|25 April, 2019

Banks need to dedicate 10% of revenue to innovation, says fund manager

Increased resources required to fund fintech development could also lead to more bank mergers, says Jupiter AM's Guy de Blonay

Across the GCC, banks and financial institutions are working with fintech firms to digitalise operations and provide fintech solutions to customers. Image used for illustrative purpose.

Across the GCC, banks and financial institutions are working with fintech firms to digitalise operations and provide fintech solutions to customers. Image used for illustrative purpose.

Gettyimages/Virojt Changyencham

More bank mergers in the Gulf are likely as lenders realise that they have to dedicate increasing amounts of resources to keep pace with developments in technology, an executive at Jupiter Asset Management has told Zawya.

In an interview discussing the company’s research paper, Shifting sands: FinTech as a catalyst for change in the Middle East’s financial sector published on Wednesday,  Jupiter Asset Management’s fund management director, Guy de Blonay, said: “The digitalisation process is an ongoing process that in my view is irreversible, it is a question of speed.”

Jupiter Asset Management’s report argued that banks need to spend 10 percent of their revenue on innovation and technology as a minimum requirement.

De Blonay said that banking giant JP Morgan had set the standard in this regard, having set the 10 percent investment benchmark.

Such a heavy spending commitments will lead to consolidation in banking in order for lenders to remain competitive, De Blonay said.

“The small banks are merging because they realise that the cost to keep up with competition when it comes to technology is too high. So they want to merge the cost base, improve their revenue size and then spend on technologies.”

Rishi Kapoor, co-CEO of Bahrain’s Investcorp told Zawya earlier this month that the wave of mergers and acquisitions in the financial services industry is “long overdue”. (Read more here)

De Blonay said that GCC banks are becoming increasingly interested in technology and digitalisation, but progress thus far has been slow. In the GCC’s biggest country, Saudi Arabia, for example, progress is slower than in many emerging market peers.

As a result, De Blonay said that banks need to be mindful of the timing of their investments.

“You don’t want to fly faster than your client,” he said.

In the U.S., Asia and Europe, by contrast, new generations of customers want to conduct most of their financial affairs through a smart phone and do not want to spend time travelling to a bank.

Fintech ventures backed

Interest in, and funding of, fintech firms in the region is growing, though. According to Magnitt’s 2018 MENA Venture Investment Summary, 12 percent of the 366 companies to receive venture funding in the MENA region in 2018 were fintech firms – more than any other category.  (Read more here).

Jupiter Asset Management said that there were two types of fintech firms investors could back - adopters and enablers.

“Investing in adopters or enablers, we have got the same process, looking for companies with good management, good track record, decent leading product and a well-protected margin over time,” de Blonay said.

“In the region, traditional financial services companies are by default adopters,” de Blonay said.

An ‘adopter’ is a traditional company that is adopting a new technology to keep pace with the digitalisation process that the financial services industry is experiencing.

An ‘enabler’ is typically a technology company, an innovator or disruptor that is offering technology to participate in the digitalisation process of the financial services industry.

De Blonay said that investor returns have increasingly been coming from enablers rather than adopters, noting that adopters in the financial services industry, such as banks, have been facing difficulties due to falling margins, the low interest rate environment, more demanding consumers, potential litigation, and regulatory pressures.

The fintechs that are set to have the biggest impact in the Gulf are payment solutions, data analytics and security firms, de Blonay told Zawya.

Network International, a Dubai-based company that is the largest payments processor in the Middle East, jointly owned by Emirates NBD and private equity firms Warburg Pincus and General Atlantic, went public earlier in April on the London Stock Exchange after first securing a cornerstone investment from Mastercard. (Read more here).

“Network International going public is sending a signal that the region is ready to go cashless,” de Blonay said.

Abu Dhabi Commercial Bank (ADCB) announced in February that it has gone live in the United Arab Emirates with a personal finance management (PFM) application, MoneyBuddy, built on technology developed by Barcelona-based fintech firm Strands. (Read more here)

“Across the GCC, banks and financial institutions are working with fintech firms to digitalise operations and provide fintech solutions to customers,” Jupiter’s research report said.

“Recently, following the First Gulf Bank and National Bank of Abu Dhabi merger, the Temenos core banking system was used to integrate and centralise operations,” the report added.

Temenos is a Swiss banking software specialist. It also collaborated in 2017 with Abu Dhabi Global Market (ADGM) to provide a sandbox service to start-ups working in ADGM’s Innovation Centre. (Read more here).

Saudi Arabia is also seeing an uptake of digital banking with a number of banks in the Kingdom adopting solutions to adapt to changing consumer demands, de Blonay said.

“While progress has been somewhat slow compared to other emerging regions such as Russia, where companies such as Sberbank and Tincoff Bank have been rapidly developing their digital footprint, we continue to see technology play a key role in creating efficiencies,” de Blonay added.

In February this year, Saudi Arabia’s Al Rajhi Bank, the world’s largest Islamic bank, also picked Temenos to help its digital transformation drive. (Read more here)

Saudi Arabia also recently launched a regulatory sandbox for digital firms, when it granted 11 local and international banks the ability to allow customers to open and edit account details remotely. (Read more here).

According to a McKinsey Global Institute report published in 2017, the jobs of up to one-third of the U.S. workforce, or about 50 million people, could be transformed by 2020.

“60 percent of the jobs that exist today will be gone in 20 years, replaced by jobs that we don’t even know,” de Blonay said.

Already in the Gulf, there are signs that banks’ digitisation drives are impacting on the jobs market. Earlier this month, Dubai-based Mashreq Bank announced it would cut 12 branches as part of its digital transformation strategy. (Read more here).

(Reporting by Gerard Aoun; Editing by Michael Fahy)

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