23 minute read
Rethinking New Business Models for Banking
Leading figures in the development of Middle East financial services gathered in Dubai for a roundtable hosted by Mambu in collaboration with MEA Finance, to share experiences, gain insights into and debate key challenges confronting the banking sector and emerging business models
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The Middle East financial service sector has weathered several storms in recent years from the 2008 global financial crisis to the economic impact of the pandemic and the tightening of monetary policy to push down inflation.
The banking system in the region is as solid as it was pre-pandemic and much healthier than when global central banks started hiking their interest rates in lockstep with the US Federal Reserve (Fed). But can we safely say banks in financial architecture that digitisation is unleashing.
Simply put, the financial service sector must navigate numerous mounting challenges and uncertainties. MEA Finance in collaboration with Mambu, hosted an exclusive roundtable themed
Innovation in uncertainty: New business models to future proof banks
in Dubai, the UAE, where industry leaders discussed key concerns for the region’s banking and financial services sector and the emerging business models that are coming into play.
The Berlin-based financial technology firm’s software as a service (SaaS) cloud banking platform assists banks in their journey towards embracing modern cloud infrastructure and transitioning away from ‘legacy’ technology. They support digital banks, telecoms companies and traditional banks to advance their digital transformation across a range of domains from personal lending, business lending, mortgages, trade finance, digital wallets and current accounts.
With more than 200 customers in over 65 countries, Mambu counts neobanks N26, Tandem Bank, TymeBank, Spanish bank Santander and Dutch bank ABN AMRO among its clients. Digitalisation 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.
Banks are exploring technological innovations and new business models that include digital banking, open banking, predictive banking and the modernisation of payment systems to harness innovation, drive operational efficiencies and grow business, all to
the Middle East are out of the woods? Not really.
Cause for concern is evident in a series of challenges that are confronting incumbent banks including fierce competition from challenger and digitalexclusive banks, shifting customer behaviours and macroeconomic uncertainties. “Banks are at a makeor-break moment,” Deloitte said, while highlighting that they have a short window to act on how they want to position themselves in the new global ensure they are ready to meet the challenges of change and are future proofed to do so.
The tectonic shift
The rally in oil price, which has mostly traded above the $80 mark since February, has pushed crude above the break-even level for almost all the Middle
East’s producers extending gains earlier boosted by the lifting of pandemicrelated restrictions.
However, the global economy remains fragile going into 2023 due to a confluence of unprecedented challenges including the meteoric rise in inflation and tightening monetary policies around the world. The ripple effects of a more fragile and fractious global economy will be felt in the Middle East banking industry.
“GCC banks with Turkish subsidiaries adopted hyperinflation reporting in H1 2022 under the accounting standard IAS 29 as cumulative inflation in Turkiye had exceeded 100% over three years,” Fitch Ratings said in August. Emirates NBD, Kuwait Finance House, Burgan Bank and Qatar National Bank are worst-affected in terms of the operating profit/risk-weighted assets ratio, the rating agency said.
Manav Daryanani, Principal, Advisory at Mambu said that with inflation at 40-year highs and rising debt levels, both for public and household debt, the global economy faces uncertainties due to the severity of the economic downturn, inflation, geopolitical tensions and climate risk.
However, Daryanani said that there is still an opportunity for Middle East economies, thanks to rising energy prices, an influx of capital, new customers migrating to the region and favourable government spending policies.
To succeed in today’s challenging market, banks must evolve and adopt new business resilience mechanisms. Industry leaders are considering several business models including embracing new technologies to move to a fundamentally lower cost curve, enhance innovation and create new revenue streams.
“We see in the market several business models including banking as a service (BaaS) proposition for building a separate initiative such as the speedboat approach that we speak about often or maybe super-apps that are very popular in the Asia Pacific,” said Miljan Stamenkovic, the General Manager at Mambu MENA.
Banks in South Asia and Europe have led much of the development of the world’s modern banking industry across all dimensions—from growth to business models and innovation. However, the Middle East has tilted the scale, delivering game-changing growth and innovations in banking services.
Grant Niven, the Head of Group Digital at Banque Saudi Fransi said that he has seen a lot of digital disruption over the last nine years that he has been in the Middle East and continues to see it, adding that “adversity leads to more innovation.”
“We are shielded. I’d say in this part of the world in particular compared to my home and other parts of the world that are going through very challenging times,” Niven said while projecting that interest rates and inflation will remain low in the UAE and Saudi Arabia at a time when inflationary pressures have led to multiple rate increases from the US Federal Reserve.
