Digital Economy and the Future of Banking

The global economy today is driven by digital-native consumers and the disruptive digital business models of new players. These digital-driven demand-supply forces have drastically changed the banks approach in three key areas: Customer Experience, Collaboration, and Automation.

Customer Experience

Consumers today expect fast, contextually aware, 24×7 services from their banks. Users expect banks to provide user interfaces and service features akin to Facebook, Google, Apple, and Amazon. As Siri, Google Assistant, and Amazon Echo are increasingly becoming part of consumers’ daily lives, conversational, personalized banking experiences are becoming the norm. Leading UAE banks are responding to these trends through initiatives such as digital-only brands targeted at the new generation of consumers and small and medium enterprises (SMEs) –  (such as Emirates NBD’s Liv, E20, Mashreq’s Neo, NeoBiz and others), AI-based chat and conversational bots, biometric sign-in, etc. Rakbank, for example, is using analytics-driven digital marketing to inspire customers through personalized marketing messages, boosting customer wallet share.

Collaboration

As traditional banks rush to embrace the digital economy, they must also contend with fintechs raiding their customer bases in the future. According to a study by Dubai International Financial Center (DIFC)’s FinTech Hive, fintechs are expected to account for 8% of Middle East financial services revenue by 2022. Banks and fintechs may compete for the same customer base, but collaboration is likely to be more advantageous in the long term. The bank-fintech collaboration paradigm is a win-win for both parties – it helps incumbent banks accelerate digital transformation, and fintechs to scale rapidly. Emirates NBD, for example, embraced open banking by providing API sandbox environment in which fintechs can experiment and create real world applications and services. Analyst firm IDC predicts that, by 2025, 40% of banks will have partnered with fintech disruptors via cloud ecosystems to offer real-time payment overlay products that address business and cross-border challenges.

Automation

These demand-supply forces are also compelling banks to become nimbler and to do more with less. Banks are now heavily focusing on increasing operational efficiency and reducing costs, primarily through automation. These initiatives primarily focus on two aspects – branch automation and back office process automation. Dubai-based Mashreq Bank, for example, have been pursuing its strategy to close down half of its branches, and converting existing ones to smart branches that offer video banking, self-service kiosks etc. 97% of the bank’s retail transactions are now originated outside the branch. The bank has also made significant strides in process automation – it has 300 bots performing over 100,000 transactions every day leading to faster processing times and improved accuracy.

Building a Cloud Foundation for the New Banking Paradigm

The experiential, collaborative, and automated banking paradigm needs a cloud-based foundation to scale up, innovate and thrive. Over the last several years, the banks in the UAE have made significant investments in IT infrastructure optimization and are now actively adopting cloud – both private and public, as part of that journey.  Data privacy and regulatory pressures prevent expanded adoption of public cloud and as a result many banks are using public cloud for their non-sensitive workloads within the permissible limits from datacenters based in-country.

Hybrid cloud thus becomes the go-to architecture for banks to thrive in digital economy. It allows banks to move a workload easily between private or public cloud environments whichever is best suited for it, and manage the workloads in a unified, secure manner. It also allows easy access to and experimentation on emerging technologies such as AI/ML and advanced analytics. The easy leveraging of containers and cloud-native tools will benefit banks as they strive to modernize their legacy applications and collaborate in open banking ecosystems. The API banking environments helps banks to experiment with new technologies and innovative use cases, eventually leading these features, applications, and services incorporated into a bank’s core operations. Such open environments thrive on flexibility and scalability, making cloud the preferred deployment model for open banking. Leading banks in UAE such as Emirates NBD, Mashreq Bank, Commercial Bank of Dubai, First Abu Dhabi Bank, Rakbank are now looking to build their digital transformation strategies around a cloud-based IT model.

The Covid-19 pandemic and the drastic changes to customer and operational needs it has unleashed, have already accelerated the pace of digital transformation in the banking industry around the world and in the UAE. Banks that innovate rapidly will gain significant competitive advantage during the current crisis and thrive in the “new normal” that will emerge at the end of the recovery. To thrive in the new economy, banks must accelerate digital transformation through the new experiential, collaborative, and automated banking paradigm built on a cloud-based IT foundation.