UAE: Highly competitive retail banking market embraces digital innovation

The discovery of vast reserves of natural resources in the second half of the 20th century enabled the UAE, a country previously reliant on the fishing and pearl industries, to transform both its economy and society. This transformation saw the country enter a period of rapid growth, but the reliance on natural resources carried with it an inherent vulnerability to fluctuations in commodity prices. Now, falls in commodity prices are hurting the economy and are having huge implications for the country’s banking sector. Despite these challenges, UAE banks have continued to innovate, meaning the UAE remains an exciting space in the banking world.

A challenging period for the UAE economy

The UAE has substantial reserves of crude oil and natural gas, estimated to amount to around 10% and 3.2% of the world’s total, respectively. While the country continues to pursue its economic diversification program which has seen large-scale infrastructure investment in sectors including transport, tourism, manufacturing, technology, and ports, the crude oil and natural gas sectors still contributes around 30% of the country’s GDP.

This reliance on commodities has meant falls seen in the price of oil have resulted in GDP growth falling in 2015 and 2016, and growth is expected to remain subdued in 2017.

Furthermore, since the country usually mirrors monetary steps taken by the Federal Reserve, it raised its key interest rate by 0.25% in December 2015, reducing monetary stimulus to the economy at a time when fiscal policy is also being tightened amid growing budgetary pressure from lower oil prices.

These factors mean the UAE now operates in an environment where fiscal and external balances are deteriorating and macro-financial risks are growing.

Innovating through the downturn

Unsurprisingly, the economic slowdown appears to have affected the banking sector. Falling receipts from oil revenues have led to a reduction in government deposits at financial institutions, reducing liquidity in the banking sector. At the same time, the demand for many retail banking products fell in the first 9 months of this year. These factors have influenced the banks’ growth rates, with Standard & Poor's forecasting that UAE banks will see negative earnings growth in 2016 and a subdued performance next year.

While risks in the sector are likely to persist over the foreseeable future, the banks in the UAE are stepping up their efforts to innovate and improve customer experience, aided by the backing of supportive regulatory initiatives.

One area of development in the UAE banking sector is Islamic banking, whose growth has been outpacing conventional finance in recent years. Islamic finance assets grew substantially to reach 30% of the banking system in 2016, up from 20% in 2010. In fact, according to RFi Group’s data, at the end of 2015, 1 in 5 UAE retail banking customers had a Shariah-compliant product. The sector’s expansion has been fuelled by a supportive regulatory environment as well as strong retail customer demand.

Digital payments another area market players are concentrating their efforts on. While cash and cheques are retaining their position as the leading payment methods in the country, and according to RFi Group’s research, UAE consumers are substantially more attached to those methods compared to their peers in other markets, UAE consumers are tech-savvy and are becoming increasingly aware of different solutions in the payments space. According to RFi Group’s data, between 2014 and 2015 the proportion of consumers with contactless cards in the UAE nearly doubled to 13%, suggesting that take up is on an upward trajectory. If the providers step up their efforts to promote new payment solutions, there is potential for much greater adoption. While the transition to a cashless society will not happen overnight, the rise of alternative payment methods in the UAE has clearly begun.

Another crucial innovation consists of improving digital banking channels. Digital innovation has been strongly supported by the government as it tries to position the country as a leader in innovation. Simultaneously, Emirates NBD, the UAE’s largest retail bank, is committing AED 500M to this goal, with its investment targeting digital innovation and multichannel transformation of the bank’s processes, products and services.

RFi Group’s research shows that the UAE should be a fertile ground for greater proliferation of digital banking. Over 9 in 10 consumers have access to smartphones and they are very open to trying new technologies. The frequency of digital channel use has also been steadily growing over the past 3 years, with the take-up of mobile banking seeing some strong increases largely at the cost of branch and telephone banking.

However, the investment into digital channels should not translate into a much smaller branch network. UAE consumers continue to rely on physical branches for many of their daily banking activities and continue to value this channel, which is often key to driving customer satisfaction and loyalty. This seems to be recognised by the major banks which remain committed to branches and devote substantial resources towards their modernisation by providing more technology-enabled self-service facilities.

Conclusions

Despite facing significant economic challenges, banks in the UAE will continue to drive innovation to survive in what is a very competitive market. This desire to innovate will be supported by both the genuine commitment from the government to support innovation and an audience increasingly receptive to trialling those solutions

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