It’s sink or swim for payments business model as fintech wave comes crashing

Dubai: The retail banking and payments business model is at the immediate receiving end of technology disruption caused by Financial Technology (fintech), leaving banks with very little choice — digitise or die.

“Virtually every bank and financial services institution in the GCC is either undertaking or planning a digital transformation,” said Farhan Syed, partner, Management Consulting at KPMG. “Digital is on the agenda for every executive and every board. While no bank is questioning the value of digital, very few banks so far have been able to unlock its full value.”

Conventional banking’s value chain essentially involves functions such as taking savings, providing loans and facilitating payments. In this value chain, at the most risk of disruption is the payments business model because it is the least capital intensive and most tech intensive.

While savings and lending involve keeping an eye on the balance sheet and relevant regulations, in the case of payments, that portion on a bank’s business is balance sheet-light and regulations are relatively lower, attracting most innovators to this segment.

Entry fintech companies are expected to squeeze the margins further in business such as payments, money transfer and remittance business but the adoption of digital delivery channels has brought down the costs.

“What fintech has brought is an increased level of competition. If you look at our industry especially in this region as we know competition has not been something new and it has been extremely good for customers from a pricing perspective. The competition has made all players to adapt to new market realities and deliver solutions cheaper,” said Promoth Manghat, chief executive officer of UAE Exchange.

Despite the perceived threat of fintech companies experts say banks are likely to remain relevant as most of the fintech companies still rely on existing banking infrastructure. But banks are at risk of being disintermediated from some customers and becoming commoditised infrastructure providers.

Digital banking works well in societies where there is very high level of digitisation and connectivity. Experts say banks in very urbanised markets such as the UAE, which has very elevated high-tech penetration, have huge opportunities grow and retain business through technology adoption.