Why GCC banks and fintech startups must realign their interests for greater good

The use of technology to facilitate financial offerings, commonly known as fintech (financial technology), has been around for a while, but has gained renewed focus in recent years, in turn impacting the financial ecosystem. Banks across the world have been pushed to adopt digitalisation as a key element for their continuity plans and collaborate with third-party service providers for accessible reform, greater outreach, and longevity.

Similarly, regional banks have been forced to acknowledge that fintech will drive change in terms of customer service and product innovation. In the UAE, Emirates NBD unveiled Liv, a digital banking app targeting millennials centred on lifestyle, Mashreq Bank launched Mashreq Neo, its full-service digital bank, while Bahrain’s Bank ABC launched ila Bank, a digital, mobile-only bank.

Banks have also offered a series of technological innovations to their business customers. Last year, Emirates NBD launched a SmartTrade portal to facilitate transaction banking clients, and in 2020, the bank enhanced the portal by introducing a service that enabled complete contactless processing of export collections.

In March, Dubai International Financial Centre and UAE-based Mashreq Bank jointly launched a blockchain data-sharing platform to support licensed businesses and corporates in the UAE to “instantly” open digital bank accounts. The platform aims to make it easier and faster for new companies to do business in the UAE, removing existing paper-based KYC processes.

Additionally, multiple regional banks have executed blockchain-based trade finance transactions across the GCC. Customer adoption of such initiatives – thanks to greater connectivity, convenience and growing digital implementation – has been impressive. At Emirates NBD, the share of mobile-based digital account openings increased to over 40 per cent of new individual accounts sourced during Q2 2020, while 60 per cent of UAE-based Abu Dhabi Islamic Bank’s customers now bank digitally.

“Fintech has already impacted digital payments services, transfers and trade finance, and it is expected that the number of products and services will also diversify throughout the region, while governments will look to update regulations and legislation to reflect the evolving nature of the industry. The speed at which paperless solutions in trade finance are adopted will accelerate, given current circumstances,” says Asad Ahmed, managing director and head of Financial Services ME, Alvarez & Marsal.

There is no denying that growing digital adoption, transparency, access to alternatives and convenience have all led to a common belief that fintech – in omnifarious ways – is here to stay. But will it replace the bank’s brick-and-mortar structure? And in doing so, will that pave the way for a more engaging, competitive landscape or trigger disruption within the traditional financial industry?

Is the ascendancy of one, the oust of the other?
Experts feel that while fintech entities are shaking up the market and growing their pool of consumers, it may be a long way off before they replace a traditional bank’s key functions.

“The global financial sector has been investing heavily in technology for a number of years in order to improve both operational efficiency and operational resilience. We have seen an increased use of artificial intelligence (AI) and blockchain in addition to cloud computing, advanced analytics, biometrics, and automation. Some of this adoption is new, and some is not,” opines Bryan Stirewalt, CEO, Dubai Financial Services Authority.

“While operational efficiency and profitability are primary drivers of change, a considerable amount of the digital transformation in the financial sector is from the threats of those seeking to challenge and disrupt traditional players in the financial sector. Some challengers are competing with the sector to take their market share, some are looking to engage, partner and collaborate.”

Both traditional lenders and fintech players can grow simultaneously, operating hand in glove, offering customers a myriad of services. Banks are well-placed to adopt technological innovations themselves, while fintechs can offer similar and alternative offerings in a different and unbundled way.

“The main risk of technological disruption for retail banks in the GCC is changes in customer preference. Regulatory risk is low because policymakers are conscious of the extreme importance of local banking systems in the region, and the need to keep them safe from potentially disruptive unregulated competition. Technology and industry structure present a moderate risk of disruption. The digitalisation of GCC economies is still a work in progress. The adoption of big data, AI analytics, as well as voice and facial recognition tools could enable a more effective and cost-efficient provision of customer services,” notes Dr Mohamed Damak, senior director, Financial Sector lead, Middle East and Africa at S&P Global Ratings

“We expect some GCC bank business lines to remain protected from fintech in the medium term. These lines include corporate lending, where human added-value remains significant in the region. Therefore, even if customers’ preferences continue to evolve, we think that risks to these banking systems remain contained, at least in the next two years.”

