ME PoV Spring 2018 issue
The rise of fintech
Financial technology (fintech) is revolutionizing the banking landscape the same way Uber has disrupted the taxi industry and Airbnb has shaken up the hospitality sector. This digital evolution, and failure to address it early, can trounce even the most dominant of companies. Kodak’s refusal to support digital, and its subsequent demise, is a cautionary tale for any company and a sign to innovative start-ups that even the most monolithic corporations can become vulnerable.
Fintech refers to technology-enabled products and services that improve traditional financial services. They are often faster, cheaper, more convenient or more accessible, and in most cases, they are developed by start-ups.
In the past few years, fintech has emerged as one of the primary challengers and disruptors of the once-traditional banking industry. Innovative banking services that offer increased efficiency and lower costs have helped propel the rise of fintech in a global industry that has amassed over US$100 billion in investments. A backdrop of smartphone proliferation, technology-reliant consumers and easing of some regulatory barriers have also paved the way for growth, which has seen the number of fintech pioneers grow to over one thousand companies in 2017.
At the forefront of this disruption are agile innovations such as peer-to-peer lending and crowdfunding, that are threatening to render some traditional banking services obsolete as they provide alternative lending platforms and widen access to capital.
The fast-growing payments arena, previously a formidable forte of banks, is now under attack with entrants such as Apply Pay and Samsung Pay vying for market share. The use of blockchain technology has enabled the rapid ascent of cryptocurrencies such as Bitcoin into public discourse, igniting a frenzy of interest while creating fundamental challenges to regulators and money markets.
Stock trading apps and Robo-Advisors are challenging traditional investment and wealth management models, creating margin pressures and forcing banks to re-think strategies.
Such competitors no longer require the bricks-and-mortar footprints, nor do they need to provide the same depth of products and services. New entrants can unbundle a formerly interlocked segment of the banking ecosystem in a bid to redistribute the vast profit pools available in the industry.
Fintech disruption in advanced financial hubs such as London (widely considered the fintech capital) has permeated the banking ecosystem. In the GCC, fintech has made steady advancements and alarmed incumbents but remains at an embryonic stage and has yet to cause the tremors that have impacted players in mature markets.
Lending and saving segments carry higher barriers to entry as they invoke regulatory hurdles and require strong balance sheets. Banks in the region also tend to be backed by governments and influential stakeholders, dampening the development of some start-ups within this area of the banking ecosystem.
The payments and remittance models have been the most exposed and at the heart of this disruption as they remain the least capital intensive and most technologically intensive. The GCC boasts one of the highest smartphone penetration levels and is characterized by a youthful population, providing further impetus to the rise in digital payments.
While regional banks recognize the disruptive influence of fintech on their industry, many lack a sense of urgency and indeed, lag behind peers within the region.
Those that have adopted a proactive outlook are partnering with start-ups that provide fintech solutions such as payment gateways and remittance solutions, while other, larger banks are allocating capital to explore potential investments in the start-up space.
Across the GCC, banks in the United Arab Emirates (UAE) have taken the lead in embracing fintech. Emirates NBD, for example, has positioned itself as a technology leader, launching the Emirates NBD Future Lab and announcing its commitment to invest AED1 billion in the space. Its subsidiary, Emirates Islamic Bank, ascribes to a vision of “digitize or die”, being the first Islamic Bank in the UAE to support both, Apple Pay and Samsung Pay.
Mashreq Bank has gone one step further and developed Mashreq Pay, an organically developed mobile wallet that can be used to make purchases. The bank also launched the region’s first digital-only bank, Mashreq Neo–and has begun to utilize robotics to manage accounts.
Elsewhere in the GCC, Riyad Bank launched the first contactless payment method in Saudi Arabia, a country where cash has long been the primary payment method.
Within Islamic Banking, a sector that is often incorrectly perceived as being slower to engage in technologies, leading banks have begun to respond to the fintech disruption and are intent on capitalizing from this burgeoning sector. In Bahrain, a major player in the region’s Islamic Banking sector, three banks announced in December 2017 the establishment of a company dedicated to research and development of Sharia-compliant fintech products.
The importance of fintech has certainly not gone unnoticed by regulators. In the UAE, the Dubai International Financial Centre launched the FinTech Hive in 2017, an accelerator program that provides a platform to nascent technology firms, with similar initiatives in Bahrain and Abu Dhabi. The Dubai Financial Services Authority is also in the process of rolling out a supervisory environment to aid the development of fintech.
The UAE Central Bank and the Saudi Arabian Monetary Authority announced plans to use blockchain technology to issue a digital currency accepted in cross-border transactions between the two countries.
The future for GCC banks
As investment continues and traditional policies governing the financial services sector evolve to capture new technologies, fintech is likely to flourish in the region. Disruption will not be a one-time event but rather a continuous pressure to innovate that will shape customer behavior, business models and the long-term structure of the industry. The most successful banks will be those that can adapt and stay abreast of trends as the financial services environment evolves.
Although many players have made progress in responding to the disruption, the pace of change has been slow and there remain obstacles to growth in the shape of a lack of skilled IT workers along with continued underspend on technology. Other banks that have long recognized the risks of fintech to their businesses have been slow to innovate owing to internal bureaucracy.
Banks that will be least impacted by this sea of change will have embraced the disruption by gaining a lead on their peers and investing in technology platforms, talent, in-house technology incubators, accelerators and forged partnerships with fintech companies.
Incumbents can ill-afford to dismiss the rise of fintech from their strategic priorities, and those that continue to rely on their name or size alone may experience margin pressures, loss of market share, and ultimately, the discontinuation of business lines as they lose viability in the face of lower cost fintech solutions.
While the fintech evolution in some advanced economies is reaching tipping point, the extent of disruption to GCC banks has been less pronounced thus far. However, the pace of disruption is likely to accelerate as a combination of rising investments and cross-industry partnerships fuel the rise of fintech and its acceptance as a credible component of the banking ecosystem. Banks should act now and shift their strategic focus in order to remain competitive with faster moving new entrants.
by Rajeev Patel, Director and Uthman Al-Basri, Manager, Financial Advisory, Deloitte, Middle East