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Leveraging technology to bridge the efficiency gap in transaction banking

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Bana Akkad Azhari, Head of Relationship Management CIS & MEA, Treasury Services, BNY Mellon discusses how technology initiatives can enhance transaction banking in the Middle East

Wednesday 24, October 2018 BY ANNUAR NABILAH

Transaction banking is undergoing unprecedented change. New initiatives—including SWIFT’s global payment innovation (gpi) initiative, developments in application programming interfaces (APIs) and artificial intelligence (AI)—are being introduced and explored in the world of cash and trade; challenging traditional models and potentially transforming how we process transactions.  There is a growing need for technology to enhance the transaction industry.

Payment processes, for example, have often been challenged by time and cost inefficiencies; legacy back-end payment systems and procedures can be slow and expensive.  These issues are accentuated in cross-border payments. With multiple banks involved in the chain and money moving between the networks of different countries, payments can take days to settle, tracking payment status can be complex resulting in a lack of transparency, and costs can be high.  Trade finance has equally struggled with inefficiencies. Manual and paper-based tasks mean that processes are both labour and document intensive—again increasing costs and decelerating cash flow. 

Client demands are driving change

Evolving client expectations are encouraging banks to provide new, enhanced capabilities. Fuelled by the digital steps taken in retail payments, corporate clients are seeking faster and more transparent payment and trade solutions.  The Middle East’s growing millennial population is also driving the need to go digital—some 60 per cent of people in the UAE are under 25. This youthful population has grown up with technology, so many are used to managing their affairs quickly and easily from their technology devices—an expectation that extends to banking. 

MasterCard’s 2016 Impact of Innovation study is a testament to this attitude:  59 per cent of the UAE respondents state that mobile phones are their preferred payment device, highlighting a universal desire to manage one’s finances efficiently and conveniently.  As millennials increasingly enter the business world, they bring with them their modern expectations—this only fuels the need for more efficient payment and trade processes in order to meet evolving requirements. 

Innovation is bridging the gap

A number of technology initiatives are helping to digitalise transaction banking services. Recently, SWIFT leveraged its network to create the gpi initiative, which aims to make international payments faster, more transparent and easily traceable. SWIFT gpi has already made significant headway in the industry.  More than 160 financial institutions (FIs) have become members—including 18 banks from the Middle East—and nearly all of the approximately $100 billion worth of SWIFT gpi messages sent in the daily flow of transactions are now being credited within 24 hours.

Gpi is also helping to improve visibility through its Tracker—which facilitates the end-to end tracking of all payment actions—  resulting in a reduction in the costs of tracing payments for member banks, in some cases by as much as 50 per cent.  Further in the future, AI could hold significant potential for the industry. AI is a term used to refer to computer systems that can perform tasks that normally require human intelligence and thinking, such as speech recognition, visual perception and decision making.  Banks are increasingly exploring the use of AI to automate business processes, such as chatbots or robotic process automation (RPA) between systems.

AI systems can replace many simple, repetitive and standard procedures with automated processes, allowing staff to concentrate on more strategic priorities; thereby improving efficiency and transparency, reducing costs and accelerating cash flow.  APIs can also enrich the client experience. APIs act as a “go-between,” enabling software programs to interact by permitting streamlined communication between various software components.  APIs can therefore be used by banks to enable systems to share information and can be particularly valuable in creating digital ecosystems that connect different parties to provide value-added services. 

BNY Mellon has been developing a robust digital platform which integrates solutions and data from BNY Mellon, clients and select third-parties, which clients can access via APIs as well as via a single portal.  Finally, blockchain is attracting significant attention in the trade space. A blockchain is a digitalised, decentralised ledger that is inviolable and transparent.  The technology records digital information and adds it to its database in chronological order—allowing market participants to keep track of transactions without a central controlling body. It is therefore less subject to human error or manipulation.  Banks are examining the use of blockchain to help speed-up payment processes.

It is believed blockchain could streamline cross-border payments between participants operating under different levels of regulation and security, which has the overall effect of speeding up the entire transaction.  Similarly, trade services often involve ecosystems of external partners, which can add complexity to the process. As blockchains facilitate transactions under one system, ongoing developments also aim to support faster trade operations.  For example, accelerating processing time through smart contracts—computer codes that are capable of monitoring, executing and enforcing an agreement—  and automated processing. 

Technology initiatives gaining traction in the Middle East

Given the enhancements technology can provide, it is no surprise that the Middle East is increasingly embracing digital solutions. In 2016, fintech investment in the Middle East totalled $18 million.  In 2017, that number was surpassed with a single $20 million investment in PayTabs, with the total fintech start-up deals in the MENA region growing significantly year-on-year to $66.6 million.  The number of MENA fintech start-ups is also soaring, more than doubling over just two years—from 46 in 2013 to 105 in 2015. This figure is predicted to rise to 250 by 2020. The majority of start-ups are based in the UAE, followed by Jordan, Lebanon and Egypt.  The Middle East is increasingly becoming a home for fintech development. Last year, for example, the World Blockchain Forum took place in Dubai. 

Following this level of activity and potential, governments across the region are looking to support this thriving fintech ecosystem. For example, the Bahrain Fintech Bay, launched earlier this year by the Bahrain Economic Development Board, supports local and global fintech start-ups and partners with large financial and non-financial companies, to support the countries digital transformation.  From a regulatory perspective, governments are also accelerating development through sandboxes, which have permitted a bespoke, firm-specific licensing regime for a limited testing period.  There are currently three sandboxes across the Middle East: the Dubai International Financial Centre (DIFC), the Abu Dubai Global Market (ADGM) and Bahrain. These sandboxes also allow governments to learn about new technologies and to help shape regulations accordingly. 

A collaborative solution

Fintechs are developing a solid presence in the Middle East, and bank-fintech engagement—including incubator programmes and venture capital investment—is on the rise. In fact, fintechs are increasingly playing a role in helping local banks digitalise their offerings. A recent survey in the region revealed that 70 per cent of bankers believe GCC banks are open to integrating innovations by fintech providers. The rationale behind such collaboration is to bring together the strengths of local banks and fintechs to create something stronger than either can provide alone. Such alliances combine institutional expertise with fintech innovation and efficiency.  However, some challenges hinder participation.

Resources are limited and some regional banks may choose to concentrate their investments elsewhere, but collaboration between local banks, global banks and fintechs can help to overcome this.  Many global banks are investing heavily in technology and their talent pool. And through non-compete correspondent banking partnerships between local and global banks, local banks can tap in to these fintech initiatives and digital solutions without the need for significant investment.  Through this tripartite collaboration, local banks can access the technology initiatives to enhance their processes.

All parties benefit: local banks gain access to technology solutions that can improve efficiency and transparency, global banks gain access to the unrivalled country specific insights and expertise of local banks, and fintechs gain from the extended reach of global banks.  A tripartite alliance can, therefore, create a financial services provider that is both efficient, modern and innovative, helping to ensure reliability, safety and security.  The value of fintech is being recognised by FIs across the Middle East.  And with the appetite for digitalisation growing, banks are increasingly looking to harness new capabilities to address the need to enhance existing trade and payment processes. Although local banks may sometimes struggle to access the fintech developments necessary to modify their transaction services alone, a collaborative approach can help to ensure they are positioned with enhanced solutions that could bring real value to the region’s businesses and their payment and trade operations. 

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