KPMG Lower Gulf: What Should Banks Focus On?

Author: Abbas Basrai

Shifting Customer Behavior, Economic Headwinds, Intensifying Competition, Regulatory Pressure and Technological Disruption – What Should Banks Focus On?

It has been a tumultuous last 12 months for banks. Reeling from the aftershock of the pandemic, despite Central Bank actions to support the economy, banks continue to persevere in an environment characterised by low interest rates and deal with issues relating to counterparties’ credit worthiness and provisioning. Organic growth has been minimal, although there has been some progress in the GCC through mergers and acquisitions. The challenge for banks in 2021 will be to effectively extract value from data to help them focus on their most profitable segments.

With pressure on revenue expected to continue, the only way banks are likely to maintain profit margins is by strictly managing costs. Underlying this is the need to bolster back-end functions, which tend to be driven by people and paper, rather than merely focusing on what is visible to the customer. The mandate for a strong IT infrastructure is more relevant than ever, as lockdowns have rendered effective remote-working technology invaluable.

In a precarious market, banks are being forced to consider alternative models utilising cutting-edge technology, including Banking as a Platform (BaaP), which allows third-party FinTech developers to build products and services on behalf of bank customers. There is now a broad range of FinTech applications for loans, payments, investing, wealth management and other services.

Banks can overhaul their operating models by considering a combination of partnerships and alliances, technology incubators, FinTech acquisition, investments and transformation of their internal capabilities. They will need to rethink the customer experience by leveraging a “design thinking” approach to identify the customer journeys that prompt digital offerings from the platform. Banks should increasingly train their employees to guide customers toward platform-based services. The process, risk and control framework should be realigned, and the control environment will likely need to be extended to third parties.

“Technology is not, however, a universal panacea; wider implications around legacy infrastructures and data repositories remain.”

Today’s customer is generally seeking a self-service, seamless, automated and omni-channel experience – with minimal waiting time. To enable this, banks across the Middle East are digitalising complex processes and end-to-end customer journeys across the front, middle and back offices. It remains to be seen whether banks are truly delivering on the promises they make to their customers, but the outlook is promising. The GCC has a strong regulatory foundation for the launch and operations of digital-only banks.

Technology is not, however, a universal panacea; wider implications around legacy infrastructures and data repositories remain. This has led several banks to consider alternative services that are able to support customer demands for consistent execution and provide for consolidated data storage and near real-time reporting – at lower operating costs. Managed services companies can help banks outsource certain functions. Banks can thereby optimise their footprint, business continuity planning (BCP) strategy, and total cost of operations.

It seems unlikely that banks can continue to maintain their competitive edge without effectively leveraging digital transformation to match their customers’ evolving expectations and behavior. They can optimise their customers’ digital seamless journey through outlining a framework that aims to provide a coherent digitalisation journey based on the current tech maturity, positioning of the bank, providing next-best-action recommendations, and proposed processes elimination.

Additionally, cloud computing has presented consumers with stronger security and privacy tools, and improved measures for detecting, responding to and preventing security breaches, thus easing the burden for IT functions. By migrating to the cloud, financial services firms can leverage solutions that are inherently better suited to manage six key operational risks: cyber security, digital sovereignty, the remote workforce and customers, third party, technology, and facility.

Automation and AI are instrumental not only in driving operational efficiencies but can also play a role in boosting employee satisfaction. The people aspect of technology cannot be disregarded: it can help staff focus on the more fulfilling parts of their job, freeing them from monotonous, tedious tasks that can be done by a machine. Over the coming years, banks are projected to increase their reliance on robotic process automation (RPA) technologies to conduct human resources (HR) functions, like onboarding and talent acquisition. This should be combined with a focus on upskilling and reskilling employees through investment in learning and development initiatives.

Keeping up with technological innovation is only part of the puzzle: robust regulatory compliance and governance is also critical. In several Middle Eastern countries, over the last two years alone, local authorities have issued or revised many regulations to enhance financial stability. New ones pertaining to banks in the UAE, for example, include corporate governance and risk management regulations. The federal government recently published an updated Banking Law, Anti-Money Laundering (AML) Law, and Companies Law. To succeed in an environment characterised by continual change, banks must adopt compliance frameworks that are mature and flexible.

Regional regulators have also issued regulations related to internal controls over financial reporting (ICOFR). Globally, ICOFR was introduced by the Sarbanes–Oxley Act of 2002 (SOX). The board and senior management of banks are responsible for implementing an adequate internal control framework that identifies, measures, monitors, and controls all risks. Unlike their US and UK counterparts, however, local banking regulators do not generally mandate periodic reviews on the effectiveness of ICOFR systems.

An integral part of robust corporate governance is the statutory audit. The relationship between auditors and audit committees (ACs) plays a critical role in good governance. The discussion of the audit should not be considered as merely an ‘agenda item’ for the AC at quarter and year ends, but as an opportunity for the external auditor to provide independent insight on matters discussed in the AC meeting. We would also encourage more frequent bilateral (regulator and auditor) and trilateral meetings (including the bank) to create a better understanding of the audit approach taken.

Regulators, standards setters, audit committees and investors—indeed, the full spectrum of stakeholders—expect a culture of transparency and strong governance. They are seeking enhanced clarity and consistency of metrics being reported, faithful, complete disclosures, and greater assurance around the governance and culture framework of an organisation. Banks are witnessing a time replete with dissonances: great technological advancement tempered by the potentially catastrophic implications of the pandemic. Customer retention will be key, and retention strategies can be supported with digital transformation drives. It is imperative that financial institutions deliver on the promises they make to customers, ensure their experience is seamless, and fortify their control environment against the threats that abound.

By Abbas Basrai Partner, Head of Financial Services, KPMG Lower Gulf