Finance Monthly March 2020 Edition

The current low-interest-rate environment not only threatens traditional business models in financial services but also serves to push the emergence of FinTech companies as direct challengers to financial institutions. They are fueled by cheap money seeking return and the substantial efforts of governments to attract new industries in their bid for economic diversification and development. FinTechs are interesting not only because they seek to innovate, but also because they have a different risk profile: where established players need to get their digital strategy right in order to not jeopardise existing business and employment, FinTechs can take a stab at one specific problem time and again. In the worst case, they go out of business when they run out of capital. The founders then have the choice to pivot and take another stab at the problem with a new company – so long as they manage to continue raising funding. Fail fast approach to innovation is now becoming a norm and many corporates are in the early stages of figuring out how to embed this in their own organisations. As the popularity of FinTech in the region increases, banks are no longer bound to innovate internally. Instead, they may carry out the process through partnerships with the startups. Currently, the choice between organic innovation and partnership stands as a crucial decision that could have a significant impact on the outcome of substantial effort and investment. Therefore, firms must be cautious about the advantages and disadvantages of each option before making a decision. How has digitalisation affected the banking and finance industry in the Middle East? Digitalisation has a substantial impact on the financial services industry in the Middle East. Just think of three key developments: drive towards simplicity, development of best-of-breed partnerships and the innovation strides of regulators. Moving from complexity towards simplicity is prevalent in many industries. In the automotive industry, the combination of internal combustion engines and fuel is being replaced by a combination of electric motors and battery packs. The key to optimising electric motors and batteries is in the software that manages the systems, hence, Tesla’s ability to improve performance over-night through software updates. Similarly, the financial services industry is increasingly making use of flexible, lighter cores that are complemented by a variety of other systems – held together by software that connects and makes sense of the data. There are a number of providers of such new forms of interaction such as chatbots, facilities to conduct business online (e.g. insurance renewal) and financial planning tools such as mortgage calculators. In addition, some financial institutions have started replacing their legacy core systems, ranging from full replacement of the core system to light-core system and middleware connected by a host of API-linked systems. Digitalisation is a topic that continues to occupy substantial mind-share with financial services executives on transformation projects and as a strategic challenge to their market positioning. What is happening beyond the existing financial services players? Digitalisation also allows players from outside the financial services space to make inroads into banking and insurance, often leveraging highly developed customer insights. One example in this regard is telecom providers moving into financial services in a bid to broaden their traditional offerings. They leverage extensive information about customers for businesses such as micro-lending, crowdfunding, credit scoring and others. Other players in highly customer-centric industries are considering similar models – retailers are a good example. FINANCIAL INNOVATION & FINTECH - DIGITALISATION 41 www.finance-monthly.com