Digitalisation and innovative technologies are creating unprecedented disruption in the banking sector and the rate of change is accelerating. Niven said Banque Saudi Fransi, one of the Middle East’s oldest legacy banks, is evolving by investing in disruptive new ventures, adopting new business models, leveraging new financial technologies and opening up regional markets to new customers.
“The bank branch is far from dead in terms of traditional banking, but it
WE SEE SEVERAL BUSINESS MODELS IN THE MARKET INCLUDING BANKING AS A SERVICE (BAAS) PROPOSITION FOR BUILDING A SEPARATE INITIATIVE SUCH AS THE SPEEDBOAT CONCEPT THAT WE TALK ABOUT OFTEN OR MAYBE SUPER APPS THAT ARE VERY POPULAR IN THE ASIA PACIFIC
– Miljan Stamenkovic, the General Manager at Mambu MENA
needs a radical transformation. COVID19 accelerated the need to create great experiences and collaborate with different sectors and business models and provide more financial services and products,” he added.
David Henry, the Chief Operating Officer at Nomo said the Shariahcompliant challenger bank’s business model is quite fortuitous in the current economic conditions. He concurred with Grant that the GCC region is somewhat insulated, thanks to high oil prices that soared to record highs between March and August this year.
“Regional governments have a lot of dry powder to call upon should they need to step in and support the economy,” Henry said adding that for Nomo, which recently launched a Shariah-compliant home financing product, the current economic conditions present an interesting opportunity.
From an innovation perspective, Henry said that the adoption of innovative technologies as a form of efficiency is becoming mainstream. “Partnering with fintechs for some of the well-established incumbent banks in this part of the world who have investment budgets and the capital to deploy is potentially a way to expand the market footprint and share capital through acquisitions,” he added.
To deliver a market-leading platformbased value proposition, banks need to leverage data for personalisation and stronger customer engagement, adopt a cutting-edge technology stack to speed up innovation and develop an agile operating model to respond to fastchanging markets.
Niven said that over the years Banque Saudi Fransi has been building up a venture model both in terms of delivering new business models and tapping into new customer segments. The Riyadhbased bank has been weighing how to invest in innovative digital solutions that are redefining interaction with consumers by offering an array of financial services from digital money transfers to AI-powered credit underwriting.
“Investment in startups is particularly buoyant in the Middle East where funding doubled during Q1 2022 with fintechs accounting for 41% of the total $864 million raised, according to a report by MAGNiTT that was published in August.
Traditional banks have also been assessing how to continue investing in their businesses to transform their services and products to be digital first. “Technology, modernisation and new business model. We’re trying to smash down all the challenges we’ve got, the internal blockers and call people out to
transform their parts of the organisation and it’s a top-down initiative,” said Niven.
Regional banks must push ahead with their digital transition to an agile culture, lift barriers to cross-functional collaboration and create semi-autonomous teams that can deliver solutions quickly in alignment with enterprise strategy.
Mohamed Roushdy, Founder of Fintech Bazaar said that the majority of banks in Saudi Arabia have a fintech offering payments services while some fintechs are now venturing into mainstream financial services. Niven weighed in saying that D360 bank, payments provider STC Pay and Saudi Digital Bank moving to full-fledged digital banks.
Legacy banks are powering their foray into digital banking by building the infrastructure and connectivity through APIs to get access to services that fintechs can grow and accelerate faster, Niven added.
Muhammed Al Nuwaiser, the Head of UAE & DIFC at The Saudi National Bank concurred with Henry that innovation is a means of attaining efficiency for traditional banks while drawing an example of the consolidation between National Commercial Bank and Samba Financial Group—a tie-up that was completed in eight months, thanks to innovation and efficiency.
For regional regulators weighing digital banking’s benefits and risks, the challenge is to strike a balance between supporting innovation and protecting consumers. “Regulators are ahead of us in issuing the guidelines of digital and online transactions, whether it’s Dubai Financial Services Authority (DFSA), the Central Bank of the UAE and the Saudi Central Bank,” said Al Nuwaiser.
Meanwhile, Mohamad Elkhalil, Director of Supervision at (DFSA) highlighted the fact that most traditional banks in the region are either investing in fintechs, launching their own or partnering with one has created a bit of a mess in the financial services industry. “But I think that is a natural phase that we need to go through until every financial institution
THE BANK BRANCH IS BY FAR FROM DEAD IN TERMS OF TRADITIONAL BANKING, BUT IT NEEDS A RADICAL TRANSFORMATION. COVID-19 ACCELERATED THE NEED TO CREATE GREAT EXPERIENCES AND COLLABORATE WITH DIFFERENT SECTORS AND BUSINESS MODELS AND PROVIDE MORE FINANCIAL SERVICES AND PRODUCTS
– Grant Niven, the Head of Group Digital at Banque Saudi Fransi
discovers their preferred business model,” he said.
