The promise of digital banking in the MENA: a necessity, not an option

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10 January 2021, by ADGM's Staff Editor

Digital technology causes a paradigm shift in the banking industry, and MENA financial services players are seizing the opportunity at hand.

In only 10 years’ time, the digital banking industry will look significantly different than what it looks like today. While some elements of traditional banking will remain relatively the same or evolve a bit, others will unquestionably undergo a radical transformation.

The digital banking ecosystem is showing signs that it will be far more competitive with new fintech players in the space, much more efficient with big data management tools, and astronomically innovative when it comes to delivering a personalized autonomous experience for customers.

As of 7 October 2020, fintech startups comprise 10% of market capitalisation, compared to 20% for payment firms, and %70 for banks. Nevertheless, industry experts remain optimistic and rather unabated by the fact that nimble fintech startups are chipping away from their market share. A synergy between big banks and fintech startups will become more apparent as time passes.

One thing is clear, digital banking levels the field between bank and customer, and therefore allows for a more transparent relationship to begin. The era of ‘one size fits all’ has passed, and the sooner that banks realize that fact, the better.

Recently, we had the opportunity to discuss the potential of digital banking in the MENA and the main drivers for its growth with Ronit Ghose, Global Sector Head for Banks Research, Co-Head of the FinTech Group and Head of MENA Research for Citi.

Ronit is the lead author of Citi's GPS Bank of the Future and FinTech Report series - the first edition has had about 350,000 downloads making it the most read report ever published by Citi, and one of the most read fintech reports ever published. Since joining Citi in 1997, Ronit has covered banks in the Americas, Asia and EMEA. He is also an Advisor at the Centre for Finance, Technology and Entrepreneurship.

ADGM: Digital banking has become a necessity rather than just an option, especially after the COVID-19 pandemic unveiled the need for it. Currently, what are the 3 main challenges the banking sector is facing? And 3 main opportunities?

Ronit: The first challenge the digital banking sector is facing is economic uncertainty, which leads to higher credit losses.

Secondly, before COVID-19, the region and the UAE were in a low growth environment and there will be question marks about the future growth outlook for the UAE and the GCC, given the impact of multi-year low oil prices and reduction in demand.

The third challenge is an operational one. The disruption caused by COVID-19 both internally with employees and externally with respect to customer relationships has made things much more digital. Working from home, dealing with clients, managing services -- all online. COVID-19 has revealed that many incumbent banks do not have a digital framework or a digital skeleton that's ready for the 21st century.

As for opportunities, COVID-19 has been called the Chief Transformation Officer of the banking sector as it has done so much change in the last six to nine months, accelerating banks' timelines for digital adoption.

ADGM: Financial services must become simpler and more accessible to everyone. What are the benefits of digital banking in the UAE and the region?

Ronit: Digital banking makes it easier for clients to access their bank, wherever they are and whenever they want, and becomes mainstream with smartphones turning into your new bank teller, ATM, and even your credit card.

For clients, the true value of digital banking is about efficiency, productivity, and convenience. Clients could access financial services and perform transactions on the go. As for non-clients, digital banking gives them greater access to financial services.

In Abu Dhabi or Dubai, adults are largely banked compared to other parts of the world. However, there is a certain section of society within the UAE especially lower-income groups that are unbanked or underbanked. It would be helpful for those groups to be better included in the economy.

Digital banking reduces operational costs by streamlining cost-effective processes, rather than spending too much money on rent and high salaries.

ADGM: Customers are now more sophisticated than ever - they have higher expectations and demand immediate access to their finances, in addition to having complete control. How is the banking sector preparing itself to face the mindset, culture, and market shift?

Ronit: Until recently, banking was based on technologies and processes that didn't give you real-time access 24/7 to money.

Today, most things are happening in real-time. If I send money through faster payments in the UAE, the money will go from my bank account to another person's bank account in real time. Managing real-time payments forced banks to have a robust digital infrastructure.

Banks must invest in technology and update their IT systems to cope with higher velocity, increased number and frequency of transactions.

ADGM: Do you see this happening already?

Ronit: Yes, both the central bank and commercial banks have been doing this. It's still not perfect though, because sometimes systems break down and have unexpected failures, but those are exceptions to the rule. Generally, banks are managing this transformation, but it causes a lot of strain on the 30-year-old or even older legacy systems.

I would like to use this analogy: A bank today in the UAE or in the US or the UK is like an old building and you're having to renovate while you’re still inside it. It's easier sometimes to build a new house with a new vision. That is why some existing banks are setting up their own new challenger bank.

