Why banking in the Gulf will never be the same again
By Neil Halligan Saturday, 25 June 2016 12:36 AM
Banking is radically changing. And although the GCC has been slower than expected to adopt smart technologies, digital disruption is set to revolutionise the industry the same way it already has in other parts of the world.
While many in the GCC still favour attending a bricks-and-mortar branch when dealing with financial institutions, statistics show customers are gradually moving towards digital banking. Other signs suggest they would be even more willing to embrace technology if it was easier to access.
According to the GCC Digital Banking Report by global advisory firm EY, only 34 percent of residents in the region who own a smart phone used the device for banking transactions.
Seven banks - including NBAD - made international payments last week using blockchain - a first.
The same survey, based on the responses of 2,000 customers, analysis of social networks and discussions with leading banks and banking industry leaders, found that up to 64 percent of GCC customers would feel comfortable switching to a digital-first bank, while three out of four would switch banks to receive a better digital experience.
EY suggests that up to 50 percent of retail banks’ net profits could be at stake as a result of their failure to adopt a strong digital strategy, adding that larger banks appear to be more prepared to invest in digital transformation.
Emirates NBD, Dubai’s largest bank, announced ambitious plans last month to create the UAE’s first digital bank targeted at millennials. It would invest $136m over three years towards digital innovation and multichannel transformation of its processes, products and services.
The new digital bank would offer customers online-only products and create “a new paradigm in the way people bank in the UAE”, according to CEO Shayne Nelson.
“Emirates NBD is by far the most innovative bank in the Emirates at the moment,” says Max Di Gregorio, PwC partner digital and technology consulting for the Middle East.
“They have quite innovative management that is quite well connected with the global banking industry. They definitely have the sense of the change that is happening in the banking industry and they are trying to be the frontrunner in digital transformation.”
That wave of change has already started in the US and Europe, and Di Gregorio says he expects it will gradually come to the GCC in the coming years.
“We will see the pace of change accelerating in the coming months and years, because this transformation is quite pervasive across the banking industry,” he says.
The region’s banks have already gone digital and are now starting to announce and develop new distribution channels, he says, as well as streamlining and automating processes, reducing frictions to improve the customer experience, and targeting new customer segments with a mobile first approach.
“This is definitely happening on a global scale. It’s a significant disruption that is impacting financial services and sooner or later it’s coming to the GCC. Emirates NBD is anticipating this and is taking the right decision to be the frontrunner,” he says.
While customers in the region have not yet embraced the digital transformation, the EY survey points to a desire to embrace the new banking streams, with a large percentage unimpressed with the mobile proposition on offer. Among reasons cited for this low take-up is the lack of convenience and simplicity, with less than half of the customers surveyed by EY saying they were happy with their mobile banking experience.
Alpesh Doshi, co-founder and managing director of UK-based Fintricity, a company that specialises in digital transformation, says it is not enough for banks to introduce new digital channels.
“With banks, it isn’t just about creating a website or a mobile app, it’s thinking about how their business will be transformed and how will banking become more efficient with digital; not just ‘let’s create a mobile app to do banking’,” he says.
“Data analytics [help banks] understand customers better. It’s about banks saying ‘how are we going to use this stuff to really understand customers better’ and not just fire products and services at them.”
The development of new technologies in the region will be enhanced by the planned establishment of a financial technology (fintech) ecosystem. Significant moves have been made in recent months to develop the start-up sector, at both financial centres in Abu Dhabi and Dubai.
Abu Dhabi Global Market, which has announced its intention to become the fintech capital of the Gulf region, recently signed a memorandum of understanding with Flat6Labs, a start-up accelerator in the Middle East and North Africa region, which will help to create and grow the fintech ecosystem in Abu Dhabi.
While little details are available about the exact plans, announcements are due to be made in the coming weeks.
In Dubai, the DIFC also has plans to develop its own ecosystem, but Di Gregorio says there is plenty of promise in fintech in the region, despite being well behind more mature markets such as the US and Europe.
“The UAE is far more advanced than other countries. Saudi is a country in which there are some discussions but nothing that is somehow similar to a fintech ecosystem. The rest of the Middle East is far behind,” he says.
