DOHA: The main risk of technological disruption for retail banks in the Gulf Cooperation Council (GCC) is changes in customer preference, S&P Global Ratings said yesterday in a report on ‘Tech disruption in retail banking’.
“This is the conclusion we drew from our four-factor analysis of a banking system’s technology, regulation, industry, and preferences (TRIP), which we are incorporating in our ratings on banks in the region. 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. Technology and industry structure present a moderate risk of disruption,” said S&P Global Ratings credit analyst Mohamed Damak.
The digitalization of GCC economies is still a work in progress. The adoption of big data, artificial intelligence (AI) analytics, as well as voice and facial recognitions tools, could enable a more effective and cost efficient provision of customer services. S&P expects some GCC bank business lines to remain protected from fintech in the medium term. These lines include corporate lending, where human added-value remains significant in the region. “Therefore, even if customers’ preferences continue to evolve, we think that risks to these banking systems remain contained, at least in the next two years. This is because regulators continue to protect them and the share of current activity at risk is small,” Damak added.
In 2018, the GCC banks that S&P Global rate generated about 20 percent of their revenue from fees and commissions and foreign exchange gains. The latter contributed about 5 percent of rated GCC banks’ operating revenue over the same period. Although we understand that a significant portion of this revenue involves lending and advisory activity, part of it also comes from payment services, money transfers, and currency exchange.
GCC countries remain net exporters of capital. Their small populations, significant investments, and economic development have brought about a significant need to import skilled and semi-skilled staff. As a result, the populations of most GCC countries are dominated by expatriates (blue- and white-collar workers). According to the World Bank, these expatriates sent $119.3bn back to their home countries in 2017, with India, Pakistan, Egypt, and the Philippines the main destinations. S&P believes, fintech could disrupt the money transfer operations of banks and exchange houses in the GCC. Fintech companies, by definition, focus on lowering transfer fees and reducing transfer times.
Payment services is another business line that fintech is disrupting. A closer look at fintech operations being launched in the region shows that some are developing alternative payment methods, with a focus on contactless payments and securing transactions through blockchain. That said, we expect some business lines at GCC banks to remain protected from fintech.
These lines include core lending–primarily corporate and to a lesser extent retail lending. It’s worth noting that on average, the top 20 customers contributed 25 percent-35 percent of total lending at the GCC banks S&P rates.
Some fintech companies in the GCC are targeting niche segments such as banking for low-income employees, microsavings, microinvestments, and youth. Others are targeting more secure transactions or even banks’ compliance with regulations and internal policies.
Source from: The Peninsula