Can banks play the fintech game?

Fintech may seem like a millennial uprising, but truth be told, the deployment of technology to facilitate financial offerings has been around for decades with credit cards finding their way into consumer pockets in the 1970s, and online banking into consumer lives in the 1990s. But what has been key in recent years is the growth fintech has achieved, fuelled by three core drivers: technology – which has allowed financial services, once an industry traditionally built on fixed assets, to scale operations virtually; customers – who are demanding more from their financial providers; and regulations – that have curbed lending options for banks, in turn encouraging startups to offer engaging alternatives.

Banks worldwide, at the very least, have had to re-assess their digital strategies and subsequent collaboration with third-party service providers to stay relevant.

Regionally, financial institutions have well recognised the need for the integration between finance and technology, and have entered the arena in a big way. In 2017, Dubai’s biggest bank Emirates NBD unveiled Liv., a digital lifestyle banking app, part of the bank’s $136m planned investment towards digital innovation and multichannel transformation. UAE’s Mashreq Bank launched Mashreq Neo, its full-service digital bank the same year, allowing users to make their investments on the move. Meanwhile, Bahrain’s Gulf International Bank launched meem, which is claimed to be the Gulf’s first Shariah-compliant digital banking service.

Taking into account that around 65 per cent of UAE SMEs consider banking a challenge, Mashreq and Emirates NBD rolled out digital banks – Mashreq’s NeoBiz and Emirates NBD’s E20., to enable SMEs and startups to access banking services seamlessly.

“The banks in our region are going through a remarkable change right now — one that will span over the next 10 years or so. That is due to the rise of digital banking and new business models, which specialists call Banking 4.0,” says Alaa Elshimy, managing director and SVP, Huawei Enterprise Business Group, Middle East. “The fact is that banks also generate a massive amount of data every day from different sources and need an effective solution to manage that data and extract more value from it. Data is quickly becoming the core foundation of fintech and digital transformation.

“We are embracing the Fourth Industrial Revolution as an era of intelligent technologies. 5G connectivity — combined with AI, cloud, and the Internet of Things (IoT) — is being integrated into every aspect of our lives. These technologies have the potential to reshape all industries, especially the financial services sector,” Elshimy adds.

Digital banks on the rise
While large banking institutions need to untangle inefficient infrastructure and overhaul legacy systems as a first step to engage with – and potentially adopt – fintech, a wave of financial disruptors worldwide such as challenger banks – relatively small digital banks challenging incumbents – and neobanks are beginning to resonate with consumers, startups and small businesses.

Regionally, Dubai based neobank Xpence – focused on micro and small businesses (MSB) and startups – is a mobile-first business banking alternative designed for entrepreneurs by entrepreneurs.

“Legacy banks are releasing digital products and positioning them as neobanks and challengers. However, these are digital offerings from fully licenced banks. We are yet to see a venture-backed fintech launch one. I am confident there is a market, especially considering that there are many unbanked consumers and enterprises throughout the region,” opines Saad Ansari, co-founder and CEO, Xpence.

According to him, the traditional business banking ecosystem has failed to meet the needs of the modern entrepreneur.

“Big banks don’t always offer the service startups need, and smaller banks don’t always provide the technology modern entrepreneurs are looking for. Traditional banks make account opening cumbersome, while simultaneously charging exorbitant fees for making payments or international money exchange. There’s also a long list of other unmet needs, such as tracking employee spending and automating accounting and invoicing,” Ansari highlights.

But the change is happening
In 2019, Abu Dhabi Global Market (ADGM) awarded its first digital banking licence to Anglo-Gulf Trade Bank (AGTB) – a joint venture between Abu Dhabi’s Mubadala Investment Co., and Britain’s AGTB Holdings Limited – to offer trade and transaction banking services to people in the UAE.

Regionally, Bahrain’s Bank ABC made its entry into the digital, mobile-only banking space with the launch of ila Bank in 2019, beginning in Bahrain with the intent to take it across the MENA region.

“We built ila on the premise of offering all services on digital channels to offer a new customer experience, promote financial inclusion and a cashless society. However, we also understand customers’ need for cash, and for that purpose, ila customers can withdraw cash, free of charge, at any ATM in Bahrain with their physical debit cards. Customers can also withdraw, deposit cash and cheques at ila ATM,” states Sael Al Waary, deputy group CEO, Bank ABC and chairman, ila Bank advisory board.

When banking met blockchain
While the jury is still out on whether bitcoin is the future of payments or not, there are different sentiments pertinent to its underpinning technology in the larger banking spectrum. Several banks, having realised the potential of the decentralised ledger technology, have adopted it for greater transparency.

In 2018, HSBC stood at the vanguard of this revolution, when it partnered with ING Bank to execute what it claimed was the world’s first live trade finance transaction deploying blockchain technology. Carried out on behalf of US-based firm Cargill, the transaction entailed a huge soybeans shipment from Argentina.