“In the short term, what we see is the potential of Dubai and Abu Dhabi to start nurturing and developing some fintech incubators, and also some of the local banks in the emirates can support the development of fintech ecosystems.
In the medium term there might be some opportunities in Saudi Arabia to develop fintech initiatives.”
Fintech featured heavily on the agenda of the recent Cards & Payments Middle East conference in Dubai, where much of the talk focused on the role that blockchain technology will play in the future of the banking and payments system.
Billed by some as being one of the most significant technological innovations since the creation of the internet, blockchain technology has the ability to transform the world of payments, according to Doshi.
Also known as distributed ledger technology, blockchain, which is the underlying technology that Bitcoin uses, creates a shared database in which participants can trace every transaction. Its proponents say it has the potential to shake up how financial markets operate, and can be applied across all sectors.
Doshi says it will disrupt the marketplace in a way never before seen.
“Blockchain technology will enable the creation of a more digital environment to actually process transactions, manage transactions and the investments,” he says. “Right now, most transactions are done through a trusted third party, a hub, like an exchange or some central party. The challenge with that is that one person controls it and there’s a whole load of issues around how you enable trust.”
He explains that blockchain is a distributed ledger environment where you effectively have distributed trust that will do away with the need for a third party and make the processing of payments simpler and more efficient.
“If you’re buying or selling property and it’s crowdfunded and you have 100 different people involved in that transaction, right now you would have to have a set of advisors who would do all this manually or semi-manually. A blockchain technology enables you do it in a distributed way, digitally, without any central control,” he says.
“If you bought a $500m tower block that was rented out and if you had to distribute the income to all the investors, that’s a lot of manual work.
The blockchain technology builds a network of trust and has what’s a called a ‘smart contract’, which incorporates the rules by which the money is distributed, and the management of that property is done on the blockchain - when it’s sold, how it’s sold, who owns the title, how the title is shared, how the money is distributed, and when.”
Doshi says the technology will save a significant amount of money on costs such as reconciliation and distribution.
“The biggest change right now in banking is the application of blockchain to lots of different business lines. One example is Nasdaq, which has implemented a private exchange using the blockchain in New York. Financial services is the first user of blockchain, but it applies to lots of different markets,” he says.
Di Gregorio agrees the technology will reach far beyond the financial services industry.
“We see a lot of traction in blockchain technology. This is definitely one of the most innovative, disruptive technologies that we see in the financial services. The input is going even beyond the financial services industry, with applications in manufacturing and retail industry. There is no doubt that role of blockchain will be pivotal across multiple industries,” he says.
Dubai has been at the forefront of embracing the technology through the Museum of the Future, which is expected to fully open in 2018. The museum was established with a mandate to encourage innovation and help develop new technologies in the emirate.
Dubai has also founded the Global Blockchain Council, with 32 government entities and private companies as members, to discuss the best applications in blockchain technologies.
“Dubai has considered a broader adoption of blockchain that is going far beyond financial services,” Di Gregorio says. “The blockchain might be key technology to setting up a smart government or e-government infrastructure.
It’s a way of integrating multiple entities of the smart cities and providing e-services throughout this technology. It’s going beyond the banking or payment application.”
As with many online services that require personal information, security remains a concern, but Doshi says it is a matter of perception.
“There are always risks around cyber security. The challenge is the technology available and can you make it secure. Nothing is 100 percent secure.
If you imagine how digital is transforming banking - in London [for example], 60 to 70 percent of people do electronic banking – so it seems like [an issue of] perception, rather than reality in the GCC, that there’s no trust in digital transactions. It’s not because there isn’t - there’s billions of dollars of transactions done digitally every day.”
Blockchain also has the added advantage of keeping the same record on multiple computers, making it all the more difficult to hack or falsify.
Using cryptographic algorithms, including digital signatures, blockchain keeps track of and verifies transactions, adding new transactions in blocks to the chain of all previous transactions.
The electronic ledger can be shared across a network but records of the transactions already verified cannot be tampered with or revised.
And by removing the middlemen, the question remains as to how blockchain will impact on banking.
The technology, still in its early days, has potential to streamline many operations in a traditionally bureaucratic environment. It could be the key to unlocking a real revolution in the way we bank.