In the past 5 years, we saw an increase in challenger banks that start from scratch: modern technology, modern functionalities, and a modern mindset. Nevertheless, there are lots of advantages to the ‘old house’ as well.

ADGM: With revenue growth and customer relationships coming under pressure, banks are rethinking their revenue drivers. How are banks diversifying their revenue stream ahead of an anticipated economic downturn?

Ronit: Banks in all countries have been looking to diversify their revenue streams by developing new products. For example, wealth management products, savings, or insurance. Banks have been doing this for many years already, though what's new is how these products are being distributed.

Banks are exploring new distribution channels through cross-industry collaboration and also by cooperating with other non-bank companies like technology startups or telecom companies or even retailers.

ADGM: With digital banking on the rise, data security has become a priority for all stakeholders. What steps are banks taking to manage and protect large databases?

Ronit: Cybersecurity is a major topic for all banks.

In today's world, your average bank branch has very little cash in it, and a bank looks more like a retail outlet than a bank. There's less focus on physical security compared to cybersecurity because banking is already digital for the most part: Financial transactions have become electronic messages.

Ultimately, though, the biggest potential cyber risk remains ‘human risk’; it’s not necessarily someone hacking you from the outside. Reducing human error and manipulation remain a priority.

Organized cyber-criminals from around the world could trick clients or employees in a myriad of ways: they only need a computer and the internet and can attack you from anywhere in the world. As a result, the potential number of bad guys trying to attack you has exponentially grown.

ADGM; How do you see banks benefiting from increased automation brought by digital banking?

Ronit: Increasing automation is important because it promises to improve a bank’s productivity, risk management and also improve client service and how clients think of the bank.

First, automation will reduce the amount of paper-pushing jobs, and thus increasing productivity. If you're a shareholder or an investor in a bank, the cost of running the bank is going to go down, because 60% of the cost is people.

Secondly, it's very difficult for a bank to manage risks. Having a robust digital infrastructure allows you to do better risk management as well, specifically when it comes to loans and credit risk decisions. By automating the process, the bank would have all the data it needs to analyze and safely manage risk.

Lastly, automation improves client service and that should improve client satisfaction. People should be happier with their bank. Many of today’s chatbots are paving the way towards a completely automated experience, but there's still a very long way to go.

ADGM: ADGM’s Regulatory frameworks have created a favorable environment for banks and fintech players to innovate and provide better financial products. How are banks leveraging this for their favor?

Ronit: ADGM has been one of the centres leading the way in this part of the world when it comes to creating a business-favorable ecosystem that empowers entrepreneurs and established businesses, while also incentivizing investors to bring capital in.

Secondly, the fintech ecosystem needs the availability of capital and entrepreneurs. Though, while there’s plenty of capital in the region, there’s an immense shortage of specialized talent.

ADGM, through its numerous programs and initiatives, is playing a critical role in educating entrepreneurs and empowering them with the know-how that will elevate their businesses.

Lowering the risk of starting, building, running, and selling businesses has really helped the startup ecosystem in the US and China. This remains a big challenge in this part of the world, and this is what ADGM is trying to fix by offsetting this imbalance.

Banks traditionally tend to be quite conservative; they talk about partnering with fintechs, but there's a gap between talking and actually doing it. Most banks are very keen to talk about how they're going to work with fintech startups, while they are less keen to actually do it.

ADGM: In your opinion, do banks consider fintech startups as a threat or a potential opportunity collaborator?

Ronit: Banks have an established way of doing things, so it’s complicated to change things. fintech startups, on the other hand, don’t usually have the time or the expertise to deal with large banks.

There’s an opportunity for ADGM to step in and say “we can help bridge this gap between the two players”. Banks are generally more conservative towards change. They don't like change and it's easier to talk about change than to actually change.

ADGM: Do you see traditional banks completely moving away from a product-driven business model and head towards becoming a platform providing consumers a holistic service?

Ronit: In some parts of Europe, it’s common for banks to offer a relationship-based approach, where they sell you many services and products. Customers don’t only go to the bank for a credit card or for a current account.

In the US, financial services have been more product-based and the banking model is more siloed. You have different financial services provided for different products. The UAE is in between the European and the US model.

Looking at the tech companies that have emerged in the last fifteen years, they want to be a one-stop-shop. They want to include as many services as they can into a platform that would provide financial freedom and convenience, matching customers’ lifestyles and expectations.

What these big tech companies often do is start from a background in social media or e-commerce and eventually bundle financial services inside that model.

This doesn’t mean they become a digital bank, but instead, they become a provider of financial services.

It's going to be very difficult for a traditional bank to become a platform company, but they are slowly trying to move towards more of a relationship-based approach.

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