9 minute read
Banking in the future
Though digitalization was already apparent across the Middle East financial services sector, the outbreak of COVID-19 in 2020 accelerated the rate of digital transformation to record highs as the pandemic had a monumental impact on consumer behavior. McKinsey & Co. said that the coronavirus crisis has reshaped the global economy and society as banks face an urgent imperative to reimagine their business models amid a shift in the operating environment which is having an unprecedented impact on their bottom line.
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Digital transformation has been a key battleground for banks in the Middle East region – a competition that was intensified by the outbreak of the pandemic.
Although 2020 was a challenging year for all industries, it presented an opportunity for the global financial service sector to accelerate and strengthen the digitalization of complex processes and end-to-end customer journeys across the front, middle and back offices, a trend that was already in full throttle across the region.
“The next three to five years will also see an exponential increase in the volume of data generated through a more digitally native demographic and which will require advanced data science capabilities, powered by artificial intelligence, to generate customer insights and interactions, such as the use of bots to provide basic banking services,” said Dan Robinson, Head of Wealth & Personal Banking at HSBC UAE.
Banks in the GCC region are exploring technological innovations and new business models that include digital banking, open banking, predictive banking, and modernization of payment systems as they seek to enhance user experience (UX) and personalization of products while they keep an eye on increasing cybersecurity concerns.
Following the outbreak of the coronavirus, the Middle East region’s digital payments volumes skyrocketed, reportedly generating as much as 10 years’ worth of growth across B2C, B2B, and P2P spaces in just over 12 months. PwC said that digital payments, once a convenience, have become a necessity in these times.
Similarly, aside from being a powerful enabler of transformation in how banks handle their customers’ financial information while putting control back in their hands, open banking is driving competitiveness in the financial service industry across the GCC region. “Open
banking is a platform-based business approach where data, processes, and business functionalities are made available within an ecosystem of customers, third-party developers, fintech startups, or partners,” said Deloitte.
The emergence of new technologies is offering the financial services sector a window to be more innovative and efficient in-service delivery, but it is also opening the door to new entrants such as fintechs, global retail giants as well as card networks and neobanks.
The future is open
The COVID-19 pandemic is shaping up to be a crucial turning point in the financial service sector, changing regulators’ perception towards open banking. PwC said that opening banking has the potential to reshape the financial services landscape and several financial centers in the emerging markets, the GCC region included are making considerable moves in this space.
Open banking is a connected ecosystem of financial services that allows two or more unaffiliated banks to enrich their digital offerings safely and securely, bringing greater financial transparency and new and tailored customer services to the region. By leveraging API, a set of communication protocols used to develop computer applications, open banking platforms authorizes retail and enterprise clients to access consumers’ financial data in realtime and share account information and transaction history with external parties such as vendors, suppliers, business partners and other banks.
KPMG said that it expects a rapid uptake of open banking approaches and models over the coming few years as consumers and small to medium enterprises (SMEs) are becoming more aware of the benefits it can bring – the ability to quickly understand their financial position, explore alternatives and make better financial decisions.
The Gulf region financial service sector is unarguably mature when it comes to regulators’ preparedness for open banking compared to other emerging markets though there are some teething problems such as the need to modernize the regulatory landscape. In October 2020, Bahrain unveiled its Open Banking Framework which provides a holistic definition of the country’s open banking regulation, guidelines, technical standards for Open API platforms, security standards (including data privacy), and overall governance.
In the UAE, PwC said that new open banking platforms are rising with fintechs and lenders moving towards the adoption of open API solutions amid the defining of the roadmap towards open financial markets by national and offshored regulators. The UAE central bank recently announced plans to open a FinTech Office to support financial innovation in the country while the Abu Dhabi Global Market proved its unwavering support towards the open banking revolution having awarded its first digital-exclusive banking license and Category 1 status to Anglo-Gulf Trade Bank in September 2019.
Crossing the border into Saudi Arabia, the central bank also introduced its open banking framework earlier in 2021, a move that is expected to revolutionize how customers, merchants and financial services providers enhance the value they reap from accessing financial data. Saudi Arabia is investing in the development of its financial services sector as part of the kingdom’s economic diversification drive under Vision 2030.
Open banking will enhance trust between customers, banks, fintechs and other financial players, and the Saudi Central Bank (SAMA) plans to go live with open banking during the first half of 2022.
However, amid these developments, KPMG said that the challenge facing policymakers and regulators is how to structure an open banking regime that balances the need for innovation, information security and privacy, and does not inadvertently create an uneven playing field for both traditional and nontraditional players.
