Digital finance could be a boon to individuals, businesses and governments, boosting GDP and making the aspiration of financial inclusion a reality.
A spurt in digital finance in the UAE is inevitable as the country embraces the global trend of smart payment solutions.
Digital finance - financial services delivered via mobile phones, the internet or cards linked to a digital payment system - could be a boon to individuals, businesses and governments across the developing world, boosting GDP and making the aspiration of financial inclusion a reality, says a recent report by McKinsey Global Institute (MGI), 'Digital finance for all: Powering inclusive growth in emerging economies'.
The recent developments in the UAE's banking industry is a testimony of something perceived as long-term plan of the nation is already at threshold and ready to define lifestyle of UAE residents.
The UAE Banks Federation (UBF), a professional representative body comprising 49 member banks operating in the UAE, recently announced that the much awaited Emirates Digital Wallet LLC, a company owned by 16 shareholding banks and fully sponsored by UBF, has reached its final development stage.
Emirates Digital Wallet, previously known as the Mobile Wallet project, is offering consumers and businesses in the UAE an effective and convenient way to receive, store and transfer money, while setting the path for the country's transition to a digital future.
"Our objective, since the initiation of this project and subsequently moving from blueprint to implementation, is for banks to establish a dedicated entity and take direct responsibility for expediting the process of digital transformation in the UAE," said Abdulaziz Al Ghurair, chairman of the UAE Banks Federation.
For banks to attract and retain "digital natives", digitalisation and integration of channels and transactions to deliver true omnichannel consumer experiences is the way forward according to Habib Hanna, managing director for the Middle East at Diebold Nixdorf.
Digital natives is a generation born and raised in the digital world, making them accustomed to the concept of personalisation. From ringtones to avatars to mobile apps for taxi services and bill payments, digital natives are used to "having it their way" and expect to have choices in all aspects of their lives.
They are comfortable relying on digital channels to make payments, order groceries, select insurance and visit the doctor (virtually, of course). Digital touchpoints serve as an efficient tool that enables them to do what they want, where, when and how they want.
However, the full potential of digital finance remains untapped. The MGI report indicates that almost two billion individuals and 200 million micro-, small-, and medium-sized businesses in emerging economies today lack access to savings and credit. Even those with access must often pay high fees for limited product choice.
Susan Lund, a partner at the McKinsey Global Institute and co-author, said: "Using traditional brick-and-mortar banks, we've seen financial inclusion improve slowly as a country's income rises. But we don't find any correlation between mobile-money usage and income. Rather than waiting a generation for incomes to rise to close the financial inclusion gap, developing countries can use mobile phones to provide digital financial services for the vast majority of its citizens within a decade."
MGI finds that digital finance could boost the GDP of all emerging economies by as much as six per cent versus a business-as-usual scenario, or $3.7 trillion, by 2025 - the size of Germany. This additional GDP could create up to 95 million new jobs across all sectors of the economy. Nearly two-thirds of the GDP increase will come from improved productivity of businesses and governments as a result of digital payments. One-third is from the additional investment that broader financial inclusion of people and micro-, small-, and medium-sized businesses would bring. The small remainder comes from time savings by individuals which enables additional hours to be spent on work.
Digital finance has the potential to provide access to a financial account for the first time to 1.6 billion people, more than half of them women - and many in the middle class. For all individuals, convenience, cost and the range of financial products available would dramatically improve. People in towns and cities will no longer have to spend valuable business hours in line at a bank; rural households can forgo trips to nearby towns and spend more time on income-generating activities.
MGI estimates that individuals in emerging economies could save 12 billion hours a year by switching to digital financial services. Emerging economies could sustainably unleash $2.1 trillion in new loans to individuals and small businesses. Governments could gain $110 billion by reducing "leakage" in expenditure and tax collection. For financial service providers, the cost of offering customers digital accounts can be 80 to 90 per cent lower than using physical branches. Financial services providers could save as much as $400 billion in direct costs from the shift from cash to digital payments and expand their balance sheets by as much as $4.2 trillion.
However, Alain Penel, regional vice-president for the Middle East at Fortinet, cautions banks today must be able to respond to customer demands relatively quickly, and be nimble enough to adopt new technologies and implement new tools and processes when they become available.
There is a need to understand how regulation and compliance needs to evolve to allow for new innovation and timely change. At the same time, they have to be able to constantly screen new technologies, decide which make the cut and which do not, and then integrate these pieces into their IT architecture.
Three building blocks need to be in place to capture the economic opportunity via digital finance and they include widespread mobile and digital infrastructure; dynamic business environment for financial services that allows space for competition and innovation at the same time as limiting risk and digital finance products that meet the needs of individuals and small businesses that they will prefer to existing alternatives.
Olivia White, a partner in McKinsey's Global Banking Practice and co-author, said: "Shifting from cash to digital payments will lower financial-service providers' cost structure, open up profitable new ways to enlist new customers, and create trillions of dollars in new deposits. But whether those new deposits go to banks or nontraditional players is up for grabs."