COVID-19 has undoubtedly been the biggest game-changer across industries, including banking. It has impacted consumer needs and behavior, setting the ground for new opportunities and innovative business models. While most banks responded swiftly to build solutions to help customers in the wake of the crisis, the real question is whether they will be able to capitalize on the momentum and push forward their broader digital transformation goals to make them competitive in the future.
So far, most banks find themselves lagging behind fintech and big tech organizations when it comes to the pace of digitization. As per the Innovation in Retail Banking report produced by Efma and Infosys in November 2020, when respondents were asked about the progress of digital transformation efforts, a mere 7 percent said that they had deployed at scale and the results delivered were as desired.
For digital transformation to be successful, a mere lift and shift approach does not always make sense. Instead, banks need to completely reimagine their processes and models while also driving a shift from a legacy to a digital banking culture. Innovation and meeting changing customer expectations can be especially difficult during a crisis. However, progressive leaders and a culture of innovation are important success factors for banks to thrive in the digital future. A commitment to building a truly digital organization rather than just checking the boxes is extremely crucial.
Drivers for Banking InnovationIn the Middle East and North Africa (MENA) region, factors such as changing customer preferences, high mobile penetration rates, growing competition from fintech companies are driving change. These, coupled with governments' thrust on digitizing financial services to drive global competitiveness, is leading to the disruption of the industry. For instance, the United Arab Emirates (UAE) Government has put steps in place to drive digital innovation through increased spending as well as encouraging private investments. Similarly, the Saudi Vision 2030 goals also emphasize investments in digital banking and innovative banking models.
As per a report from International Data Corporation, spending on digital transformation initiatives is set to touch $40 billion by 2022 in the Middle East, Turkey, and Africa (META) region. Oman's Bank Sohar found that revenue from its loans portfolio grew to over 10 times the expected target once it implemented a core banking platform. Similarly, RAKBANK worked to ensure contextual interactions and consistent cross-channel journeys for its customers while also preparing for API-driven innovations. It found a 50% increase in user transactions on its digital platforms, along with a 70% increase in high-value transactions via digital channels. Aafaq Islamic Finance too leveraged a modern digital platform, which enabled it to automate across operations and enable new account opening in less than five minutes.
Innovative Banking TrendsAs banks in the region embark on their digital transformation journeys, the following key technology trends in banking have gained prominence.
#1 Digital Payments/Instant Payments
The digital payments market in the Middle East and North Africa is expected to grow at a CAGR of 6.5 percent from 2020 to 2025. This is driven by factors such as a steep rise in e-commerce sales, ubiquitous internet availability, and high mobile penetration. At the same time, the rising number of digital wallet fintech, as well as the growing acceptance of digital wallets among retailers, has also pushed demand. A shift in consumer preferences, spurred by demographic changes and global trends, is also a factor. Regulatory changes such as the push for open banking and ISO 20022 migration are raising the bar on expectations.
Bank real-time electronic payment solutions provider ACI Worldwide recently announced a strategic global partnership with Vocalink into Saudi Arabia enabling fast bank adoption of real-time payments through ACI's UP Real-Time Payments solution. First Abu Dhabi Bank (FAB) launched UAE's first all-in-one digital wallet. Emirates NBD implemented its Enterprise Payment Hub that provides full scalability to rapidly launch new and existing payment innovations across all Emirates NBD markets and entities. The UAE Central Bank too adopted its UAEPASS initiative to processing all banking transactions.
#2 Digital Only Banks
In the recent past, there has been a rise in digital banks and payment banks with a slew of announcements in the Middle East region. The data generated from digital banking also lends itself to advanced AI and analytics to identify consumer preferences and push relevant offers. Incorporate banking, analytics can facilitate payment forecasting and loan decisions.
In its bid to empower the country's financial technology sector, the Saudi Central Bank (SAMA) has licensed about 13 payment companies, including International Digital Solutions Co and Azm Fintech Co recently. Also, ADQ, the holding company for some of the biggest assets in the UAE including Abu Dhabi Airport, announced plans to set up a digital bank legacy license from First Abu Dhabi Bank (FAB). In December 2019, Bank ABC launched "ila Bank" its digital, mobile-only bank in Bahrain. Egypt's Banque Misr has announced its plans to launch a digital-only bank during the third quarter of 2021.
#3 Reimagined Digital Branches
Banks in this part of the world have always relied on brick-and-mortar branch offerings considering the customer segment and regional customer affinity towards personalized service. However, off late banks are trying to turn traditional branches into digital branches. Banks are exploring technologies such as voice-enabled robots, full-service kiosks, digital appointments and video conferencing, mobile tellers, and AI-based hyper-personalization among others. Many banks in the middle east have come up with such digital offerings to make their branches more tech-savvy, paperless and people less yet maintain the personalized service to customers. Meem Bank in Saudi is one such example. In UAE, Mashreq Bank and ENBD are investing heavily in digital branch offerings.
#4 Cloud Adoption
For banks, the biggest question with respect to cloud adoption is not 'why', but 'how'. In general, a step-by-step approach that starts with shifting non-critical environments to the cloud, leveraging cloud techniques to optimize infrastructure investments and performance, and finally, moving the production environment to the cloud works well. Already, countries such as UAE and Bahrain have embraced cloud computing, while the Kingdom of Saudi Arabia (KSA), Egypt, and Oman are also opening up cloud adoption for banking.
#5 Open Banking
Open banking too is gaining momentum. Central Bank of Bahrain ("CBB") launched the Bahrain Open Banking Framework in October 2020, with KSA the following suit in January 2021. Jordan's Bank al Etihad is in the process of finalizing its open-banking developer portal with over 400 APIs. Banks are re-designing their technology need around open banking to leverage the fintech and partner ecosystem growing in the region and to meet the dynamic needs of their customer base beyond banking.
As we go through 2021, the onus is even greater on banks to better understand the banking ecosystem and customer preferences. This can help identify gaps, reset priorities, and make the appropriate investments. The bottom line is that digital banking transformation is no longer optional; rather, it is essential for survival.
As the world braces itself for post-COVID' new normal' it is important to keep in mind that there is no proven guidebook or strategy that promises to deliver. However, the right technology investments coupled with a laser-sharp focus on customers will help create the right solutions for banks in the region to survive and thrive.