HSBC made inroads regionally as well. In Q4 2019, the bank completed two blockchain letters of credit (LC) transactions — one between firms in Saudi Arabia and Bahrain, and another between companies in Oman and Abu Dhabi.

However, the banking giant is more focused on converging all stakeholders towards a common platform for collaboration.

“The whole idea is to bring all of the world’s banks towards a common platform. We are looking for collaboration not just between banks but also with corporates as well – buyers, sellers, and traders,” explains Joshua Kroeker, director, Blockchain Lead for Global Commercial Banking, HSBC.

The decentralised technology is gaining momentum in the trade finance space, also because it effectively obviates the exchange of – and reliance on – multitude of paper documents, that create unwarranted delays and potential administrative hurdles.

“Paper is a great source of friction in global trade, and it creates processes that make international trade quite complicated, especially if you are a smaller corporate and looking to buy and sell from new countries. There is a next generation of business owners that are looking for more intuitive and more digital, more streamlined offerings and that’s only possible if we can build this global network. In terms of actual benefits for a company, removing friction can drive enhancement and working capital; it can free up capital that gets lost in delays of paperwork,” adds Kroeker.

That said, the benefits of ledger technology aren’t restricted to trade finance alone, as blockchain also facilitates expedited transfer of money which could add a lot of value to any bank’s offerings.

“There are a lot of processes between banks such as for foreign exchange or wholesale payments where they are looking at how a blockchain network can be an improvement over some of the older infrastructure that exists for payment messaging. A blockchain network is quite a bit different from sending a message because both parties are in sync so you get real-time updates, visibility and transparency into how your transaction is processing, and that can have a lot of value in both foreign exchange transactions and wholesale payments as well,” says Kroeker.
Holly Joint, head – Major Programmes Office, Group Service and Customer Experience Management at Abu Dhabi Commercial Bank (ADCB), concurs.

“Blockchain technology is the distribution of trust. This means that any process where a financial institution acts as a middleman or broker of trust along any value chain can leverage the technology. Financial institutions need to look at their internal processes to find valuable use cases where there is a need for trust and where an irrefutable single source of the truth would be preferable to multiple versions. Things like payments – where we have nostro, vostro accounts, trustee accounts, currency transactions and other remittances across international borders. Other interesting use cases involve HR, document collection, ID and verification, and legal and compliance.”

According to ADCB, it became the first bank in the UAE to run an end-to-end blockchain trade finance transaction through the dltledgers platform, offering corporate customers efficiencies and faster access to cash.

The 5G angle
Customer expectations are emerging like never before, beckoning an era where banks will need to be omnipresent, not visible, suggests author and CEO of start-up Moven – Brett King – in his book Bank 4.0: Banking Everywhere, Never at a Bank.

Referring to banks as just an avenue for financial services access, King opined that financial institutions that rely solely on branches for account opening are likely to disappear.

As industry 4.0 unfolds, and computers integrate seamlessly with each other to take decisions possibly without human involvement, financial institutions will have to adopt intelligent technologies to stay relevant. In the process, “banking” may find itself as an embedded function in the larger scheme of financial actions.

“Instead of just offering technology solutions, Huawei and our partners offer new business models. Through our networking and cloud solutions, we help financial customers to build open and scalable ICT systems through which they can quickly launch and optimise services. Our virtual banking, insurance cloudification, and blockchain-based credit investigation solutions work hand in hand to fulfill security, compliance, and trustworthiness requirements. We also work with banks on smart experiences. Unattended counters, intelligent customer service, and VR banking are all examples of how we are pioneering applications in the IoT and intelligent security domains,” Elshimy says.

To drive the banking ecosystem in its virtual form, enhanced mobile network connectivity – 5G – perhaps, may become a driving force. From processing big-ticket transactions to enhanced security, accurate fraud prevention to widespread digital payment adoption, the speed and capacity of 5G’s wireless technology coupled with AI and data will facilitate banks to run parallel processes in real time.

“The region’s financial services industry is already undergoing unprecedented changes, and it is these changes that will drive new applications in a 5G era. In this sense, 5G connectivity is really an enabler of industry innovation. The power of 5G is enabling organisations to work on next-generation digital financial services. If you look at 5G combined with other technologies such as biometrics, for example, you can make digital services safer, deploy new fraud detection protocols, maintain stronger user authentication, and defend financial data much more effectively.

These capabilities are going to drive the development of the 5G ecosystem,” Elshimy adds.

Banking, as we know it, is set for an overhaul in the next few decades as all nuances of its traditional landscape continue to get re-engineered. To stay relevant, financial institutions will have to reimagine banking, as merely digitising the old way of doing things may not prove to be enough.