunity, through the cloud, to build entire suites of services around core offerings. Consider the home loan. What if a bank could offer access to services such as property search, relocation, decorating and maintenance to every customer who sought a mortgage? Examples such as this become easier to imagine in the digital era with cloud services at our disposal.

Another realm that is simplified and strengthened by the cloud is that of security – a critical concern for FSIs and their regulators. As COVID and its associated lockdowns amplified the online spending of millions of the region’s shoppers, banks and their CISO’s have become inordinately occupied with the protection of proprietary and customer data. Identity compromise and fraud are commonplace. And on top of increased consumer activity, the attack surface has swelled under the influence of video conferencing, chat, and collaboration tools, not to mention the escalation of shadow IT, all of which were brought about by remote work.

Any compromised user constitutes a risk to their bank, and this is where the cloud becomes a boon. Its architecture allows hyperscale providers such as Microsoft to leverage signal, intelligence and operational experience at scale to harden endpoints, applications and

services. Microsoft Security solutions are trained on 8 trillion daily threat signals and the insights of 3, 500 security experts. Custom algorithms and machine learning models make and learn from billions of queries each day. This leads to faster identification of threats and more efficient responses.

AWARE THAT REGULATORS WERE BECOMING INCREASINGLY TOLERANT OF CLOUD MODELS, BANKS MIGRATED IN LARGE NUMBERS OVER THE PAST TWO YEARS

Compliance and risk

The region’s regulatory labyrinth is growing. The UAE’s recently enacted Personal Data Protection Law, which outlines “governance for data management and protection and defines the rights and duties of all parties concerned”, is just one example of regulation with which every UAE business must comply. The Consumer Protection Law of 2020, which requires responsible entities to ensure that consumers have access to a “safe environment when purchasing a good or receiving a service”, is another. Along with compliance goes risk management – a central tenet within the FSI industry, where misconduct, errors, and oversights constitute the potential for material damage to the business. And when COVID forced a hasty migration to new work models, checks and balances were often neglected in favour of business continuity.

Once again, the cloud can help. The Microsoft Cloud for Financial Services accommodates a range of complex control frameworks and regulatory requirements. It houses the industry’s largest compliance portfolio, including external certifications covering more than 75 compliance jurisdictions. We address the most rigorous security, regulatory and privacy demands in partnership with the

financial services industry and through engagement with regulators.

While it is true that risk is becoming increasingly difficult to predict, financial institutions are still under enormous pressure to foresee and mitigate it. Beyond the threat actor and the risk to data, climate-related challenges and the rise of environmental, social and governance (ESG) require financial institutions to leverage data and technology to improve their risk management.

The silver lining

The cloud is now the natural home for regional FSI organisations. Its scalability ensures business continuity. Its architecture paves the way for cost efficiencies and enhanced productivity. Its flexibility allows the development of niche offerings that enhance customer experiences. And its advanced technologies provide security and allow tighter risk management. The future of the regional FSI industry will be written in the cloud.