From a supervisory perspective, Elkhalil cautioned that regulators are reactive when it comes to innovation, and they are always one step behind the financial service sector because they let the industry innovate first then step in to understand what’s happening and catch up with developments.
Tommaso Leodari, the Chief Investment Officer at Index & Cie weighed in saying that the majority of venture capital and investment in fintechs is not going towards revolutionising banks’ core
systems but it is going toward payments in the fintech subsection of finance.
This means that the capital market, which includes angel investors, is investing money into fintechs and the proceeds are being channelled towards innovation, revolutionising power and cutting costs, Leodari said while highlighting that major banks are not investing in the early stages of fintech startups.
Meanwhile, for challenger banks, the ‘momentum is up and running. “Digitalexclusive banks don’t want to wait for time, they want to get up and running while competing with traditional banks,” said Dalal.
Asked whether banks are being held back or if the world is moving too fast, Barbara Biro, the Head of Digital Ecosystem at the National Bank of Ras Al-Khaimah (RAKBANK) said that there are three possibilities, either those banks do not have the proper vision, they can’t figure out financial service industry trends or do not see the reason why they should innovate their services and products.
However, Biro noted that a full-fledged bank cannot be digital-exclusive adding that there are banking services such as wealth management that still require
in-person interaction. “A bank cannot go fully digital there. But there are banking products and services that must be the same as and fully digital,” she added.
New business models - Speedboats
Banks in the Middle East were already at the forefront of innovation and digitalisation well before the pandemic. Industry leaders who attended the roundtable projected that the trend would continue to dominate the financial service sector as some incumbent banks are launching speedboats to transform their core business.
A speedboat is an independent, cost effective and agile digital banking spinoff that operates like a fintech. The majority of traditional banks in the GCC region are leveraging their existing resources to introduce cloud-native digital spinoffs that enable faster time-to-market for the launching of new products and market expansion.
Mambu said that a well-executed speedboat, often customer-centric or targeting a niche segment, can be quickly scaled up according to the market requirements. The speedboat approach requires legacy banks to quickly develop
new digital products and services that attract and delight customers. These offerings need less capital than traditional banking products and they are said to be far less expensive to support.
Pratikk Dalal, the Chief Financial Officer at Al Maryah Community Bank said that momentum is key for a successful digital transformation. He said that most incumbent banks are trying to break the shackles of their legacy systems and adopt architectures that are digital to the core either with a new digital bank or digitalise their core banking platform.
Challengers or neobanks in the Middle East are competing with speedboats
from Emirates NBD, Bank ABC and the National Bank of Kuwait as Gulf states broaden access to financial services. UAE’s Mashreq Bank and Emirates NBD launched digital-exclusive banks for SMEs, NeoBiz and E20 respectively, in September 2019. The unveiling of the digital-exclusive banks came exactly two years after both Mashreq Bank and NBD had launched Mashreq Neo and Liv., lifestyle banks that seek to meet the banking needs of millennials.
Dubai Islamic Bank unveiled its digital offering rabbit in December 2021—a digital app that is aimed at tech-savvy
customers. It offers a current account, globally accepted debit card, payments and money transfer services.
Bahrain’s Bank ABC also launched ‘ila Bank’ in 2019 – an AI-powered and data analytics digital-exclusive bank. ila Bank launched in Jordan in October and aims to expand into Egypt. Meanwhile, NBK launched Kuwait’s first digital bank, Weyay, last November and it will provide retail banking services.
Biro highlighted that there are now two types of fintechs, one that is focusing on the digital transformation of legacy banks and the other one that is going with merchant flow—customer demand and the government-controlled type of new rails, new payment rails and new product rails.
Nomo’s journey
The ongoing transformation in the Middle East financial services market is partly being driven by tech-savvy customers and regulatory initiatives such as regulatory sandbox and open banking—which are creating an enabling environment.
Asked how Kuwait’s Nomo was serving its customers’ overseas banking requirements, Henry highlighted that in plotting new paths to digital innovation,
the greenfield banking approach is confronted by brownfield organisation, brownfield governance and brownfield license. “We are talking about the legacy mindset, the legacy management, the legacy culture and getting approval to launch a product in less than five months,” he added saying that a greenfield bank goes through all these processes.
