Middle East retail banks are still facing a unique set of challenges as they navigate the digital transformation journey. From regulatory hurdles to tech savvy mobile customers and disruptive non-traditional competitors, they risk becoming passengers or worse – irrelevant spectators to the industry’s transformation.
Today, FinTech is a fact of banking life and the emerging digital players are linking with the major social media platforms, powered by the Cloud, to create rapid scale and reach mobile-hungry customers. As with any digital transformation, the challenge, the opportunity and the risk does not lie in the technology but in a much more fundamental area of the bank – the culture that lies at the heart of every institution.
There’s no doubt that the Middle East financial services sector is distinctive. In some regions such as Europe, retail banks are experiencing rapid deregulation and disruption from non-traditional competitors including social media platforms, mobile operators and others offering payments and loans to consumers. Meanwhile, the Middle East banks are tied to a highly regulated environment.
There is a pressing need for greater digital innovation within the region’s traditionally conservative banking industry. If not the banks, who is driving the innovation and can banks harness this or collaborate with these innovators?
Clearly, banks are looking for the ultimate ‘win-win’ – ways to reduce costs and improve customer experience at the same time, through the greater convenience of digital services. Internet and mobile banking is so much quicker and cheaper, more convenient and personalised, with banking services delivered through one simple portal or device.
Smartphones are driving the adoption of mobile banking – meeting the demand for a simple, controlled and comfortable experience. Where the customers go, the banks must follow – and it’s a game of catch up. Meanwhile, the region’s growing community of innovative FinTech startup companies is leaping ahead – a risk but also an opportunity for those banks that can respond by creating effective digital collaborations. Those that can’t are going to miss out – because customers have started using FinTech tools and it’s becoming a habit.
According to Deloitte’s inaugural Middle East FinTech study (June 2020), 82% of Middle East banking customers surveyed are willing to start using FinTech solutions, however only 22% of Middle East banking customer offer FinTech solutions today. So, there is obviously a gap in the market and the potential for significant growth.
The market opportunity for digital and mobile banking is significant, and not only in the bankable segments of the population; for example in Egypt, 40 banks compete for the 10 million people with a bank account, while the other 90 million people live without bank accounts – but with mobile phones.
One of the very distinctive characteristics of the GCC is the large expatriate population that remits a significant amount of earnings and savings to families in the home countries. Traditionally this was done through exchange houses and banks, with significant margins – and cost to the customer. Today, a remittance can be done quickly and at minimal cost directly by the customer via a mobile device with a local telco. According to the Deloitte study, customer behaviour across the Middle East, and especially in Saudi Arabia, is characterised by a willingness to adopt innovative solutions offered by banks; in particular, when it comes to peer-to-peer money transfers, account aggregation and automated investment advice. In other words, customers are crying out for innovation that offers speed, service and simplicity.
How can banks respond (and who should lead)?
In fact, financial services functions integrate well with the internet and social media platforms but the challenge for banks is not technology; the biggest challenge of all is to change the internal culture of banks themselves and their low appetite for risk, including caution when it comes to external collaborations with startups.
The digital dilemmas that banks face are the challenge to win internal support and funding for digital initiatives, especially when the benefits cannot be clearly quantified, and there is still a lack of clarity on the ‘ownership’ of digital within the banking environment.
As the Deloitte study also confirms, the FinTech ecosystem is evolving rapidly when it comes to deploying innovative solutions, but it is struggling to attract additional financing that will boost its footprint and impact. When someone needs money, a bank can be a very useful partner.
The Deloitte findings also suggest that while banks are keen to engage with FinTechs they are reluctant to integrate FinTechs into their strategy, preferring to take a ‘wait and see’ approach. This level of institutional caution presents a major risk and means that banks are – again, according to Deloitte – not leveraging the full suite of FinTech solutions/features to address customers’ needs and requirements to enhance the daily banking journey and experience. This sounds like it could be the obituary for the banking sector.
Chief digital officers (CDOs) in banks will naturally be looking to initiate digital innovation, while the chief information officer (CIO) may be more focused on the legacy platform, and the SVP Retail will be looking at customer services. The final owner of the bank’s digital platform and customer digital experience may still be unclear within the organisation.
According to the EY GCC Digital Banking Survey 2017, 28% of those surveyed disagreed to some degree that digital transformation through FinTech innovation is a strategic initiative championed by board or senior management in their organisation; 57% stated that there was no individual delegated with the responsibility for innovation and a clear mandate.
Banks are reacting with the role of the CDO growing and this is leading to more innovation with a sand box approach to testing new digital solutions before launching to market. Inevitably, one of the other main challenges is time; whereas a bank strategy might traditionally have been based on a three-year planning and execution period, today strategy is a constant and may look ahead no more than three months, as digital disruption accelerates.
As it becomes clear that banks are in a race for digital transformation, it’s also becoming clear that ‘culture’ is the major barrier they are facing.