The United Arab Emirates’ economic growth trajectory is looking rosy. After posting a sluggish 1.3% gross domestic product increase in 2017, improving oil prices as well as healthy contributions from the non-oil economy are expected to lift this figure to 3.4% in 2018. This comes despite elevating levels of political risk across the wider Gulf Co-operation Council, as a trade embargo against Qatar continues and tensions between Saudi Arabia and Iran remain high.
“The UAE will remain one of the most important countries in the region from a business perspective. The economy is well diversified and investments into non-oil sectors, including health and education, are continuing,” says Elyas Algaseer, co-head of Mitsubishi UFJ Financial Group’s (MUFG's) Middle East and north Africa operations.
The government’s economic reform agenda and its Vision 2021 development objectives are serving up a suite of compelling, long-term investment opportunities. This is because the scope of these ambitions is so wide: from the privatisation of government assets and the large-scale development of infrastructure projects to the growth of the knowledge economy. The opportunities for participation and investment are vast.
An Adnoc example
A healthier economic outlook, and with it stronger government finances, will only help to accelerate these plans. The initial public offering (IPO) of a fuel retailing unit of the Abu Dhabi National Oil Company (Adnoc) towards the end of 2017 is a case in point.
“The IPO of Adnoc Distribution mirrors the privatisation drive that is occurring across the region. International and regional banks can both benefit from this trend,” says Mr Algaseer.
Developments of this kind are a welcome reminder of what is set to be a longer term growth story in the UAE and the wider region. Dubai alone has allocated about $3.2bn towards infrastructure and construction projects in 2018, based on the figures from its latest budget.
“A bank such as MUFG has the resources and the expertise to support large project finance deals that are a feature of the UAE’s diversification agenda. We expect a lot of the UAE’s project finance deals to come back on the table in 2018, so its importance to our business in the region will only increase,” says Mr Algaseer.
From physical to digital
But the UAE’s development and diversification drive is as much about the digital as it is about the physical. So while big ticket infrastructure projects will present opportunities for some, the future of the country’s digital economy is occupying the attention of others.
Initiatives such as the country’s ‘Smart Government Goals’ and Smart Dubai 2021 have helped to propel the UAE to ‘standout’ country status (and the most advanced Arab market) in the World Economic Forum’s 2017 Digital Evolution Index. This index tracks the pace of change in digital economic development across 60 countries.
The financial sector is not being left behind in this digital evolution. Innovation is sweeping through the country’s largest banks and financial institutions, while a growing community of fintechs and start-ups are emerging at the other end of the spectrum.
“Digital banking in the UAE is developing very quickly. Local banks have the resources and the aspirations to capture the very best market innovations that are out there,” says Philip King, global head of retail banking at Abu Dhabi Islamic Bank (ADIB).
ADIB's advancement
In the drive to serve a well-connected wealthy locals, white collar professionals and migrant workers, the UAE’s banks are rethinking and reshaping their business models to meet a new digital era. ADIB, for instance, has partnered with a German fintech operator called Fidor to unveil the region’s first community-based digital bank.
“It is an online community space where people can discuss their personal finances, read content on banking and finance and even get deals on local restaurants. It’s been likened to the TripAdvisor of finance,” says Mr King.
“We are now in the pilot stage of the next phase of this project, which will incorporate smart banking, allowing our customers to conduct transactions and apply for finance online and through their mobiles,” he adds.
The bank’s branch network is also receiving an upgrade. The launch and roll out of ADIB Express branches, which are heavily tilted towards digital engagement, continues at pace. Towards the end of 2017, the bank unveiled a new location in one of Dubai’s metro stations.
“ADIB’s Express branches offer customers access to a wide range of digital services, including a paperless account opening process that takes just 30 minutes. These branches are being positioned in locations with a high footfall and where customers are looking to conduct quick transactions,” says Mr King.
The AI frontier
Meanwhile, frontier technologies including artificial intelligence (AI) and data analytics are also being deployed. Mirroring developments in the leading innovation and technology hubs in the US, UK, Israel and Asia, banks in the UAE are deploying these offerings to enhance efficiency, reduce costs and improve the customer experience.
“AI is impacting banking in three key areas: compliance and regulation, client communication, and credit and market risk analysis,” says Ronit Ghose, managing director, global banks sector head, Citi Research, Citigroup.
To date the most visible use of AI by UAE banks is in the form of chatbots with a meet and greet function, as well as the deployment of AI virtual assistants.
“AI chatbots replace more direct human interaction. And this is not necessarily a bad thing. Often human interaction, with a call centre for instance, is conducted in a user-unfriendly environment. It’s expensive for the bank and it involves customers not getting a particularly good service. So chatbots reduce costs and potentially improve client satisfaction,” says Mr Ghose.
