Banks in the Middle East are expected to face unprecedented challenges as digital giants begin to turn their attention to the banking sector, according to a new report by global management consultancy Boston Consulting Group (BCG).

The report, titled “Banks Brace for a New Wave of Digital Disruption”, urges banks to reassess their digital capabilities and competitive agendas as shifts in market share and the rise of digital giants threatens the conventional workings of the sector over the next decade.

BCG’s research highlights that banks are at the risk of being disintermediated by tech giants in key areas of their business, and this is a prevalent concern in the Middle East today. In the short to medium term, banks in the region are likely to be impacted by innovative tech drive financial solutions such as Alipay or usage of WhatsApp messaging in the financial sector, which will in turn threaten the core revenue streams of banks.

“Many banks in the Middle East today tend to approach digital transformation with what can best be described as a patchwork, incrementalist approach,” said Godfrey Sullivan, managing director & partner at BCG Middle East.

“The increasingly digitalized landscape of the banking sector and looming threat of the digital giants entering the sector calls for banks in the region to adopt a much more comprehensive digital transformation agenda,” added Sullivan.

The report examines what banks must do now to position themselves optimally for the future. BCG says that banks need to start acting like digital giants before digital giants act like banks. Successfully achieving this holistic transformation will require coordinated efforts across multiple interlinked elements of the bank as well as mandatory action steps.

These imperatives are: drive to scale; digitize end-to-end customer journeys; leverage big data, analytics, and AI; pursue partnerships to increase capabilities and scale; adopt new ways of working; attract and retain digital talent; simplify technology and data infrastructure; and enhance cybersecurity resilience.

“Complacency of bank leaders to embrace end-to-end digitization in the short-to-medium term could be detrimental to long-term success,” added Sullivan. “Scale will be a particularly important component of success in the region. The winners will be those players who both willing and able to make the investments needed to succeed in much more holistic digital transformation efforts”

The report also explains BCG’s recommended action steps for banks in detail.

Drive to scale. Scale—sheer size—which allows for operating at lower unit costs, has always been a source of competitive advantage for banks. Today, however, scale is more important than ever before: it gives banks a much greater ability to invest in marketing and technology. Perhaps most critically, scale today means larger customer bases and more data. These are huge sources of advantage.

Digitize end-to-end customer journeys. Banking products and services are notoriously friction filled and tedious, entangling customers in the machinery of the banks’ legal and risk policies, P&L structures, and legacy IT systems. Although most banks have started to redesign end-to-end customer journeys—precisely to eliminate these pain points and identify better pathways—they must work to overcome the snags inevitably presented by bank operating models, processes, and product silos.

Leverage big data, analytics, and AI. This is the Holy Grail—the use of data and analytics to make banking easier and more personalized for customers, as well as more profitable for banks. When combined with big data, AI can, much earlier than traditional methods, help banks identify customers who might leave for another bank—in many cases, before the customer even realizes that he or she is unhappy.

Pursue partnerships to increase capabilities and scale. For the things they cannot do well on their own, banks must develop a partnership strategy. Many banks have already entered into accords with fintechs, generally by making minority investments. Another possibility is to partner with one of the digital giants directly. This may seem like a risky move, but for a bank with a unique attribute or capability that a digital giant might covet, there could be a negotiation of peers—and a successful partnership.  

Adopt new ways of working. Most banks haven’t fundamentally changed the way they approach their work in decades. This is certainly true in software development. Sequential “waterfall” methods, misalignment of business and technology organizations, and emphasis on product features over customer benefits often produce disappointing results. Banks need to rethink this aspect of their work. In particular, they would do well to move to agile approaches.

Attract and retain digital talent. Even the largest banks, those with the most ample resources, have struggled to recruit and retain the talent they need to compete in a digital age. Although some IT workers currently working in banks may be able to develop the needed skills through dedicated training and coaching, this is also an area in which it will make sense to partner with, or even acquire, high-calibre fintechs or boutique engineering firms.

Simplify technology and data infrastructure. Having the right technology and data infrastructure is a prerequisite to digital transformation. To provide the digital experience that customers expect, banks will need to aggressively adopt the technology paradigms of digitally native companies. This can happen only if banks drop the vertically integrated legacy technology stacks that they’re using today and opt for horizontally layered, platform-based technologies.

Ensure cybersecurity resilience. This is a condition not only for succeeding in a digital age, but also for surviving it. All of the good things that banks are trying to do with the help of digital technology—create step changes in convenience, turn their customers into advocates, and operate more efficiently—can be undone by security breaches. A best practice for banks’ chief risk officers is to identify best-of-breed providers and to form strategic partnerships with promising fintechs and “risktechs.” – TradeArabia News Service