Greenfield banking models have flourished in retail and small business banking as financial institutions look for faster ways to get new propositions to market. For Nomo, Henry said that the proposition came from Kuwait as the digital bank is positioned to address the needs of more than 600,000 customers in the Gulf state.
From a governance and people perspective, he said that the legacy mindset is still a huge challenge, but with the help from Mambu, the bank was up and running in nine months. “We have both USD and GBP current accounts, GBP debit cards, USD and GBP term deposits and we onboard customers straight out of Kuwait,” Henry said while noting that all this was achieved in nine months.
The Nomo app is comparable to using Monzo in the UK or one of the
well-established neobanks or fintechs,” said Henry.
Banking-as-a-Service
Emerging financial technologies are offering the financial services sector a window to be more innovative and efficient in service delivery. A study by SimonKucher & Partners showed that there are now around 400 neobanks around the world serving close to one billion clients.
From a revenue stream point of view, Neale Crouter-Foy, CTO at Securrency used the Blockbuster analogy to highlight that the remittance market in the Middle East is huge and there is significant cash
flow coming in, however, this business model is likely to change very soon. “The whole fundamental model has changed,” Crouter-Foy added.
Saad Ansari, the CEO of Xpence, said that the business banking platform is working with different regulators and incumbent banks across the MENA region from Morocco to Egypt to Bahrain. “Different technologies and core systems are being used by banks in these countries, some that are easier to integrate with others are less,” he said.
The biggest challenge the banking sector face is the change of mindset. “We always see people talking about legacy core banking systems. But no one talks about the legacy mindsets within
the banking industry,” Ansari said adding that a financial institution can have a brand-new core banking system, but what difference does it make to a fintech if the mindset hasn’t changed?
Banks in the Middle East region plan to increase their use of APIs to reduce IT complexity and enable agility and partners. Ansari said that several banks in the region are setting up their APIs and they’ve got their doors open to work with fintechs. Emirates NDB launched a comprehensive and readyto-use financial API developer portal ‘Emirates NBD API Souq’ in September to provide fintechs and developers with an ecosystem to develop innovative financial solutions.
The cloud is moving to the forefront as the focal point for information technology leaders, C-suite executives and board members as the future of financial services is digital. A growing number of non-bank companies are now offering financial services such as bank accounts, digital wallets, payments and lending.
Financial institutions in the region are increasingly offering banking as a service (BaaS)—bundled offerings, cobranded products and services that non-bank companies can use to serve their customers at a time when the demand for embedded finance has soared to record highs. Banks can adopt a cloud strategy by service type including BaaS, infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS).
Niven said that BaaS is the big frontier for financial services that brings together a massive community of different industries, service providers and technology companies.
Over the past 18 months, Banque Saudi Fransi has been building a platform that allows connection with fintechs while allowing them to use the bank’s license to embed and deliver services to the entire country. “At the point of contact for a consumer, be it a corporate, an SME or a
– David Henry, Chief Operating Officer, Nomo
retail customer, they want a service and easy access they don’t care from which bank it comes from,” he added.
Though Banque Saudi Fransi expects tiny revenue from BaaS and embedded finance, the bank acknowledges that onboarding global unicorn fintechs who consider entering Saudi Arabia’s remittance market will be a great opportunity.
Given the increase in the number of service providers in this space, embedded finance-minded banks and brands evaluating BaaS platforms should consider brand-bank fit, product specialisation and brand-bank relationship. While smaller banks and fintechs initially dominated the BaaS and embedded finance market,
incumbent banks including Emirates NBD and HBSC are now beginning to wake up to its potential.
Cloud solutions allow banks to streamline upgrades by reducing the substantial time and effort that is spent configuring new upgrades and capabilities on disconnected legacy systems by allowing an enterprise’s technology partners to handle both the software and hardware upgrades.
From a strategic point of view, Shiba Nair, Senior Manager - Platform Development and Customer Experience at the National Bank of Fujairah said that financial institutions need to be clear on their digital strategy.
– Pratikk Dalal, Chief Financial Officer, Al Maryah Community Bank banks are catering to the needs and requirements of customers.
PwC said that by observing and often experiencing first-hand what banks offer—or do not offer—new entrants pick off segments of the banking sector and develop narrowly defined, but highly effective solutions to manage customer expectations.
