Financial institutions in the Gulf Cooperation Council (GCC) are fast catching up with the latest technologies in retail banking as pressure mounts from customers for better service delivery, according to ratings agency S&P Global.
“The adoption of big data, artificial intelligence analytics, as well as voice and facial recognition tools could enable a more effective and cost efficient provision of customer (banking) services,” S&P Global said in a new note.
It said a shake-up in banks' operations due to technology was much more likely to come from changing customer preferences than from regulatory pressures.
“Regulatory risk is low because policymakers are conscious of the extreme importance of local banking systems in the region and the need to keep them safe from potentially disruptive unregulated competition,” said Mohamed Damak, S&P Global Ratings credit analyst.
Even if customers' preferences continue to evolve, risks to banking systems remain low for at least next two years, said Mr Damak, adding, “This is because regulators continue to protect them (banks) and the share of current activity at risk is small.”
Some of the areas of banking most impacted by technological change include money transfer, foreign currency exchange and payment services.
Financial technology (FinTech) companies, which focus on lowering transfer fees and reducing transfer times, could significantly disrupt the money transfer operations of banks and exchange houses in the GCC, added S&P.
In 2017, expats in GCC nations sent over $119.3 billion (Dh429bn) back to their home countries, with India, Pakistan, Egypt and the Philippines the main destinations, according to World Bank figures.
The region's young and fast-growing population, who are more familiar with new technologies, are the main drivers for digital services in retail banking. About 40 per cent of the GCC population is under 30, which creates significant demand for digital financial operations, according to the Statistical Centre for the Cooperation Council for the Arab Countries of the Gulf.
“Some banks, such as Dubai-based Mashreqbank, have sought to capture this market by launching neobanks - 100 per cent digital banks - and we think more will follow,” noted S&P.
Online banking penetration also remains significant in the GCC. In Saudi Arabia, National Commercial Bank saw 36.6 per cent of financial transactions executed online or through its mobile application by the end of last year.
“Online banking penetration has reached 92 per cent in the UAE banks and 85 per cent in Saudi banks,” said S&P, citing McKinsey figures, adding that the shifting of transactions online from branches is “high on the agenda” of some banks.
In the UAE, the number of bank branches have been declining since December 2014, said S&P, suggesting that banks have managed to migrate some transactions to alternative channels. The UAE Banks' Federation's 2018 annual report published last week showed bank branch numbers in the country last year fell by 31 to 823.
Authorities and regulators in the GCC are also encouraging collaboration with FinTech companies, with many setting up 'sandbox' regimes allowing FinTechs to try out technologies within a flexible regulatory environment.
The UAE tops the list of countries with the highest number of FinTech start-ups in the region with 67, according to Bloomberg Intelligence, followed by Turkey at 44 and Jordan and Lebanon tying at 30.