How banks can set themselves up for a profitable future

13 January 2024 Consultancy-me.com 4 min. read

Alberto Alvarez, Senior Partner with McKinsey & Company based in the Middle East, outlines five strategies that could help the region’s banks maintain a competitive edge and build a profitable future.

With Saudi Arabia aiming to produce half of its energy from renewable resources by 2030 and the UAE pledging to reach net-zero emissions by 2050, banks are finding profitable new opportunities in financing the energy transition. This could be a major long-term revenue opportunity, but business does not stay fixed.

Conditions are always changing. For example, rising interest rates and the emergence of financial technology companies such as Tabby and Tamara and neobanks like Wio could be seriously disruptive.

How banks can set themselves up for a profitable future

Regional authorities are meanwhile developing regulations for banking as a service and open banking that could further intensify competition.

We cannot predict the future. What we can say, however, is that only by investing in new capabilities can banks in the Gulf ensure that the recent past is prologue to a prosperous future. The following five actions could help the region’s banks achieve this.

Increase operating efficiency

To a surprising extent, considering how sophisticated they generally are, Gulf banks still perform many back-end processes manually. A number of areas are ripe for automation and innovation.

In addition to revamping the customer journey from beginning to end, banks can reduce the number of service interactions at assisted channels, enhancing customer self-service options and automating interactions to resolve issues, thus lowering both costs and error rates.

Improve the customer experience

Banks that meet customer expectations could enjoy a significant competitive advantage. GCC banks should also explore the possibilities offered by emerging technologies, such as AI, robotic process automation, and intelligent automation, that can provide a high-quality customer experience tailored to individual needs.

The ultimate goal would be to be a one-stop shop for customer service, with the bank branch one node in an omnichannel system and “smart branches” offering a unique experience to engage customers.

Create shareholder value through M&A and restructuring

The primary rationale for consolidation is shifting from cutting costs to finding ways to grow, including expanding into new markets. For example, acquiring Fintechs could help traditional banks to increase scale, access new capabilities, and capture growth in BaaS and other emerging areas.

Another approach is to offload non-core businesses to free up capital and thus concentrate their efforts on core business areas. Abu Dhabi Commercial Bank did just that, selling its $1.1 billion non-performing loan portfolio. First Abu Dhabi Bank created a separate entity, Magnati, to assume its payments business, then subsequently sold a 60% stake in it in 2022. These kinds of actions create additional options for value creation.

Unlock the full value of advanced analytics

Investing in new analytical capabilities can help GCC banks realize the full potential of their datasets and generate deeper insights. For example, machine learning algorithms can analyze financial behavior to identify distinct consumer segments. Advanced analytics can also be used to assess creditworthiness and make quicker, more informed loan underwriting decisions that forecast default probabilities and assess risk profiles.

Finally, by tracking customer responses, banks can get more bang for their marketing buck while reducing their customer acquisition costs.

Modernize technology to serve new business and operating models

To keep pace with the fast-changing environment, GCC banks will need to act more like tech companies. In terms of corporate culture, that means creating cross-functional teams with clear lines of accountability, cultivating strong engineering practices, and encouraging intelligent risk-taking.

In practical terms, the priorities are to implement state-of-the-art tech stacks grounded in data analytics so that banks can offer customized products and services that can be readily scaled up and that adhere to the highest global standards for cybersecurity. Cloud platforms alone represent a significant opportunity for the financial sector. Banks can use public cloud services to upgrade their existing infrastructure and launch innovative, cloud-native apps.

Doing any of this, however, requires attracting new talent and re-skilling existing talent.