– EY
Bank of tomorrow
Digitalization in the banking sector is swiftly changing the field of play where incumbents are facing increasing competition from nontraditional entrants who are billing on customer experience as their point of sale. For several regional lenders, business is no longer about the products and services on offer but enhancing UX. The outbreak of the pandemic has brought about more than decades worth of changes in the way banks do business in just a few months.
“Listening to customer feedback is critical to ensuring we create the right personalized experiences to help them achieve their ambitions here in the UAE,” said Robinson.
“Digital transformation is no longer a luxury, but a necessity. Banks that are agile, flexible, and willing to transform their business models will be the ones that succeed, and secure their financial strength for future growth,” said KPMG.
The UAE’s first independent digital banking platform, YAP, was unveiled in
March. Other neobanks that are expected to launch soon include Zand, the first Shari’ah-compliant digital-exclusive bank, while ADQ is also considering setting up a digital bank using a legacy banking license of First Abu Dhabi Bank. “The UAE has a strong regulatory foundation for the launch and operations of digital-only banks,” said KPMG.
In September 2019, Mashreq Bank and Emirates NBD launched digitalexclusive banks for SMEs, NeoBiz and E20 respectively, in a bid to support one of the UAE’s important sectors. The unveiling of digital banks for SMEs came exactly two years after both Mashreq Bank and NBD unveiled Mashreq Neo and Liv., lifestyle digital-only banks that seek to meet the banking needs of millennials.
While in Bahrain, Bank ABC launched ‘ila Bank’ in 2019 – an AI-powered and data analytics digital-exclusive bank. ila Bank is expected to launch its services in Jordan this year before it expands into Egypt, and it also started offering credit cards and loans to Bahraini customers in March.
Digital payments
The pandemic crisis and its related economic fallout have undoubtedly accelerated a string of existing trends in both consumer and business behaviors while introducing new developments that saw the use of digital payment methods surpassing the use of cash and debit cards.
A Middle East consumer survey that was conducted by Mastercard last August revealed that 70% of the participants are using some form of contactless payment method since the outbreak of COVID-19 due to safety concerns while 81% of the respondents noted that they would continue using digital payments post-pandemic.
“Driven by changes in digital technology, consumer demand and competitive forces, the way people make payments is evolving faster than any other area of financial services,” said EY.
Globally, payments remain one of the best performing financial services products but unfortunately for banks – the traditional providers of payments services – this momentum is no longer extending to most of them, especially in these challenging times. Technology giants, fintechs, merchants and social media giants have all created their digital payment offerings.
“The payments landscape is constantly evolving in the UAE and around the world. The UAE is already a digital first payments and transfers market, which has caught the attention of global and UAE based fintechs who are launching mobile led experiences,” added Robinson.
For banks to maintain their position in the payments sector, McKinsey said, “Success will depend on thoughtfully assessing capabilities, determining the role of payments in market strategies, and appropriately aligning payments operations to achieve the required performance improvements.”
Analysts believe that curving out payments as a stand-alone business entity for example in the case of Emirates NBD’s Network International allows for the expansion of services across the financial services sector and opens the service to a broader array of customers, thereby driving scale and improving profitability.
In April, First Abu Dhabi Bank completed the carve-out of its payment division into a stand-alone operational entity called ‘Magnati’. Aside from its payment services, Magnati seeks to provide enhanced capabilities to partner with fintechs on product and service innovation.
To adapt to the changing operating environment while maintaining a competitive edge in a congested market, payment services providers across the GCC must understand the needs and expectations of their customer base. Accenture said that as the payments market expands, customer experience is becoming the prime competitive differentiator.
Boston Consulting Group and Swift expect the global digital payment sector’s revenues to hit the $1.8 trillion mark in 2024, from $1.5 trillion in 2019, buoyed by the continued transition away from cash, sustained strong growth in e-commerce and electronic transactions, and greater innovation.
The coronavirus containment measures that were introduced by regional governments shifted consumers and businesses toward e-commerce platforms making it vital for financial service providers to offer seamless payment solutions. The ongoing shifts toward e-commerce, digital payments (including contactless), instant payments, and cash displacement have all been significantly boosted in the past six months, said McKinsey.
The Gulf region financial service sector’s digitalization drive is partly self-motivated. Regional banks are proinnovation and industry experts see them continuing to dominate the Middle East banking landscape as the sector goes more digital. The banks’ tech-savvy customers and regulatory initiatives such as regulatory sandbox and open banking are also expected to accelerate the digital transformation.
– KPMG