Meanwhile, the prospect of the finance industry partnering with fintech, each availing the strengths of the other, could offer the impetus for both to ride the wave of change more successfully.

“Partnering with fintech providers can help the region’s banks deliver their products in a more accessible way and offer convenient digital financial services to customers. This will meet the demands of the ‘new normal’ and ultimately propel the region’s banking ecosystem further,” says Thomas Bicknell, partner, Financial Services, Pinsent Masons Middle East.

Phygital banking
The reality is that the banking industry – now more than ever – is leaning into further disruption, building its narrative around a holistic package that offers benefit, convenience and efficiency wrapped into one.

That is also perhaps the need of the hour, with disruptive technologies manifesting interminably. With digital transition gaining ground, putting into question the shelf life of brick-and-mortar structures, banks have been forced to make the ‘phygital’ leap and leverage the power of technology, more to survive than to innovate.

“A ‘phygital’ bank interacts with its customers digitally across both physical and online channels. All interactions are powered by digital to have intelligent context aware conversations with the customer as a bank – and not as siloed individuals or channels,” explains a report by Accenture, describing the newly coined phrase.

“In each interaction, the phygital bank of today, embeds AI powered bots and intuitive user interface (UI) to break the cognitive, language and literacy barriers to increase end-to-end seamless interactions for all customers,” it adds.

A phygital bank is inherently digital as an organisation. Everything – including its leadership, culture, the way it collaborates to deliver services and how skills are acquired or developed is attuned to the digital era. Furthermore, banks can become phygital by acting on seven strategic interventions – including re-imagining the network to leverage on digital-led efficiencies, updating the operating model and setting up distinct ecosystems, according to the report.

In a nutshell, banks must effectively morph the strengths of physical and digital to form a hybrid experience for users. Financial institutions can learn from technological innovations in other industries such as AI-powered chatbots and secure video interactions to recalibrate their operations and offer customers a better experience.

“There is a long and exciting road of development ahead for phygital banking. Our own studies tell us that customers now consider ‘technology and platforms provided’ to be the priority when assessing banks for a cash management provider, over other measures such as ‘breadth of solutions’ or ‘geographical presence’,” notes Noor Adhami, regional head of Global Liquidity and Cash Management, Middle East, North Africa and Turkey at HSBC.

In June this year, 93 per cent of corporate payments and 77 per cent of trade transactions in the UAE were submitted digitally via HSBCnet, the bank’s online corporate banking platform, says Adhami.

“As for the future, we predict that the winning formula is one that blends physical and digital; a ‘phygital’ presence where clients can access an expanded range of offerings via our digital channels without losing the personal touch and the expertise of specialist bankers.”

How open is open banking?
Likened to how changing consumer preferences and technology-driven innovation have propelled a seismic shift in banking, they have also accelerated the adoption of collaborative models such as open banking – the practice of securely sharing banking data through APIs (application programming interfaces) between unaffiliated parties to deliver enhanced benefits.

Banks sharing financial data with authorised third-parties – such as other banks and fintechs – could be the starting point of another wave of innovation that realigns the competitive landscape of the regional banking ecosystem. It could also be a turning point for banks, which have until now, kept customer information strictly within their field of vision.

Regionally, lenders are already starting to adopt open banking solutions. Last year, National Bank of Bahrain (NBB) claimed to be the first bank in Bahrain and the Middle East and North Africa to launch open banking solutions. The bank’s aggregation service grants customers a holistic view of their finances, enabling them to make instant transactions and informed decisions on competitive products and services.

NBB’s open banking services were developed by Tarabut Gateway, MENA’s first and largest licenced Open Banking platform.

“Within the MENA region, Bahrain has pioneered the open banking movement by being the first in the region to mandate all retail banks to comply. Open banking enables banks of all sizes to harvest an enormous amount of data, known to currently hold greater value than any other industry in the world, hence unleashing a new wave of personalised financial products and services,” comments Abdulla Almoayed, CEO and founder of Tarabut Gateway.

