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How technology will change the banking industry

Dubai - Technological innovation will benefit bank customers and money remitters with reduced service costs, but will impact the profitability of banks by slashing money transfer fees and commissions

The fast-paced technological innovation in the GCC financial sector will benefit bank customers and money remitters with reduced service costs, but will impact the profitability of the region's banks by slashing money transfer fees and commissions, analysts said. For the banks that normally generate around one-quarter of their revenues from fees and commission and foreign-exchange gains - particularly from transfer fees involving more than $102 billion in outward remittances made by the GCC expatriate population - fintech revolution will have major impact on their profitability, analysts at S&P Global Ratings said.
The ratings agency said fintech would change the way banks operate over time. "While we don't expect major disruption of lending activity in the GCC, which remains concentrated on the corporate sector and by individual corporate borrowers, we think that fintech could impinge on retail banking, particularly money transfer and foreign-currency exchange," said Mohamed Damak, S&P's Primary Credit Analyst.
As a result, some banks will have to adjust their operations through increased digitalisation, branch network reduction, and staff rationalisation, he said.
Fintech companies focus on lowering transfer fees and reducing transfer time. "In our view, fintech could disrupt GCC banks' money transfer operations. The World Bank estimated the global average transfer cost at a hefty 7.2 per cent in the third quarter of 2017 (for a transfer of $200, the global weighted average was estimated at 5.5 per cent)," Damak said in a report titled "The Future Of Banking: Could Fintech Disrupt Gulf Cooperation Council Banks' Business Models?"
"Technological innovation in the financial sector is a global trend, reaching developed and developing economies alike," said Damak, adding that fintech alone will not have a significant influence on S&P's GCC banks ratings in the next two years.
"That's because we consider that banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures."
Damak said 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.
Ian Johnston, chief executive of the Dubai Financial Services Authority (DFSA), said the authority's fintech regime is developed to enhance and improve access to finance and the efficiency of markets.
"Our fintech regime is developed to enhance and improve access to finance and the efficiency of markets. We also want to encourage innovative financial services and solutions," Johnston recently said after signing an agreement with Securities Commission Malaysia to cooperate in the development of financial technology.
"Fintech companies and banking institutions can be seen as complimentary, and should work hand in hand. Although there are times when both are seen competing to own customer relationships, working together they can provide modernised and harmonised services for consumers," said Habib Hanna, managing director, Diebold Nixdorf Middle East.
The main differentiation between the two in the region today is their regulatory frameworks. For fintech companies to progress in the region, the proper regulatory frameworks need to be developed, said Hanna.
While fintech will increasingly become a force to be reckoned with, its eventual impact on bank ratings will depend not only on how banks respond to the new competition and the particular vulnerabilities of their business models, said Damak.
According to EY's GCC FinTech Play 2017 report, only 42 per cent of GCC banks that participated in EY's survey were familiar 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.
- issacjohn@khaleejtimes.com