Digitisation in the GCC: Will established FIs choose to disrupt or be disrupted?

The Gulf Cooperation Council (GCC) region is well known for combining tradition and innovation in the payments space. On one hand, there is a high population of young tech-savvy digital natives with one of the highest smartphone penetration rates in the world, and on the other, there are payment behaviours driven by culture, with a heavy propensity towards cash.

In recent years, there has been a seismic shift towards digital payments driven by socio-cultural factors, changing consumer preferences and government initiatives that encourage both innovation and competition. In this era of market transformation, cash is no longer king, or at least it won’t be for long. Those that come out on top will be the FIs that reimagine and overhaul their digitisation strategies and subsequently adapt to ensure both relevancy and market share.

Whilst traditional banks still dominate in the market, governmental bodies across the region are working to actively advance digital transformation in order to position the GCC as a global fintech hub. Consequently, neobanks and other financial disruptors are making significant headway and becoming serious competition in a financial services landscape that, just a few short years ago, was deemed very conservative and averse to change.

Prior to this accelerated digital revolution, traditional banks were not standing still and were making inroads into this space. Over the years, established FIs have been building out their products and services in order to offer them online via websites and apps in parallel with increased internet access and smartphone penetration. However, digitising existing services as an extended offering and building digital-first, mobile-first products and services from scratch are two very different approaches with differing outcomes.

Traditional banking products and services developed in a pre-internet, pre-smartphone era, were built around the constraints of the available technology, rather than being enabled by it. As such, these systems were built with cards at the front and centre as the sole payment method, and FIs still running their businesses on these architectures find themselves left at a disadvantage whereby they are unable to natively represent the objects and functions of the modern payments world. Unencumbered by these constraints, fintechs and neobanks have entered the GCC, bringing exciting new products and services to market, serving previously underserved market segments and ultimately opening up new revenue streams. Without all the disadvantages of legacy technology, processes, and mindsets, these new entrants are in a position where they can easily adapt to changing and wide-ranging consumer preferences in an agile and more accessible way. As the shift to online services accelerates, the playing field between traditional and digital banks is levelling up.

Across the GCC, digital banking is becoming ingrained as part of everyday life with millions of consumers jumping onto the digital bandwagon over the last 12 months. There are currently 25 neobanks serving 25 million people in the region which is only set to increase. A recent study by McKinsey found that over 50% of consumers in this geography are willing to hold their main account with a purely digital bank, whilst 80% were willing to shift a portion of their holdings to the bank with the most compelling digital-only proposition.

To compete, traditional banks must work hard to evolve. Embracing digital transformation as part of a wider business strategy that addresses long-term ROI and encompasses business, operations and technology is a herculean task. In a bid to get ahead of the game, several well-established FIs have built symbiotic digital equivalents, such as Neo by Mashreq Bank and ila from Bank ABC. These entities are extending their parent bank offerings with minimal levels of independence in terms of strategy and development. Other institutions are partnering with, and in some circumstances, acquiring fintechs for newer functionality and often forming innovation labs.

The danger here is that system modernisation is not a simple revenue-generating plug-in. Innovation labs are often run as separate parts of the business and can quickly become unintentional silos that lack cohesion with the overarching strategic requirements of the bank as a whole. Whilst there is a very prominent trend to partner with as many service providers as possible to quickly navigate the market and offer a robust package of financial products, this business growth cannot be carried out opportunistically. Instead, change needs to be driven by a carefully constructed strategy with a future-proof vision in order to evaluate longevity of the proposition. If unchecked, such enthusiastic expansions can exacerbate complexity; whereby the bank becomes a systems integrator at the mercy of its vendors, rather than the owner of its value-chain.

Fintech disruptors with digitisation built into their very DNA can easily adapt to changing and wide-ranging consumer preferences, due to the underlying platform architectures they are built on. In order to compete, banks need to carry out extensive impact analysis, whether to integrate, buy, build, outsource, replace, or upgrade parts or all their business in order to create an integrated payments hub with a single customer view. Digitisation from the ground up can initially appear more daunting, expensive, time-consuming and risky the more established the bank, but this doesn’t have to be the case.

Investing into the future of the business is about long-term value creation, whether streamlining operational costs, establishing vendor-independence, speeding up bringing new products and services to market, ensuring regulation and compliance, reducing service delivery costs or increasing performance, flexibility, scalability and future-readiness. Many concerns and fears can be alleviated by partnering with a vendor that can offer flexible pricing, various migration options and deployment models to suit an FIs requirements now and well into the future.

Truly effective long-term transformation ultimately comes down to the underlying technology with legacy infrastructure rails only hindering progress. In an instant payments world, can FIs in the Middle East continue to run on payments platforms that are card-centric? In an Open Banking world, can systems afford not to be architected as API-first? In a real-time payments world, can batch-oriented systems go the distance? And, in an agile and integrated payments ecosystem, can FIs compete to remain relevant on antiquated technologies?

Complex legacy system architectures equate to limited manoeuvrability, scalability and system responsiveness which becomes a huge burden in an increasingly future-focused ecosystem swiftly filling up with newer more agile payments players. These modern disruptors offer immediacy and transparency, 24/7 availability, instant access, and above all, the convenience of personalised customer experiences.

As the appetite for all things digital increases to include everything cashless from banking to e-commerce, encompassing digital wallets, P2P transfers and everything in between, banks in the GCC need to expedite their digital transformation strategies and take advantage of their already established customer bases, consumer trust and loyalty. By moving towards a more holistic, customer-centric approach built on serving, rather than providing, banks can become digital enablers with comprehensive, intuitive and inclusive product and service offerings for businesses and consumers alike. As a one-stop shop, or financial supermarket, traditional FIs in the GCC have the breadth of experience to blow fintech disruptors out of the water and position themselves at the forefront of the modern, digital payments landscape.