By Asad Ahmed, Managing Director, Financial Services, Alvarez & Marsal
The banking industry has undergone an extensive transformation over the past decade, buoyed by the advent of digital technologies. Digitalisation is revolutionising the industry, and banks that refuse to adapt will fall behind, struggle and eventually be consigned to financial history. Traditional banks are working to evolve as new digital banks enter the market, and this will be an important driver of financial transactions and institutions going forward. This disruption has also caused shifts in customer inclinations and expectations—with more and more consumers opting for online, branchless banking that offers a one-stop destination for all their banking needs.
It is genuine customer demand for digital services that is driving banks to hasten their digitally enabled banking services. Various segments of the Gulf Cooperation Council (GCC) fintech (financial technology) space are providing solutions to address specific financial areas, such as digital payments, lending (including BNPL [buy now, pay later]), insurance, wealth management and peer-to-peer lending, to name a few. A plethora of fintechs, so-called “nonbanks” and non-traditional financial-services companies, have expanded their activities across the GCC during the pandemic and accelerated the move to online services. These include Emirates NDB’s Liv., Mashreq Bank’s Neo, Gulf International Bank’s (GIB’s) meem and Bank ABC’s ila. But these digital banks are perhaps more digital extensions of traditional banks than full, independent neobanks, as they have varying degrees of reliance on their parent organizations.
A variation of this theme is the one adopted by Commercial Bank of Dubai (CBD), which is partnering with NOW Money to provide loans to the low-income segment1; also of note are the tie-ups between Yap and both RAKBANK (National Bank of Ras Al-Khaimah) and the Emirates Development Bank (EDB) to provide specific digital services to complement the offerings of these two institutions.
Growing the digital landscape in the GCC
It is interesting to note that the current consumer-adoption rate for digital payments in the Middle East and North Africa (MENA) region is 53 percent, while the same for digital remittances is 41 percent, Redseer data showed2. Already adoption is very high in payments and remittances at more than 40 to 50 percent. Other fintech sectors, such as lending and insurtech (insurance technology), are more nascent currently, but the intent to use it in the future indicates five times the current usage levels. With the emergence of fintech companies and neobanks, the MENA region is poised for significant growth, as the fintech industry is expected to hit a record valuation of $3.45 billion by 20263. These new fintech companies have spotted an opportunity in the upheaval and are making headway among the tech-savvy. As more services move online, such as the process to make international payments or buy foreign currency, the window of opportunity for new providers opens ever wider.
Digital banking is becoming a way of life for consumers across the GCC, and we have seen millions of new customers coming onto the digital bandwagon over the last 12 months. Earlier, fintechs were seen as competition to the established financial system, but the COVID-19 pandemic has transformed the business environment and encouraged the industry to collaborate by bringing banks and fintechs together to accelerate digital payments.
Shifting to a digital-first thought process
As internet access and smartphone penetration increased across the GCC, traditional banks acted by building their digital infrastructure and offering some of their services online, initially on their websites, then through apps. This was short-lived as the arrival of fintech startups brought agility and technological innovation, which paved the way for new services that catered to changing consumer preferences for more accessible, faster and more user-friendly banking services.
In the United Arab Emirates (UAE), three digital banks have been announced: Al Marayah Community Bank, the first licensee under the “Specialized Banks” regime, is already functioning and positions itself as the “first specialized digital bank in the UAE”; Abu Dhabi’s holding company ADQ is set to launch its (not yet publicly named) digital bank. And digital-banking challenger Zand, chaired by H.E. Mohamed Alabbar, is currently in the final stages of going live. Saudi Arabia’s cabinet (Saudi Council of Ministers) has also approved licensing for two digital banks in the Kingdom with total capital of US$1.06 billion. The first recipient, Saudi Telecom Company’s (STC’s) Pay, will be converted to a digital bank. The second firm to obtain a banking license is an unnamed digital bank created by real-estate firm Abdulrahman Saad Al-Rashid & Sons (ARTAR). These licensed digital banks will help improve service quality and user experience for customers across the GCC, supporting innovation and reducing costs. Meanwhile, in Bahrain, Bank ABC’s ila is now operative following GIB’s meem, which entered the market some years ago.
It is important to differentiate between banks that simply offer digital services and new financial-services providers with digitization built into their DNA. The latter have significant advantages: They have less staff because repetitive tasks are automated; they utilize new, leaner, and more efficient hardware and software; and they downsize real-estate needs, leading to less property to maintain. Financial institutions that understand this and drive digital improvements into new areas will be the winners.
Synergies for customer confidence and innovative models
While banks rope in fintechs to build their tech platforms, three related models are emerging.
The first model is banks financing early-stage fintechs, providing them with capital to develop technologies to support their digital offerings. In some geographies, especially where open banking is not available, traditional banks currently have the edge over fintechs in terms of customer trust and data; therefore, deploying the right software can help banks enhance the overall customer experience and offer personalized services.
The second and third models are around cross-ownership. We are witnessing increasing announcements (outside the GCC) that banks are taking equity stakes in fintechs (model 24). Examples from India include Kotak Mahindra Bank’s 9.9-percent stake in KFin Technologies and HDFC Bank’s 5.2-percent stake in Mintoak Innovations last year. Model 3 works the other way around, with fintechs taking equity stakes in banks. In the United States, we are seeing this trend, with six such transactions of fintech companies taking an equity stake in small charter banks were announced in 2021 in 2021.
