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Middle EastSeptember 1 2017

Can Gulf banks build on their digital momentum?

Banks in the Gulf region have scored some notable successes in the digital field, such as Liv, a UAE bank run by and for millennials. However, the longer-term threat from fintechs still looms large, writes James King.
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Emirates NBD

Consumer banking in the Gulf Co-operation Council (GCC) can be a difficult proposition. Typically small populations are characterised by a young and tech savvy-mix of wealthy Gulf nationals and a mobile set of blue- and white-collar global workers.

For banks in the region, successfully tapping into these market segments demands careful strategic planning, investment into innovative products and services, and a strong brand equity. Digital banking solutions are increasingly being used to fulfil these objectives as various 'push' and 'pull' factors compel the region’s lenders to innovate their products, services and processes.

“I think the Middle East region has done quite well in the digital banking stakes over the past five years. We have come a long way,” says Suvo Sarkar, senior executive vice-president and group head of retail banking and wealth management at Emirates NBD.

A favourable market

Many bankers point to the region’s high proportion of millennials, extensive smartphone penetration and the push by various public authorities to promote smart initiatives as contributing factors to the growth of digital banking. In addition, both nationals and foreign workers in the Gulf often spend time in neighbouring countries, increasing the exchange of ideas and ultimately the competition between markets.

“GCC banks are, in general, not the kind of mega institutions you find in the US or Europe, so investment approvals can happen more quickly. Banks in the region are quite nimble. There are some very impressive digital innovations occurring throughout the region, particularly in the United Arab Emirates, Qatar, Kuwait and Saudi Arabia,” says Steven Eliopoulos, deputy general manager of consumer banking at Gulf Bank, a Kuwaiti lender.

Gulf Bank is a case in point. Over a very short period the bank approved, designed and launched a new mobile banking app in 2016 with facial recognition technology. This led to a 414% increase in new mobile banking registrations between June 2016 and June 2017, accompanied by a 70% increase in mobile financial transactions.

Getting personal

Cumulatively, these trends are altering the way in which banking products and services are being designed and offered to customers in the Middle East. With greater frequency, digital banking is now driving the personalisation of the banking experience with new mobile apps and online services, among other offerings, tailored to particular sub-sections of the consumer market. This is also changing how banks compete with one another.

“Historically, banking has been a ‘push’ model: products and services were developed and pushed on customers, with competition based mostly around rates and fees. But that one-size-fits-all approach is over. Nowadays, customers want customised products and services,” says Umair Hameed, a financial services partner at KPMG.

This personalisation is leading some lenders to launch services tailored to particular age groups, for instance. In early 2017, Emirates NBD launched a digital-only bank designed for millennials in a nod to the UAE’s swiftly growing youth market. Known as Liv, it has been quick to gain market traction.

“We wanted to challenge ourselves, the largest retail bank in the UAE, in reimagining the bank from the ground up,” says Mr Sarkar.

Liv (which is also run by millennials) enables new customers to download the mobile app and immediately open a new account by scanning their Emirates ID card. Funds can then be deposited by using any bank debit card held by the new customer. Fund transfers and bill payments can be conducted online while an ATM card is posted to the new account holder. Beyond these features, the digital bank offers users a social experience highlighting events in their vicinity, as well as lifestyle tracking options based on health and fitness metrics.

“It is less of a bank and more of a lifestyle store. We made it light on banking and heavy on lifestyle. One in four of our new accounts are now opened through Liv,” says Mr Sarkar.

Branch rethink

So what does the advent of digital offerings such as Liv mean for a bank’s traditional business model and infrastructure? On the physical side, branch networks across the region are likely to rationalise, along with a fundamental rethink of what branches can and should achieve for customers.

“The role of branches is under scrutiny, so with further anticipated consolidation, digital adoption and increased availability of smart ATMs, the UAE like elsewhere will undergo rationalisation programmes,” says Rick Nugent, executive creative director at Start Middle East, a customer experience design consultancy.

Some regional lenders are now rebranding and rethinking the role their branch networks will play in the future of the business. This trend reflects changing customer preferences for the execution of simple banking transactions. In a survey of 1750 urban respondents across the UAE and Saudi Arabia, conducted in October 2016 by consultancy McKinsey, a clear majority preferred to conduct balance enquiries and money transfer activities on digital channels.

“As a bank we have to consider how we remodel the largest branch network in the country. Branch transactions are dropping between 12% and 15% every year while mobile and online transactions are growing at 30%. The bank branch is now more of a product showroom or a consultation destination. It is no longer a place to conduct transactions,” says Mr Sarkar.

Indeed, when developing new products and services for the branch, most banks now have an eye on the digital future. While this adds to the complexity of launching a new offering, it is likely to save the expense of duplicating efforts for both the branch and the digital space.