Emirates NBD has taken the lead in this domain with the launch of its virtual assistant EVA, as well as its in-branch AI robot known as Pepper. Both systems can handle customer queries and engagement in Arabic and English.
“These are baby steps and it is about proving the concept. We have seen many customers embrace this technology, although others can be more hesitant. It is important to support the customer as these new services and offerings are introduced,” says Suvo Sarkar, senior executive vice-president and group head of retail banking and wealth management at Emirates NBD.
Indeed, the relative immaturity of customer-facing AI propositions gives rise to two challenges. For one, these technologies have only very recently acquired a level of accuracy that enable them to be deployed.
Second, customer engagement with AI robots and virtual assistants remains something of a journey. Not all customers are immediately comfortable with the technology, so banks that adopt them must be ready to assist their customers in order to familiarise them with these offerings.
“It’s not just about technology and innovation, it’s about customer adoption. We can’t force technology on customers. The launch of Pepper has been helpful in getting customers familiar with the technology,” says Mr Sarkar.
Falling headcounts
Despite the challenges of engaging with technology early on, the long term benefits are clear. Speaking to local press in September 2017, the head of Mashreq Bank, Abdul Aziz Al Ghurair, noted that the bank’s workforce was expected to fall by about 10% over the following 12 months as the impact of back-office AI investments started to bear fruit. This kind of headcount reduction can be expected to occur with growing frequency.
“Banks to some extent have been white-collar factories. But factories are largely automated now. A Japanese car plant today doesn’t look like a factory in Detroit in the 1930s. The same thing is happening to the banking industry,” says Mr Ghose.
Regulation and compliance is one area of banking that is ripe for the kind of disruption that AI can deliver. “For good reason there has been significant expenditure by banks on regulatory compliance. Now they are looking to see if they can improve the efficiency of that process. By replacing humans with machines you can, to an extent, reduce error rates and do a better job without tens of thousands of employees filling those positions,” says Mr Ghose.
Vital partners
UAE banks are cognisant of the fact that they cannot effectively adapt to this wave of technological and digital change on their own. As a result, many are now turning to partnerships with external experts to capitalise on these trends and develop their products, services and processes to meet the demands of the future. ADIB’s Mr King points to the cultural benefits that the bank’s partnership with Fidor has delivered. “The partnership with Fidor, which is a fintech, has given us a chance to learn how to be agile. I think our digital team has developed as a result,” he says.
Beyond Fidor, the bank has also partnered with IBM in the creation of a studio for the development of digital offerings. “IBM is responsible for building our smart banking app through the IBM-ADIB digital studio. That was expertise that we didn’t have in house and which we built up from a low level. This type of collaboration is helping us to transform digitally,” says Mr King.
In this way, banks in the UAE are benefiting from the input of international partners and the introduction of groundbreaking concepts to provide services to global standard. So although the country’s banks may not be global leaders themselves, they are swiftly catching up with their international peers. By operating in this fashion, the UAE’s banks can deliver products and services to market with minimal delay.
“The other key thing about our partnerships is that they can deliver existing products that are ready to go. By working together we get traction on key strategies more quickly,” says Mr King.
On this point, Emirates NBD’s Mr Sarkar agrees. “We want to work with multiple external partners to create a holistic experience for our customers. That’s the future,” he says.
The next steps
The question that faces the UAE’s banks is: what comes next? Most of the country’s largest lenders are adopting digital innovations at a breakneck pace. And this is a clear reflection of management-level objectives that are looking to position their respective institutions as digital leaders in a highly competitive landscape.
“It can be quite important – when you’re looking at digital and technological change – to think about how you would analyse it at a company level. How interested or how committed are top management, the chairman, the CEO and the board? How much are they sponsoring and backing this digital transformation agenda? It’s about future-proofing the organisation and looking around the corner,” says Mr Ghose.
Emirates NBD has allocated Dh1bn ($272.3m) over the next three years towards its digital transformation programme. ADIB, meanwhile, is adopting a similar investment-led approach to its digital transformation over the coming years.
“In 2018 we will be expanding our digital investments even further. This is a focal point of the bank and the board. We will be securing approval to expand our digital transformation as part of our three-year plan. It’s really transforming the whole bank,” says Mr King.
Cumulatively, this bodes well for a financial sector that is evolving to meet a future digital economy. Already, about 80% of urban consumers in the country execute part of their banking through digital channels, according to research from McKinsey. Among other things, this means that Dubai and Abu Dhabi have every chance of emerging as genuine global heavyweights in digital financial technology.
“In the next three to five years getting digital and technology right is going to be a key differentiator between successful and unsuccessful banks,” says Mr Ghose.
