Finance Monthly March 2020 Edition

ownership and usage of customer data, level playing fields, channels to the customer and many more. Will banking and insurance truly become open, or will the incumbents create artificial barriers to protect their data? Many a new business model is hidden in the answers to these questions. In what ways have regulatory pressures and the low/zero-interest- rate environment in the Middle East affected the financial services sector? A low-interest future poses major challenges for central banks around the world. Their initial measures to reverse negative interest rates were heavily criticised and more recent interventions, suchas a graduated interest rate (introduced for example by the ECB), indicate that monetary remedies are reaching their limit. The low-interest environment changes the dynamics of the game at two levels – the first one is the traditional business and revenue model in the financial services space as it is based on interest (or a profit markup in Islamic Finance that is at least loosely oriented on interest). On the second level, low-interest rates lead to a diversion of substantial funds into more risky asset classes such as early-stage funding and venture capital, which in turn fuels a growing number of challengers in the banking, insurance and asset management sectors. As a result, low-interest rates endanger the profitability of the incumbents and prop-up their competitors of tomorrow. Regulation, on the other hand, is here to stay, albeit likely in a different shape. Mis-selling of financial products, the protection of consumer interests and rights (especially in a world where the product cycle is faster), the stability of the overall financial system and other dimensions warrant continued scrutiny by the regulators. Regulators will continue to focus on stability (capital adequacy, illiquidity, etc.), security (AML, Sanctions, Cyber, etc) and financial inclusion. Technology and digitalisation also allow regulators to become faster and more focused themselves. This may lead to the current approach of creating relatively comprehensive licenses with extensive compliance and reporting requirements being replaced with a more nimble “a la carte”-approach for regulation. The regulatory sandboxes are the first step in that direction. To fully enable and support digital transformation, regulators will have to think about creating larger markets than the ones in existence today. This may require solutions such as passporting of financial services, a realisation amongst players that their individual positions are untenable and therefore they have to find (institutionalised) partners incl. markets in the Middle East are often comparably small in terms of the addressable market. In addition, some are (over-)saturated with financial services players and therefore faced with strong competition. This combination of small scale and often fierce competition limits individual companies’ ability to justify the required substantial investments into new technologies and innovation. The obvious solution of consolidation has been on the cards for over a decade now – but it yet has to happen at scale. As an alternative option, some players are already considering pooling and partnering as viable options to enable themselves to utilise technology, e.g., across the value chain in insurance to enhance the customer experience. Can you give a specific example? Open Banking is an interesting example because regulation is forcing banks to share data with not just other banks but any unaffiliated businesses looking for that data. This data portability has created several innovative business models like DAPI (a UAE born company), the first financial API in MENA that lets FinTech apps leverage open banking by initiating payments and accessing real-time banking data. But that is just the beginning, Open Banking will fundamentally change the landscape of banking and insurance. Yet, this will raise an entirely new set of questions around FINANCIAL INNOVATION & FINTECH - DIGITALISATION 44 www.finance-monthly.com