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A new generation of technology startups has taken aim at the heart of the banking industry. Worldwide investment in disruptive financial technology (fintech) is increasing year-on-year – it reached £8.7bn in 2015, according to Innovate Finance.
Alternative financial platforms, such as crowdfunding sites and peer-to-peer lending, have become the norm in the world’s fintech hotspots, such as the UK, US, China and Southeast Asia. But this global trend has yet to infiltrate the Middle East, according to experts.
The latest report from FinTech Week stated that less than 0.1% of fintech investment originates in the Middle East. “Consequently, the region’s banks and fintech startups are lagging behind their foreign counterparts in the development of new services and business models,” said David Martinez de Lecea, a principal at Roland Berger.
However, as regional governments push to become knowledge economies in the coming years, the global fintech gap is likely to close. De Lecea said the current gap represented a major opportunity for local banks to embark on the fintech journey with the benefit of hindsight.
“By analysing and replicating proven ideas, UAE [United Arab Emirates] banks can become first-followers and very quickly revolutionise the way financial services are provided in this country,” said de Lecea. “If all parties, such as banks, regulators, technology providers and customers, align, the UAE banking sector could be seriously transformed very soon.”
He said more UAE banks were “waking up to fintech”, and regulators, such as the Financial Services Regulatory Authority of Abu Dhabi Global Market with its RegLab initiative, were accelerating the trend by easing entry for new players.
David Martinez de Lecea, Roland Berger
The region has also seen a smattering of crowdfunding players come to market and attract finance from venture capitalists, including Dubai-based Eureeca, Beirut-based Zoomaal and Cairo-founded Sharia investment site Shekra.
In May 2016, financial software provider FIS held its industry-shaping Fintech 2020 Dubai event and cast a live poll to glean insight from the audience. According to an FIS spokesperson, 30% of the 150 financial services directors questioned said they would increase investments in disruptive technologies and companies, while the majority of attendees agreed mobile and wearable technologies and multi-asset trading technologies were the most compelling advancements to their business.
Banks need a digital push
Wissam Khoury, FIS managing director for Middle East and Africa, said the region had much to gain from the take-up of fintech.
“We have lots of room to grow our banking industry through fintech. This could include new ways to attract funding and of dealing with SMEs. It could also include expanding the banking community via financial inclusion, through gender, with more focus on including women, or through income levels, with innovative payment and remittance solutions using social media.”
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Khoury said local banks needed to embrace fintech and start building a plan to capitalise on new technology developments, rather than trying to compete with them.
He said they have the opportunity to be pioneers by either investing directly in promising fintech companies or by partnering with selected fintech-focused suppliers: “A ‘wait and see’ approach is not an option. There is no room for laggards in disruptive technology – those who invest first will reap the benefits.”
Wissam Khoury, FIS
Dominique C Corradi, Mena digital financial services advisory leader at EY, agreed that regional banks were “late” with digital innovation and much more has to be done to bring them in line with their more progressive global peers.
“Retail banks have started to jump on the mobile bandwagon, but services are still basic and do not provide the level of convenience requested by users, [so they] still have a low level of adoption,” he said.
“On the corporate side, the innovators are shy, and do not often go beyond mainstream technologies, such as document imaging. This does not match their customer demands, which have developed at an accelerated pace in the aftermath of the crisis,” said Corradi.
Local banks should become digital by design, he said, to create a strong platform to develop further digital assets, such as customer journeys, personas and digital products.
No digital quick fix
De Lecea said it would be a mistake for banks simply to view fintech as just another IT improvement project. “Digital is the new paradigm, and UAE banks need to transform end-to-end to develop competitive advantage in this new reality. Responding to fintech requires a transformational commitment, not a quick fix,” he said.
He warned that once regulators allowed the introduction of fintech products, the technology gap between traditional banks and fintech specialists would instantly widen.
But Jebin George, senior research analyst, industry solutions, Middle East and Africa, at IDC, said traditional players were still managing to maintain ground in the region, owing to local conservative attitudes to banking. He explained that some Middle Eastern customers were still reluctant to trust their money with an organisation that doesn’t have a physical presence.
This statement contrasts to the western banking landscape, where thousands of physical branches have closed in the past decade.
David Martinez de Lecea, Roland Berger
“The Middle East is different in this case. People still like to go to branches for transactions, even e-commerce is getting a lukewarm reception in the region compared to the rest of the world,” said George. “However, CIOs in the region are realising that big investments in branch banking may not yield the expected results in the long term. Currently, banks in the Middle East are investing in online and mobile channels to complement their traditional model, but soon these new channels will become the primary mode of interaction.”
In the UAE, in particular, which is already over-banked with more than 50 lenders servicing a population of about nine million, keeping customers happy in such a competitive landscape will become paramount.
V. Chandrasekar, regional CIO for Africa and Middle East at Standard Chartered, said the emerging markets-focused bank was investing in setting up fintech incubators across markets such as Dubai and Singapore to stay abreast of trends.
“Technologies such as bitcoin are being regulated. Once they are, they will be available for organisations to use, so the adoption of technology will happen over time,” said Chandrasekar.
“Fundamentally, we can bring the science of banking. If fintech can bring in the latest and fast-moving technologies, it’s a good combination and we can partner to serve customers. This partnership will be complementary.”