Current banking world’s massive RegTech and FinTech framework changes outlines a broad range of requirements and expectations that apply to the banking activities including the foremost technological innovation. It is also important to recognize the significant ongoing progress made by the banking sector following the financial crisis 2008 — banks are now safer and sounder, the financial system is more stable and consumers are better protected. Moreover, policymakers and regulators continue to actively monitor developments within the banking sector so that emerging potential risks are appropriately addressed.
To maintain the progress achieved to date, policymakers and regulators need to confirm that key players within the broader financial services ecosystem operate in a safe and sound fashion and comply with consumer protection, AML/KYC and other applicable requirements — particularly if they engage in bank-like activities (e.g., payments, lending). Additionally, as new technologies continue to emerge and mature, further clarifications to the existing regulatory framework may be warranted to enable implementation of more nascent innovations in a timely, safe and efficient manner.
Further, policymakers, regulators and industry should expand their outreach and enhance coordination with one another both domestically and internationally, not only to keep abreast of technological developments, but also to provide industry with a clear
and consistent message concerning requirements and expectations. This will provide industry with the additional clarity and confidence needed to move forward on investments in emerging and potentially much more transformative
and beneficial technologies that are consistent with regulatory objectives.
Technological innovations driving change
UAE and Mideast Banks have to undergo a fundamental transformation resulting from a range of technological innovations globally. Six technologies are currently most prominent in financial innovation: cloud computing, big data and analytics, artificial intelligence (AI)/machine learning (ML), robotic process automation (RPA), distributed ledger technology (DLT) and the Internet of Things. These technologies are at different stages of maturity, and some have the potential to significantly change the industry in the coming years.
Technology-driven innovation is compelling change within the banking industry both internally (i.e., bank-specific) and externally (i.e., industry-specific).
To respond to changing customer expectations and new technological innovations, banks began with a focus on digital experience capabilities, including web, mobile and social. As digital capabilities mature, new technologies emerge and customer expectations continue to evolve, banks are extending their transformation efforts from digitizing narrowly targeted functions to the broader digitization of the enterprise. These changes are resulting in expanded financial inclusion, improved internal operations and transformations to the banking value chain.
Fintech has already found a degree of success in the payments space in the Middle East. The high profile status of Pay Fort (UAE) and other payment FinTech such as Fawry (Egypt) and Madfoo3atCom (Jordan), for example, are signaling growing acceptance of FinTech in the largely traditional Arabic business market.
The UAE, along with New Zealand (14th place with a score of 3.54) and Singapore (6th place with 3.69), were the only three nations classified in this category, given their leading role in driving innovation and building on their existing advantages in efficient and effective ways. Five Arab countries made the top 60, with the UAE leading the pack, followed by Saudi Arabia in 31st place with a score of 2.80, Jordan in 40th with 2.41, Morocco in 50th with 2.12, Egypt in 54th with 1.74, and Algeria in 57th with 1.64.
The potential impact of block chain in the Middle East is being attested to by the global community. Innovative Finance, a global FinTech forum headquartered in the UK, recently set up operations in both Bahrain and the UAE. Furthermore, an Innovate Finance member, Infosys, recently helped to facilitate a sizeable trade finance transaction via block chain with Emirates NBD.
The UAE has come a long way since our leadership first launched the Dubai Plan 2021 and the Dubai Smart City Strategy,” noted Dr Aisha Bint Butti Bin Bishr, Director General of the Smart Dubai Office.
“The strategies, projects and initiatives that have been implemented in the Emirates – and Dubai, in particular – brought together all the necessary ingredients to create the incredible momentum that propelled the country to the high ranks of the World Economic Forum’s classification.”
“New capabilities are emerging on an apparently daily basis, and what is striking about most of these systems is that they could not have been delivered 5 years ago because we did not have the technological wherewithal: the mobile platforms, the bandwidth, the software and more.
“There are 6 billion mobile subscribers around the world, of which 2 billion are smart phone users, and this number is expected to double by 2020. When 3 billion people are connected, they communicate and research very differently; they also socialize, share, build communities, cooperate, crowd-source, compete and trade in ways and on a scale that has no analogous in the analogue world.”