Stamenkovic weighed in saying that digital banks are good at one thing, focusing on solving one problem such as Nomo’s specific banking proposition to work with the expats. From a coordinated approach, Stamenkovic said when all different fintechs in the region collaborate with mainstream banks and their propositions, “this is how the local
financial ecosystem can build a much greater value proposition than any bank can build and deliver to the market.”
Knitting financial ecosystems and the customer journey, Daryanani said that research shows that the embedded finance market will be valued at $7 trillion over the next 10 years, double the market cap of the world’s top three banks.
“There might be a department pushing for digital transformation and take the bank to its ultimate destination, which is being digitally enabled,” Nair said adding that vision might not be successful due to the bank’s core banking system if the
Ecosystems
Banking customers are redefining their expectations, taking their cues from other industries that offer multichannel access, product simplicity, seamless integration and ‘segment-of-one’ targeting. They want convenience, personalisation, accessibility and ease of use.
Dalal said that from a hyperpersonalisation perspective, following research of their browsing and shopping patterns, this is the point where digital
institution is not open to APIs and be partnering with an ecosystem of fintechs.
On the regulatory front, Nair said that for regulatory authorities in the region to standardise the approach to Electronic Know Your Customer (e-KYC) data, traditional banks need to move from being product-centric to customer-centric while focusing on efficiency and flexibility.
Henry said that there is a need for harmonisation of regulations and financial services in the GCC while noting the different cloud services that are currently available in different jurisdictions across the region.
“The fact that you have to work with Oracle in Saudi Arabia, Amazon Web Services (AWS) in Bahrain Microsoft Azure in the UAE it’s a nightmare,” he said adding that close coordination such as in Europe makes adoption of cloud services much easier for fintechs and banks because currently “the GCC is a bit of a minefield.”
The UAE KYC Blockchain Consortium, the first of its kind in the region, facilitates faster, more secure and streamlined customer onboarding while allowing the sharing of verified e-KYC data between licensing authorities and banks through advanced distributed technologies.
Super apps
Fintech withstood the impact of the global pandemic largely because of the increasing presence of digitisation in almost every aspect of our personal and professional lives. However, it accelerated the shift from cash to contactless digital payments that were already underway among consumers while driving the continued growth in e-commerce.
Super apps are popping up everywhere. They aggregate a broad set of services, both lifestyle and financialbased, with the added value of embedded payment capabilities to provide users with a frictionless experience.
Daryanani posed a question on the potential and opportunities of super apps in the Middle East. RAKBANK’s Biro differentiated super apps, saying purely e-commerce super apps such as Amazon and Noon already enjoy a gigantic user base and the added value services on offer will fuel growth. She highlighted that creating communitybased lifestyle super apps that offer a
one-stop shop providing services ranging from payments and financial services to communication and retail services will likely be challenging given the different cultures and nationalities that make up the region’s user base.
The first known super-app is WeChat, which was launched in 2011 as a messaging platform by Chinese technology giant Tencent. A decade later, WeChat is a portal to more than three million third-party “mini-programs,” a platform from where users can hail a ride, make cashless payments or access retail services.
Biro said super apps are a new revenue stream for banks and they must enable responsible finance, which involves teaching, educating, notifying, warning and enabling alternative options to complete a transaction instead of immediate payments using cash.
Other high-profile super apps in Southeast Asia include South Korea’s Kakao, Japan’s Line, Vietnam’s Zalo, Singapore’s ride-sharing platform Grab and GoTo in Indonesia. Meanwhile, Dubaibased Careem has expanded beyond its initial ride-hailing business to become a ‘super app’ that includes food delivery, grocery shopping, cleaning, shipping and bike rentals.
From a data ownership perspective, Ansari highlighted that it is challenging for incumbent banks to start their super banking apps. Ansari imagined RAKBANK creating a super banking app and a customer that also uses Emirates NBD coming along and plugging their account into a RAKBANK account and then collecting data, a move that will be unlikely.
The rise of open banking around the world is enabling super-apps to use financial data from multiple sources to target customers’ needs and deliver financial products. Open banking requires a robust, agile, and scalable IT architecture to enable API integrations with multiple entities. Its implementation promises to create a new data-sharing infrastructure, which will form the basis of a much richer range of services and products across the whole of financial services.
The emergence of fintech, combined with economic shifts and regulatory impacts, has changed the game for all financial services providers. The milliondollar question is what is holding banks back from leading the innovation race? Traditional financial institutions say the major challenge they’re facing is that fintechs often don’t have to meet the same regulatory and compliance requirements that they do. This allows fintechs to move more nimbly into some fields of business.