“Gulf Bank has a highly automated account-opening process. We aim to open a new customer’s account within 20 minutes from the time they enter the branch, including the issuance of a new ATM card. We have designed this process so that when the time comes for remote first-time account origination, this can be integrated seamlessly with our digital offerings,” says Mr Eliopoulos.

A full-time process improvement office now works to re-engineer Gulf Bank’s internal processes to work with limited human intervention, he says. The drivers behind this are the prospect of being able to securely and remotely identify customers and the need to develop interoperable digital and branch-based banking products and services.

Back-office overhaul

Gulf Bank is not alone in this respect; other lenders are also investing in their back-office systems and processes. For example, Emirates NBD is overhauling its IT platforms for digital readiness and scalability. Its board has committed $270m over the next three years to meet this objective.  

Nevertheless, not all investments in digital banking services, products and processes are being developed with a view to the longer term. One aspect of the digital banking revolution concerns the growth – or in some cases, the redevelopment – of a bank’s brand equity. In concentrated, highly interconnected markets, this requires banks to make waves by announcing themselves as genuine digital banking heavyweights. “Some ideas in the digital banking landscape are designed to act like fireworks. They may not be a long-term innovation but they are important in terms of building your brand equity,” says Mr Eliopoulos.

As banks look to position themselves within key market segments – and in the case of most GCC countries, young, upwardly mobile nationals are the main prize – they are swiftly redefining their brand to match a new digital age. “As with all industries, the huge shift that has and will continue to take place in the way that digital offers products and services to its customers, [including] real-time interaction from any location and from any device, will have a huge impact on brand equity,” says Mr Nugent.

A regulatory perspective

Meanwhile, regulators are also shaping the digital landscape. Gulf Bank, for instance, is keenly watching regulatory developments in Kuwait. “We are watching regulation around first-time account origination closely. This is the moment we are waiting for: the moment you can safely authenticate a customer who is not in front of you,” says Mr Eliopoulos.

“Legal and compliance issues are a key stumbling block to [this kind of] account origination in the region. The banks really have to know who they are dealing with because 'know your customer' is never easy here. Trying to validate a potential customer against watch lists and other databases is challenging,” he adds.

As McKinsey research paper ‘Digital Banking in the Gulf’ suggests, most national regulators across the GCC require personal contact in order to execute certain transactions or to open new bank accounts for the first time. But looking to the wider global market, new options are springing up, the consultancy says. In Germany, for example, lenders can confirm personal identities using video conferencing technology, while in Spain a customer can open an account with any other bank remotely once a first account has been set up in person.

“Banks’ adoption of the latest technologies can be hindered by central bank regulations. However, in such an innovative market like the UAE this is changing rapidly to meet the needs of the consumer,” says Mr Nugent.

Fintech threat

Changing regulatory conditions may also spur greater competition in the wider digital financial services sphere, because developments in digital banking are not the sole preserve of traditional banks. Burgeoning fintech sectors across the GCC could emerge as a threat to the traditional banking model. While most observers concede that today the regional fintech system is relatively small, this may change as the sector receives greater support from public agencies, more funding and a better inflow of qualified workers.

“The real challenge for banks is where they seem themselves in the value chain. The main reason that the value chain hasn’t been disrupted considerably is perhaps due to the current regulatory environment,” says KPMG’s Mr Hameed.

And change could happen quickly. Mr Hameed says the retail banking sector is ripe for disruption and the emergence of new players because in some instances Gulf lenders have not addressed the financial needs of migrant workers across the region.

“It seems as though most of the banks in the UAE are going after the upper and middle tiers of the retail segment. Nobody is going after the country’s large underserved or unbanked population constituted mostly of migrant workers. This is where I see fintech operators filling the void. For traditional banks with large service infrastructure, it may not be cost effective to pursue this particular market segment,” he adds.

By offering basic banking services, such as small loans, money transfer services and deposit-taking, these fintech operators could ultimately scoop a large segment of the retail market, according to Mr Hameed. “Banks generally tend to fall into the trap of complacency. And on the retail segment, it may be a big challenge to compete with other players in the future,” he says.

Changes ahead

Looking ahead, the digital banking revolution is set to deliver a profound change in the ways in which banks in the GCC engage with customers. Not only will this require them to recalibrate existing business structures but it is set to alter existing propositions – especially retail – in unforeseen ways. “Banks are likely to become less visible as they adopt product and service offerings from third parties. In this sense, they would be acting in a similar fashion to an app store,” says Mr Hameed.

In this changing market, lenders across the region will need to move quickly as any gaps in the market could be filled by new and disruptive players in the longer term. The steps being taken by many banks today are encouraging, from the scale of their investments into digital banking to the new products on offer. But with a tech-savvy and demanding retail market to please, this journey is likely to be difficult.

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Read more about:  Digital journeys , Fintech , Middle East