Reimagine the backend
Often massive and complex ecosystems, but those that have been able to reimagine the backends have created enhanced experiences for customers. More needs to be done, Banks will need to continuously enhance their back end digital capability to more smoothly link both ends and reduce operating costs. For some this journey will only end with a full revamp of their technology architecture and a move to a digitally native core The challenge before banks today, therefore, is to make the best use of technology and innovation to bring down intermediation costs while protecting their bottom lines.
Today, banks need to expedite their digital transformations and position themselves as one-stop shops for all banking services, thereby driving customer relationships to ensure higher levels of loyalty, improve product depth, retain existing customers, and attract new customers through cross-selling. Banks must focus on always being one step ahead of their customers and become financial supermarkets (offering all banking services under one roof) for their customers. Bank-fintech partnerships will be successful when synergies of consumer trust and innovation models come into play.
New generations are leading the digital-banking revolution
Some traditional banks are still under the misapprehension that customers will remain loyal because banks signify safety. I don’t think Gen X and Gen Z agree with that! The new-age customer today expects digital banks to be faster and cheaper than traditional banks; offer “open banking”, allowing customers to access financial services offered by third-party providers; transact across geographies; and bring an end to old-style restrictions, such as moving money only on weekdays or within banking hours.
Banks still need to ensure that their call centers offer excellent customer service, but they also need to invest in the full range of technologies that can seamlessly address a customer’s questions and needs, without, at some point, the customer not being aware of a particular need. For any of this to occur, however, financial-services providers must move away from offering the services they want to offer through channels that suit them to what, where and when the customer wants. This is language to which everyone refers but is often not implemented in any meaningful way. Even at the most basic level, everyone has more than one poor-experience story of a bank’s customer call centre!
Compared to the West, the Middle East has a larger young population, and there is quicker uptake of all things digital within the Millennial generation. This new generation of mobile and app users expect seamless user experiences. These individuals are now the main target for new-age banks looking to attract them with simplified services and products. This generation does not want just to buy products instantly and seamlessly; they are looking for an experience that allows them to utilize various services simultaneously.
Addressing the regulatory environment
While traditional banks still dominate in the GCC, it has become increasingly clear to them that relying on existing tools and customer bases will not be enough to preserve, let alone gain, market share. The coronavirus-induced lockdowns increased demand for digital banking and highlighted the potential of neobanks. However, like many geographies, the GCC financial sector had long been conservative—with most participating banks defined by their reluctance to change, with legacy systems prevailing. This is changing, and the regulators have, to varying degrees, begun to level the playing field between traditional and digital banks; it is not a short or easy process by any means, but the journey has begun.
Fintech companies, neobanks and financial apps are looking for a slice of the banking and financial-services pie, and it is time for the regulatory environment to evolve to allow collaboration to take place easily. Different types of financial organisations can benefit by working together, given they all have common goals. To support the sector, the Dubai International Financial Centre (DIFC) rolled out its $100 million (Dh367m) fintech fund in 2017 to help establish startups and grow their businesses. Likewise, the Bahrain Development Bank (BDB) and the Bahrain Economic Development Board (Bahrain EDB) launched two separate funds of $100 million each to support fintech startups in 2020.
The UAE is actively trying to develop a fintech ecosystem. The Central Bank of the UAE (CBUAE) is working with the DIFC to jointly advance the competitiveness and digital transformation of the UAE financial sector to be recognized as a leading global fintech hub.5 This will include the development of a co-sandbox and other joint initiatives to enable fintechs and regulators to test and enhance the CBUAE, the DFSA (Dubai Financial Services Authority) or joint regulations and guidance leveraging existing DIFC’s fintech programmes and capabilities.
While serving a critical economic role, these networks and arrangements can be complex, sometimes fragmented, and are likely to have operational inefficiencies. The UK House of Commons Treasury Committee’s July 2021 report “Lessons from Greensill Capital” outlined the impact of “underlap” in the regulatory environment. It would be prudent to proactively build a well-structured framework as fintechs integrate more comprehensively with financial institutions.
Earlier, fintechs were seen as threats to the established financial system, but in the last few years, many within the ecosystem have emerged as collaborative partners. This collaboration has democratized basic financial services and has taken banking beyond geographies. Many fintechs are in talks with banks to deepen their partnerships, with some working to merge so the latter become part of the former’s digital platforms.
The banking industry of the future will look radically different from what it is today, driven by continuously evolving developments. It would be safe to say that the future of banking is digital. Adopting full-scale digital transformations and engaging with regional fintech startups will allow the financial-services industry to thrive and compete with the global digital financial entities that will inevitably become service providers to this region.
1 Wamda: “Commercial Bank of Dubai partners with NOW Money,” October 18, 2020.
2 Redseer: “Digital Economy: Fintech Leads In Growth,” August 2021.
3 AME Info: “UAE’s fintech ecosystem: Financial app installs, innovation and co-existence with banks”, July 4, 2021
4 Bank Director: “Fintechs Are Starting to Buy Banks, But Why?” Naomi Snyder, November 22, 2021.
5 Crowd Fund Insider: “Fintech Adoption: Central Bank of UAE Partners with DIFC to Support Financial Tech Sector Growth,” Omar Faridi, October 18, 2021.