“The National Bank of Bahrain’s account aggregation platform grants customers the ability to access financial data from all their accounts, credit cards, loans, and mortgages across all retail banks in Bahrain from a single platform. Through our technology-driven platform, NBB customers are presented with a consolidated view of their financial position in terms of net worth, assets, liabilities, and behavioural analysis.

“Additionally, users are given the ability to filter through history transactions to provide a user-friendly navigation capability within the app, accompanied by AI-powered tools and algorithms that automatically categorise and automate spending.”

Locally, UAE-based Emirates NBD enabled open banking collaboration by launching its API sandbox. Launched in 2018, as part of the Dhs1bn investment committed towards its digital
transformation, the sandbox made the bank more accessible to developers with API technology. Last year, it partnered with Dubai International Financial Centre to launch the API sandbox programme, certifying fintechs that collaborate and innovate using Emirates NBD’s API sandbox.

As open banking becomes prevalent, its benefits – such as offering a clearer snapshot of a consumer’s financial situation and risk levels and helping in the aggregation of customer data – will enable it to gain greater traction. The technology will also possibly lead to greater product and service innovations.

“Opening up financial services to clients and third parties increases choice, transparency and competition – all good news for consumers. However, banks require a smarter approach to benefit from such a change and an ability to reimagine banking and redefine the success formula; one that is driven by innovation and a wider range of services, connected across multiple players and several platforms. Ultimately, banks need to become more comfortable with having less control over the end-to-end client journey,” says Adhami at HSBC.

Contactless solutions
A wide-scale digital reform among banking consumers has been catapulted by the onset of the Covid-19 pandemic, thrusting into spotlight various technologies that were otherwise set to slowly – but surely – gain force.

Contactless payments may be counted as one which will continue to escalate as its role in promoting social distancing – and hygiene – will resonate across consumers worldwide.

“Covid-19 has presented the perfect opportunity for banks to adapt digital transformation and innovate. Contactless solutions provide faster processing, enhanced security and convenience in transactions to customers, which the region’s banks can stand to gain from,” says Mukund Bhatnagar, partner, Financial Institutions, Kearney MEA.

“Consumers in the GCC countries are also expected to migrate more quickly towards contactless payments such as contactless cards, e-wallets, and instant payments (including credit transfers and direct debit) to replace physical cash and cheques. Since almost 80 per cent of the point of sale transactions were cash-based prior to the Covid-19 outbreak, GCC banks have an unprecedented opportunity to leapfrog with Covid-19 being a critical catalyst.”

Analyst house Juniper Research forecasts that global contactless transactions will reach nearly $6 trillion in 2024, up from $2 trillion in 2020. Regionally, in 2019, the wider MEA region saw over 200 per cent growth in contactless transactions, according to Mastercard data.

“Contactless solutions will require permanent and fundamental changes in banks’ strategies and capabilities. Banks need to rethink their approach towards innovation, taking into account consumer dynamics and their own organisational challenges. With consumers expecting more than convenience, issuers are increasingly challenged to provide interoperability with ‘top-of-device’ applications (such as Apple Pay, Samsung Pay and Google Pay) and to ensure their physical cards are ‘top-of-wallet’,” notes Bhatnagar at Kearney MEA.

While banks worldwide are accelerating the issuance of contactless cards to leverage this momentum, central banks across several GCC countries have also scaled the contactless transaction limits in their respective countries. In the UAE, the cap was upped from Dhs300 ($81.6) to Dhs500 ($136.1), marking a 67 per cent increase. In Kuwait, it was raised 150 per cent from KD10 ($32.7) to KD25 ($81.7) while in Saudi Arabia, the limit has been raised to SAR300 ($80) from SAR100 ($26.6).

“Contactless solutions ensure convenience, security and speed for both banks and end-users alike. The convenience of digitised systems translates into additional issuer benefits with increased loyalty and low attrition rates. These can help banks further strengthen their security systems, reducing the risk of fraudulent transactions,” opines Nassir Ghrous, senior vice president, Banking and Payments services for Africa, Middle East and Eurasia at Thales.

“Contactless payments are poised to continue post pandemic – this can be seen as banks have adopted new regulations in light of the ‘new normal’.”