Dubai: The financial technology (fintech) revolution that is sweeping across the banking and financial services industry across the world is likely to disrupt the retail banking business in the GCC while the overall impact on balance sheets and bank ratings is going to be minimal in the near future, according to rating agency Standard & Poor’s (S&P).
“Technological innovation in the financial sector is a global trend, reaching developed and developing economies alike. We believe that fintech could reduce the profitability of some business lines of GCC banks and change the way they operate over time.
"While we don’t expect major disruption of lending activity in the GCC,” said S&P Global Ratings credit analyst Mohammad Damak.
S&P analysts believe that fintech could impact retail banking, particularly money transfer and foreign-currency exchange business. This would push some banks to adjust their operations through increased digitalisation, branch network reduction, and staff rationalisation. 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 the balance sheet and regulation, in the case of payments, business is balance sheet-light and regulations are relatively lower, attracting most innovators to this segment.
In lending and savings, the impact of disruption has been slower compared to payments. S&P analysts don’t expect fintech alone to have a significant bearing on our GCC bank ratings in the foreseeable future. On average, banks in the GCC are still very profitable and efficient by global standards.
“We think that some banks are starting to realise the extent of the threats and opportunities that fintech poses, and are putting in place measures to adjust to the new realities of their operating environment,” said Damak.
As corporate lending constitutes a major portion of the loan books of GCC banks, analysts believe the impact of fintech on overall profitability of banks are going to be muted.
Corporate lending remains relationship-based and the human added-value remains significant in the GCC, from corporate relationship managers all the way up to decision makers.
“While we acknowledge that fintech might help enhance the efficiency of some of these operations, we don’t think they will be significantly disrupted in the next few years,” said Damak.
Analysts expect fintech to affect GCC banks’ profitability, but not across all business lines. In 2016, the GCC banks generated around one-quarter of their revenues from fees and commission and foreign-exchange gains. The latter contributed around 6 per cent of rated GCC banks’ operating revenues over the same period. While a significant portion of these revenues relates to lending and advisory activity, part of it also relates to money transfer and currency exchange.
GCC countries remain net exporters of capital. Their small populations and significant investments and economic development have brought about a significant need to import qualified and unqualified workforces. As a result, the populations of most GCC countries are dominated by expatriates. According to the World Bank, these expatriates sent $102.5 billion (Dh376 billion) back to their home countries in 2016. Fintech could also disrupt the payment industry as it would reduce costs for end users because of the reduction in the number of participants. GCC banks only started to realise the potential risks and opportunities from the development of fintech recently.
According to EY’s GCC Fintech Play 2017 report, only 42 per cent of GCC banks that participated in EY’s survey were familiar (fairly familiar or more) with the fintech industry, while 93 per cent of GCC banks doubted that fintech players could disrupt their businesses in the short term.
In the same survey, 86 per cent of GCC banks estimated that no more than 15 per cent of banks’ business could be lost to fintech in the next five years, believing fund transfer and brokerage to be the main business lines most likely to be disrupted.
“In our view, the sooner GCC banks understand fintech’s potential threats, the better they will be able to implement defensive measures or develop collaborative strategies with new fintech players.
"Collaboration could take the form of partnering with some fintech companies for specific services, for example, allowing fintech companies to use the banking system infrastructure for clearing and settlement operations,” Damak said.
Defensive measures would primarily take the form of strengthening mobile banking services, rationalising branch networks, and refocusing staff on value-added services rather than repetitive and less-profitable operations.
Role of regulators
The role of regulators and authorities lies between protecting banks and seizing opportunities.
Clearly, regulators in the GCC are looking closely at fintech, not only from a perspective of financial stability, but also from one of collaboration.
Fintech Hive in the Dubai International Financial Centre (DIFC), and the regulatory “sandboxes” set up by the Dubai Financial Services Authority (DFSA), with similar initiatives in Abu Dhabi and Bahrain, are examples of how regulators are approaching the fintech industry.
While Fintech Hive helps fintech companies benefit from collaborations with top executives at the DIFC over a 12-week accelerator programme, the regulatory sandboxes allow fintech companies to test their innovations in the real market in a restricted regulatory environment.
In Dubai, the DFSA launched its regulatory framework for loan- and investment-based crowdfunding platforms earlier this year, and it has licensed one company for peer-to-peer lending and another for equity-based crowdfunding.
What is Fintech?
Fintech is a collection of financial technology that describes an emerging financial services sector in the 21st century.
Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. The term has since expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.