This scenario is unfolding today as financial technology (FinTech) innovators develop platforms that enable consumers to act on the data from multiple financial services companies, all aggregated together—and to move capital easily among institutions without friction or fees.
The Real Challenge
This type of new innovative services could put direct pressure on the operating margins of FinTech incumbent banks. Combined with a regulatory climate that favors financial interoperability, it creates a new competitive threat for financial services companies.
“Banking portability – the ability to retain account numbers even when transferring accounts to new providers—will exacerbate the threat. Fintech banking may not fully emerge this year or forth, but it is a real competitive threat within the banking system, looming during the next five years.”
When consumers can manage a variety of financial products and services from different institutions with one application, it will facilitate the cross-institution movement of money and accounts and will dramatically improve the flexibility of consumers to pick and choose products seamlessly at competing providers. More important, consumers will be able to see and act on their full financial profile at a glance, thereby allowing them to make better-informed decisions.
To compete against this new service model, financial institutions will need to develop more flexible product distribution, enhance partnerships, and deliver compelling digital experiences to sustain the perceived value of consolidated banking relationships. If not, they are likely to see their customers migrate to more inclusive FinTech platforms.
Industry data bears out hypothesis that many bank customers remain loyal at first when it becomes easier to move their activity from one bank to another. For example, in the U.K. in 2013, Bacs Payment Schemes Limited introduced its Current Account Switch Service, enabling consumers, small businesses, and nonprofits to seamlessly close their existing financial services accounts and transfer funds to new ones. Since inception, the service has helped switch 3 million accounts. Although this sounds impressive, it’s too early to say if the switch service is successful. If one assumes, that on average each of the 49.7 million people over the age of 20 in the U.K. holds one checking account, just 2 percent of people in this demographic used the service each year so far.
U.S. consumers have behaved in a similar fashion. A study of activity between 2008 and 2012 suggests only half of consumers who considered switching banks actually did so. Of the consumers expressing concerns about switching accounts, 63 percent cited worries about transferring bill pay or other automatic debits/credits to a different account. This behavior is highly indicative of the stickiness that the banking industry currently enjoys.
Cross-selling remains a high-margin activity for them. Financial services industry statistics suggest that households with 6.6 banking products on average generate twice the revenue of customers with the standard average of 2.7 products. The most prolific customers—those with an average of 16.6 products, which usually include both personal and small business–related accounts—generate nearly 17 times the revenue of a standard two-product customer. The ability to capture more business from existing customers might be the biggest driver of growth and profitability at any given financial institution, and FinTech startups, particularly, could well disrupt this status quo.
If the ability of banks to retain customers effortlessly is compromised, this will naturally add to the pressure for new customer acquisition—which is an expensive activity and an area where innovation at FinTech companies is often superior.
What shall be done?
Higher Management of an incumbent financial services institution can protect highly profitable cross-selling by taking steps to defend a key competitive advantage:
Make use of your considerable customer data assets to create more compelling cross-product interactions than could be achieved in an ecosystem of unaffiliated service providers. More specifically, you can proactively position yourself by taking actions like these:
– Explore new business models with a more fluid customer base and less reliance on deposits and transfer fees for income.
– Recruit new customer groups—for example, international customers and lower-income individuals.
– Take full advantage of the trove of customer data you already hold, using it to design relevant products and services. Banks have significantly more customer data than startups do; take advantage of this competitive edge.
In the end, a deeper understanding of human behavior may save the day for you. Sheena Iyengar, the S.T. Lee Professor of Business at Columbia Business School, is a social psychologist and author of “The Art of Choosing”. Her research has found that too much choice can overwhelm us, leading to unpleasant experiences. Banks may be able to tap into this human response to abundant choice to demonstrate the value of selecting financial products and services from one source.
The observation of key trends — such as the greater availability of data, exponential growth in computing power allowing the analysis of ever larger data sets, broader access to and the decreasing cost of goods and services, increasing disintermediation and re-intermediation, and demographic and generational changes — all point towards a crossroads of significant technology-driven change in the offering of financial services.