The bear oil market has placed significant pressure on the Gulf Cooperation Council (GCC) that in turn, triggered economic diversification away from oil. In this current market, GCC banks are in need of finding new ways to compete for growth.

In recent years, GCC banks went through the ‘Digital Banking 1.0’ phase in which they introduced internet and mobile banking platforms. These platforms served their original intended purpose of being alternative service channels. However, these platforms are now struggling to keep up with elevated customer expectations such as branchless experience and full end-to-end digital solutions, according to EY research.

The GCC has one of the youngest tech-savvy populations in the world. This, coupled with the increasing use of cards/cashless transactions and one of the highest mobile penetration rates globally at c. 70 per cent, means that moving to a new phase of digital banking is imperative. ‘Digital Banking 2.0’ is the next step for GCC banks: a new chapter for the industry in which fintechs and digital banks collaborate to create a more integrated approach to banking.

A number of GCC banks have announced or plan to introduce digital banks. While these digital banks will certainly shift the banking landscape, they remain confined within the ‘control’ of their incubator banks. Fintech disruption is slowly ramping up in the GCC (c. 40 fintechs) and has the potential to change the industry. Regulators, on the other hand, will aim to promote ‘safe’ Digital Banking 2.0 and alleviate two major concerns: money laundering/terrorism financing and cybersecurity. As the paradigm starts to shift, how should banks and regulators embrace disruption?

To future-proof their business, GCC banks should not digitise their current traditional models. GCC banks in 2030 will have to completely rethink their operating model to stay relevant to their customer base. Future GCC banks should become more vertically integrated and open platform collaborative businesses. In this model, banks link banking clients with fintechs, telcos and retailers (e.g. Noon platform). Using these platforms, banks can collaborate with fintechs across the value chain as it relates to seamless customer experience, boost SME lending, introduce social trading, behavioural risk management services (e.g. Lendoo), and efficient payment infrastructure (e.g. cryptocurrency). In a branchless environment, the 2030 GCC banking landscape will operate a relatively asset-light and analytics-intensive model. Their infrastructure will be centred on cloud based artificial intelligence and robotics.

 

Innovation parks for banks pave the road ahead

 

Most GCC banks, according to EY research, have fragmented responses to digital and fintechs. They cite that the major hurdles for their digital journeys are their technical capability and organisational agility. To succeed, boards and senior management of GCC banks should start investing in innovation parks, whose mandate would be to design a bank’s unique version of the ‘2030 GCC bank’ and identify new ways to add value to their stakeholders. Innovation parks unlock ideas that are typically present in the disrupters within the organisation who are usually characterised by being overzealous within a more traditional leadership environment. Innovation parks should be supported by a governance structure that promotes a culture of rapid and pragmatic experimentation in a safe yet innovative environment.

Their operating model is mainly characterised by three layers: business as usual sprints (minor enhancements to the status quo), incremental (step change in the status quo) and the fast lane (the game changers). They are operated by a diverse skill set (including non-banking capabilities) and exchange experiences with other industries. Such parks should evolve to become platforms to identify relevant fintechs to invest in and collaborate with as well. These innovation parks would enable banks to create the future of GCC banking.

Regulators should drive innovation too

GCC banks cannot revolutionise their business alone. They need to collaborate with regulators to bring new ideas to their markets and promote safe innovation.

Global regulators have already embarked on a journey to embrace disruption. For example, the UK created innovation sandboxes to foster innovation. Regionally, ADGM introduced a similar sandbox as well.

According to EY research, fintechs thrive on a strong-knit ecosystem built around policy, talent, capital, and demand. Investments in fintech globally reached c. USD 50 Bn in value and the GCC share of this investment is negligible. Fintechs present an opportunity for regulators to enhance venture capital (VC) and private equity (PE) capital inflow into the region and transform the GCC financial services landscape to become a VC/PE Centre between East and West.

 

Embrace change to stay relevant

 

The GCC financial services landscape is on the cusp of a major digital transformation journey. Banks cannot maintain a ‘business as usual’ attitude to the next phase of digital innovation and regulators should collaborate with banks in parallel to update their regulatory approach according to the imminent needs of this new phase. Both banks and regulators need to embrace change to stay relevant to their customers and other stakeholders which will eventually support overall economic growth in the ‘new normal’ of a less dependent hydrocarbon economy. If the new phase of digital banking is implemented correctly, it could be an industry game changer and banks could return to double-digit growth.

 

— Houssam Itani, Partner, Financial Services Advisory, EY