Middle East banks have adopted digital strategies as the growing population of younger customers increasingly demand and expect to bank online and on the go, including payments, moving money, managing funds, in addition to managing loans and savings.
The strategy is sound and solid but success lies in the execution—and speed of execution. Barriers still remain. The reality of banking today is that it is moving more rapidly into the digital world than traditional banks are able to follow— conservative regulations, obsolete banking infrastructures, digital savvy populations and aggressive competitors are all challenging the core business model of the traditional banks.
Chasing the customer
Can the banking industry overcome the barriers and leverage the opportunities of combining digital technology with financial services? This is a critical question because customers are embracing digital banking solutions way ahead of banking boardrooms and the regulatory roadmaps.
We are now seeing a very strong technology push into the banking sector and within banks, as they now increasingly compete with ‘Big Tech’, mobile operators and the new fintech start-ups for younger, tech savvy customers. Already the internet provides digital wallets, cheap transfer of money, crowdfunding and peer-to-peer consumer lending.
Social media channels (Whatsapp, Facebook, WeChat, etc) will soon be facilitating mobile money transfers, following successful pilots. All this is happening because customers and ‘Big Tech’ are finding their own use cases faster and faster, forcing regulators and the banking industry to adapt and play catch-up fast.
Interestingly, we now see HNWIs expecting real-time wealth management services and personalised dashboards— all from the mobile phone or the tablet. Expensive wealth relationship managers are being replaced by zero-costs chatbots (algorithms) that offer 24/7 self-service. In digital banking, ‘hyper-personalisation’ is the new keyword, and agile infrastructures are the main challenge.
As all local bankers in the Middle East will know, as their clients become wealthier they start looking for new and added value private wealth management services and this usually leads them to start looking at other alternatives: banks around the region or international banks; local banks are running the risk of losing their clients who will shop around to get a higher return on their investments.
Looking East for inspiration
Digital banking in Asia-Pac is compelling and provides us a with a glimpse of the future of the banking sector in the Middle East. Banks there have mastered platform-technologies in re-creating ‘banking-as- an-ecosystem’ to the point where they are now in a position to tap into additional revenue streams through adoption of cloud technology and widespread use of APIs.
In Asia, we see social media companies and car-sharing players rapidly building financial (banking and insurance) ecosystems - platforms that will facilitate billions of financial transactions - and now applying for a banking licence from the regulator. Their technology stacks are dominated by cloud platforms.
More and more digital payment service providers are moving into offering mobile financial services, with companies now applying for banking licences. Again, all using cloud-based platforms.
And this is where the regulatory environment comes in; cloud is not yet permitted in most banking sectors across the Middle East region and so the banking sector is constrained in its ability to launch new innovative digital ecosystem banking services and benefit from the attractive economies of scale that can drive down banks’ marginal costs and increase the banks’ profit margins.
Here in the Middle East, cloud offers huge potential for the banking sector and the opportunity to break away from the limitations of the traditional IT infrastructures and create a new API-economy.
As examples from the Asian banks are showing, customers want to do more with mobile ecosystem banking and we expect over the coming years that this new business model will be replicated and tested within the Middle East banking sector as well. We still have a way to go. Cloud is a great untapped opportunity for the Middle East banking sector.
Retail banks themselves are piloting private cloud infrastructures, gaining experiences and putting pressure on the regulators. Major cloud service providers worldwide, including Amazon Web, and Microsoft Azure, are only just arriving now because of the pressures on the regulatory environment.
The future focus for Middle East banks is on ‘banking-as-a-platform’ and ‘channel—as-a-strategy’; banks can no longer monopolise all the digital touch points for customers and so need to work with new ecosystem players; banks also need to learn to partner and collaborate more aggressively, in a similar way to the retail banks in Asia-Pac.
This will require new investments, mostly in agile digital banking platforms. ‘Network-as-a-service’ (using new innovative SD-WAN technologies) is already being deployed by large banking companies, freeing up CAPEX to pay for these new investments in digital ecosystem banking platforms.
‘Banking-as-a-platform’—the ecosystem play to manage near-zero marginal costs with hyper-personalisation—enables banks to use data to identify profitable niche markets and segments. If Middle East banks can get this right, then there is a strong business case (as well as a growing customer expectation) to accelerate their digital transformation and be ready for the competition with the ‘Big Tech’ challengers